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Minority-owned banks are ready for a recession

Nicole Elam from the National Bankers Association joins us on the BAI Banking Strategies podcast to discuss the solid financial health of minority depository institutions.

Dec 6, 2022 / DEI & ESG
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With odds of a recession rising, banks are positioning themselves for tougher times.

Nicole Elam, president and CEO of the National Bankers Association, tells us why minority-owned banks are now in good shape to ride out a recession.

A few takeaways from the conversation:

  • For minority depository institutions, the key value proposition is long-standing relationships in their communities built by saying yes when other banks said no.
  • In the event of an economic downturn, MDIs may be hurt less than in past recessions due to better capitalization and partnerships to extend their business reach.
  • The future for minority-owned and operated banks comes down to having access to better technology, capturing younger customers and leveraging partnerships.

Nicole Elam, president and CEO of the National Bankers Association. Welcome to the BAI Banking Strategies podcast.

Well, thank you for having me, Terry.

Nicole, if you could start us out by maybe giving us an overview of what the National Bankers Association is, who you serve, some of the key objectives of the organization, that sort of thing.

The National Bankers Association is a 95-year-old trade association that represents minority depository institutions, or MDIs. These are your minority-owned and operated banks that predominantly sit in and serve communities of color. As an association, we focus on what I like to call the four Ps. The first is around policy, so really elevating public policies that support the sector and the communities that they serve. The second is around programs, providing our banks with programs that build their capacity. The third is around profile-raising. That is just really elevating the profile of the sector as well as our member banks. And the fourth is around partnerships, and we have been spending a lot of time over the last two to three years really creating partnerships with the public, private, and non-profit sector to better capitalize, modernize, and strengthen our banks.

Thank you for that overview, and we will certainly cover some of those Ps here in this conversation. But before we get into that, during the decades that the NBA has been around, 95 years as you said, and especially lately, there’s been a significant change in the composition of the U.S. population as a range of racial, ethnic and religious communities have grown in size. How has this demographic shift, how has it affected your membership and the key issues that NBA focuses on?

Nearly four out of 10 Americans identify with a race or ethnic group other than white. So as a nation, we are more diverse than ever, especially among youth. But at the same time that you’ve seen a growth in racial and ethnic minorities, what you’ve actually seen is a decline in the banking industry, and a lot has really changed in the banking industry over the last several decades. The first thing is the decline in the number of banks. Since the Great Recession, you’ve seen a decline in the number of banks by 40% and hit the hardest have been community banks and minority-owned and operated banks. And even when you kind of double down on that number and you unpack minority banks being Asian, Pacific Islander, Native American, Hispanic, the banks that have actually been hit the hardest in this decline has been Black banks. Since the Great Recession, there’s been a decline in the number of Black banks by 54%. And if you were to even go back further in time and think about historically, the decline has gone from at its peak being 134 Black banks to today only being 19 Black banks. And so there’s been such a huge decline in the number of banks that are serving this community in this demographic as it is growing. And so that just means that what we do matters even more, but it’s been a shift indeed.

Given those challenges and others as well, as you talk to your membership these days, what is at the front of their minds? What are the key concerns that they have here as we’re winding down 2022 and heading into 2023?

There are three things that are top of mind for them. The first is capital. They want to get as much capital in the door as possible. The second thing that they’re thinking about is, how do they put this capital to use? They’re not going to be able to put it to use by just doing more of the same. So they’re going to have to get into maybe new lines of business – do participations and syndications, use the capital to build their infrastructure and their capacity through tech and talent and thinking through risk management. So those are things that they’re thinking through. And then the final thing is around deposits. For every dollar of capital that they need, they need $8 or $9 of deposits. And so as many of them are getting an influx of capital, they’re starting to turn their attention more on getting more deposits in the door as well.

And another factor that we’re all concerned about here is the possibility of an economic slowdown as we head into the new year, possibly even a recession. Certainly talk about that and concern about that is picking up pace. How are you thinking about the macro environment heading into 2023 on behalf of your members?

So the economic slowdown, or even a recession, is really at the top of everybody’s mind right now. The good news is that my banks have a track record of doing more with less. Historically, during economic downturns, they’ve continued to lend. And so even though I expect there to be a tightening on lending because of regulatory restrictions, you’re going to continue to see lending from these banks. I think another thing that you’re going to start to see is them doing more together. So more collaboration. They’re going to try to do more things together as a collective that they wouldn’t be able to do individually. And I think two key areas that you’re going to start to see that happening is around infrastructure and climate, because those are areas where capital is going to continue to flow even during an economic downturn because that’s a focus for not just the federal government, but it’s also a focus from the philanthropic community as well. And so as you’ve got these millions and billions of dollars coming in from infrastructure, you’re going to see these banks come together on maybe the financing of these public projects or even locally in their cities and states. Climate is another big area, where individually they may start to do more with EV and climate lending and green lending. But collectively, they may start to do more larger-scale climate projects together as you see the billions of dollars that are coming down the pipe for climate as well.

If we do, Nicole, find ourselves in a recession in the coming year, it will create difficult operating conditions for banking institutions overall. Looking back over history here, are there particular issues that your member banks might face during hard times that might be more challenging than what the industry of the whole would be going through?

Historically, whenever there is an economic downturn, our sector is hit the hardest. Not only is the sector hit the hardest, but the communities that they serve are also hit the hardest. You see more defaults, you see more closures, you see more small businesses that close their doors. And many of our banks have actually closed their doors during this time, and it’s because they didn’t have the capital that they needed to withstand an economic downturn. Now, what I would say is different about this economic downturn than maybe prior economic downturns is that they now have capital in a way that they have not had before.

A recession can test a bank’s very viability, as you just mentioned. If their loan book starts to get problematic via issues with mortgage defaults, non-performing assets, that sort of thing. How are your members as a whole position capital-wise? We’ve been talking a lot about capital here, but as a whole, how are they positioned for what could be a pretty rough ride in 2023?

I would say that they are better-positioned than they have ever been positioned before in the past. What’s happened over the last year or so is that they’ve got an unprecedented amount of capital, not only from the federal government, but from the private sector and philanthropic community as well. So you had $12 billion come in from the federal government, $9 billion of that through the Treasury’s Emergency Capital Investment Program, $3 billion of that through the CDFI fund, through grants and other things. And so $12 billion is capital that they have never seen before. So many of them grew by two, three, even some of them grew by 4x over a matter of 12 to 36 months. So not only have they seen that type of capital come in from the federal government, but you also saw the big five Wall Street banks make direct equity investments in a number of these banks as well, to the tune of at least $500 million. On top of the federal government and on top of Wall Street banks, you’ve also seen the corporate community and philanthropic community make investments to the tune of tens of millions of dollars. So in total, there’s been billions of dollars that set them apart in a way that they have never had before. And so I think their capital stack is much better than it has ever been before. I would say that not everybody has benefited in the same way. So when you think about the fact that there are 144 minority depository institutions, only half of those received emergency capital investment funds –so, those ECIP dollars. Only half of the Black banks received direct equity investments. So not everybody is benefiting. And so I think from those banks that have not been the recipients of all of this unprecedented amount of capital that’s flown into the sector, you’ll see hardships from them. And then the ones that have received capital, you’ll see them withstand the downturn in a way that they haven’t been able to withstand it before. And so unfortunately, I think the gap is going to continue to grow between those banks.

In recent years, banking has become more of a scale-driven business and a technology-driven business as well. How do your members compete against the biggest of the big and all of the other banks that have a size advantage on them? In other words, what’s the value prop? What is their value prop and how do they make themselves seen and known given their limited resources?

Yeah, so technology is the thing that everybody is wrestling with right now. Technology drives everything. How we live, how we work, how we play, and even how we bank. And so when you look at it just from a straight dollars and cents perspective, my banks cannot compete. When you think about the largest banks, they spend $10, $11 billion a year on technology. The average asset size of my member banks is about $400 million. So they’re not going to be able to outspend when it comes to technology. And so the value proposition of these banks is that they say “yes” when others say “no.” When the algorithm says that they should not be lending, they have an established relationship, so they don’t see them as risk. They’re looking at things that maybe an algorithm doesn’t take into consideration. So I think their mission, their history, their longstanding relationships in the community is what sets them apart. But they’re not going to be able to, on a pound-for-pound basis, be able to compete in terms of technology and the spend that these big banks are making.

You’re talking about the relationships here, and there’s been a trend lately in the industry overall toward the use of what’s called alternative data, not just your basic credit score in order to determine what the credit risk of a particular borrower might be. Is that something that your organizations do as well, that your banks call upon other factors other than say, what that three-digit number is?

When you think about this idea of alternative forms of credit or alternative data or alternative underwriting, this has been the thing that our banks have been doing since their founding. They have always looked beyond a credit score. They have always thought about the fact that just because you don’t have a mortgage, I know that there’s redlining, I know that there is a history of appraisal gaps. I know that there are so many things happening in this community, but I can look at your steady rent payments. I can also look at your steady payments around utilities or your steady payments around your cell phone bill. All of these different things to me are factors that I consider to think about whether you are creditworthy. What’s new is that hasn’t always been scalable. That is very much relationship-driven. And how do you scale that? You’ve got to scale that with technology. And so the things that our banks are now wrestling with is how do they become high-touch, which is something that they have always done, with being high-tech. And so how do they leverage the new technology that is out there that can assess all of these thousands of data points that they have been thinking about on a case-by-case basis with their customers?

A growing issue in banking is ESG, more of a focus on environmental, social, and governance related issues. Since the pandemic, Nicole, we’ve seen the big money center banks and the larger regionals, they have made pledges of hundreds of millions of dollars to bring more banking services and more financial resources overall to underbanked communities and populations. So how do you think about ESG and banking, including how these bigger banks are doing on the S of ESG, the social part, and how is that affecting your members?

We’ve all seen the headlines, and I will say that it has a huge impact. Before the murder of George Floyd, before there was a focus on ESG – particularly the S – folks weren’t necessarily paying attention to or thinking about MDIs. And so I think what’s happened with the pandemic and what’s happened with this outcry for racial equity has certainly been very helpful for the sector. It’s had huge impacts, and I would say four key areas. The first is around capital. We talked about the influx of capital that’s come in from the big money centers, but it’s also impacted in terms of business opportunities. Folks are finding ways to integrate minority banks into the way that they do business, whether it is loan syndications or participations, or even helping them figure out how to expand their own lines of business. Deposits is another big way that you’ve seen them step up to the plate. And then I think the fourth way is through pro bono consulting services. Some of them have done executives on loan, or secondment, programs. All of these things have been things that didn’t exist prior to this point. And I think the difference maker has been true partnerships. Banks that have really dedicated a person who is focused on cross collaboration across the bank – how can they bring their policy, their business, their philanthropic arm to the table to be of assistance to MDIs? Those are the ones that have developed true partnerships and have moved from being a check-writing exercise or have moved from being a headline to really delving into the way that these banks are doing their business. And so I think those banks that have made commitments outside of headlines, those are going to be the things that you’re going to continue to see exist beyond maybe the next 12 months.

Another big issue is finding promising talent, training those people and positioning them for advancement up to the ranks of banking institutions. How much of an issue is talent for your members, including keeping the best people from getting poached by those bigger players that you have partnerships with? And if it is a big thing, Nicole, how do your banks compete when it’s hard for them to match on compensation?

The war on talent is huge. And it used to be that our pipeline would be going to minority-serving institutions, and that’s how we could get a pipeline. But now you’re starting to see these huge partnerships between corporate America, even outside of the banking industry, with minority-serving institutions. So the war on talent is a big thing, but our mission is our differentiator. Folks that are committed to serving underserved communities or are committed to serving communities of color, those are the folks that we are going to be able to recruit. So our mission is our differentiator. And the good news is that this next generation is very values-driven in a way that maybe prior generations hadn’t been. And so our mission will continue to be our differentiator because we’re not going to be able to perhaps match on pay.

One of the toughest areas of competition talent-wise is on the IT side – not only bank versus bank, but really banking versus every other industry out there that needs IT talent. How much do your members rely on fintech partnerships to try to address that particular challenge?

So I’ve been around long enough to see people’s perceptions and perspectives on fintechs evolve. I remember when fintechs first came to the table, they were seen as disruptors. But now we’re starting to view fintechs as partners. The reality of it is because my banks are so small, they’re not going to be able to build or buy technology fast enough, so they’re going to have to partner. And as an association, we’ve really tried to lead the way in creating partnerships with some of these fintechs in areas that our member banks are really wanting them. Automated lending, for example, is an area that our banks have been wanting fintech partnerships or have been wanting a technology solution for. And so our response has been to create some fintech partnerships. Risk management, as many of them are growing 2 and 3 and 4x, partnerships around the customer experience and online onboarding and underwriting. So we’re not going to be able to compete, but we are going to have to partner. And I think that’s been an area that we’ve really leaned into is creating these partnerships with fintechs.

Nicole, I’d like to wrap up our conversation by getting you to look ahead maybe five years, 10 years down the line here. How do you see banking changing for small minority-owned institutions, like your membership, and what do they have to do to position themselves for the future?

Five, 10 years from now, I want to see sector of minority-owned and operated banks that is growing healthier and thriving, which means that there are more of them from a numbers perspective, but also their asset sizes are growing in a way that it hadn’t historically done. In terms of what do they need to do to position themselves for the future, I think it’s all about three things. The first is technology, which we’ve talked a lot about. Technology is driving everything about not just the banking of now, but the banking of the future. The second is around their ability to capture the next generation of customer. The way people bank is changing, and so they’ve got to be able to capture that next generation, and a lot of that is going to evolve around technology. And the third is partnerships. They’re not going to be able to do it on their own. They’re not going to be able to build it or buy it fast enough. So they’re going to have to create partnerships. All of these partnerships to better capitalize, modernize, and strengthen them as a sector, I think is what it’s going to require.

So Nicole Elam from the National Bankers Association, many thanks for making time to be with us on the BAI Banking Strategies podcast.

Thank you for having me. It’s been such an honor.