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Public focus on equality opens doors for some Black-owned banks

The number of Black-owned banks in the U.S. has been dwindling, but recent regulatory changes and momentum to fight social injustice are creating some tailwinds for the minority depository institutions.

Since 2002, the number of Black-owned banks has fallen 47.5% to 21 as of March 31, according to an analysis by S&P Global Market Intelligence. However, the death of George Floyd while in police custody ignited nationwide protests against racism, and for some Black-owned banks, the focus on race and equality is translating to new business.

"[The increased interest] has been very energizing and helpful," said Todd McDonald, a senior vice president at Liberty Bank and Trust Co., a Black-owned bank based in New Orleans. "Since there are only around 20 Black-owned banks left, we need the support, the capital and the customers."

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McDonald said the heightened awareness has led to checking and savings account growth for his bank.

"These openings have been all online, so we have seen an increase in customers from across the country," he said. "All of this stuff coming together seems very promising for a brighter future for not just Black-owned banks, but MDI banks in general."

To qualify as a Federal Deposit Insurance Corp.-designated MDI, minority individuals must own more than half of an institution's voting stock or make up a majority of the bank's board. The institutions also need to serve a community that is predominantly minority.

The shrinking number of Black-owned banks can have a negative impact on access to capital for their communities.

"Black-owned banks do more lending to Black individuals and tend to be more likely located in low- to moderate-income minority communities," said Megan Juelfs, a professor at the University of Virginia who has researched minority banking.

However, some larger collective efforts are helping raise awareness for the minority depository institutions. A "Bank Black" campaign started in 2016 is gaining new momentum. Bank Black USA, a grassroots organization that formed following deadly shootings in Black communities in July 2016, says its goal is to "connect individual and collective awareness, understanding, potential, and wealth toward the betterment and stability of Black communities and the Black experience in America."

Inspired by the movement, Netflix Inc. announced in June it would shift 2% of its cash holdings, initially up to $100 million, to institutions and organizations that serve Black communities. The company said it would use $25 million of the cash holdings to establish a fund that invests in Black financial institutions serving low and moderate-income communities and Black community development corporations in the U.S.

After the Netflix announcement, James Sills III said he has received many calls from major corporations around the U.S. looking for collaboration with the Black-owned institution he runs, Durham, N.C.-based M&F Bancorp Inc. and unit Mechanics and Farmers Bank.

"We have seen an increase in deposit growth as well as a slight increase in loan growth," Sills said in an interview. "Corporations, nonprofits, other small and medium-sized businesses are calling us to find out how can they partner with our institution, which is really good."

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An update to the Community Reinvestment Act, a law designed to prevent redlining — the practice of providing unequal credit access or terms to residents of certain areas — and encourage lending to low- and moderate-income communities, may also prove helpful for MDIs. The Office of the Comptroller of the Currency, a federal banking regulator, updated the law to provide clarity around CRA credit to non-minority banks that partner with minority-designated banks.

The CRA change does not take geography into account, so banks like Liberty and M&F Bancorp would be able to partner with institutions from around the country, McDonald said. Although Liberty is regulated by the FDIC, which did not join the OCC in updating the CRA, the bank could still benefit.

"We are looking forward to partnering with major banks," said McDonald. "With clarity, MDIs and majority-owned banks can set up a very unique partnership where it is a win-win for both sides, and we truly make the impact that is needed in the communities that we all serve."

The OCC's broader changes to the CRA have attracted criticism with consumer advocates expressing concern that the overhaul fails to address the needs of vulnerable communities. In June, the House of Representatives passed a resolution that would nullify the OCC's efforts to update the CRA. However, the fate of the resolution is unclear, and some see positives in the OCC's work with the CRA.

Rebeca Romero Rainey, president and CEO of trade group Independent Community Bankers of America, was especially encouraged by changes that will effectively double the amount of loans counted toward community development activities, she said.

"It will incentivize banks to work with and invest in minority-designated institutions," she wrote in an email.

These partnerships bring the possibility of increased loan growth for MDIs.

"Small banks have smaller legal lending limits, so partnering with a larger bank can allow you to participate in larger deals, which can result in more loan growth," Sills said.

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Historically, smaller banks, such as the Black-owned banks currently in operation, have struggled to grow due to a lack of access to a customer base and marketing. Technology now becoming available to these banks opens the door for future growth.

"[With the increase in cooperation], some of the larger banks have shown a willingness to allow us access to their platforms and a willingness to allow us to join their ATM networks," Sills said. He believes that MDIs will see more of this cooperation in the coming months.

Technology advancements and the rise of mobile banking give customers the option to bank remotely without direct access to brick-and-mortar branches of Black-owned banks. McDonald, the Liberty Bank executive, said a problem lies in raising awareness about these services, but the current public conversation about race is helping to do just that.

"[In the past] we've lacked marketing dollars because we're not large organizations, but now with social media and other media platforms that are much cheaper and easier to put messaging out, it has been helpful," McDonald said. "The more we get the word out about the services that we have, the better we'll all be."