The 2013 Interagency Minority Depository Institution and CDFI Bank Conference
Collaboration with Other Financial Institutions
|Preston D. Pinkett, III||President & CEO, City National Bank, Newark and New York City|
|Michael Brathwaite||Vice President, Urban Markets Group, Morgan Stanley, New York, NY|
|Dominik Mjartan||Senior Vice President, Southern Bancorp, Arkadelphia, AR|
|Neill S. Wright||President and CEO, First Tuskegee Bank, AL|
First, roundtable participants discussed ways to foster partnerships between MDI and CDFI banks and with other banks (large and small) and financial partners for equity investment, loan participations, asset purchases, and other activities. Next, they discussed ways to share the effort and reduce the costs of operations, for example, in technology, back office operations, compliance management, product development and delivery, or marketing. Then, they discussed the next steps to building a consensus and commitment to develop possible networks and structures to achieve these goals.
MDIs and CDFIs are ideal candidates to collaborate on business strategies, since they mostly operate in different markets and do not directly compete with each other. The benefits of collaboration include the ability to attract additional investors due to scale, and the ability to reduce operational costs by creating efficiencies. MDIs and CDFIs can come together with each other or with other financial institutions to jointly develop products and services; create loan participations to share risk and diversify their portfolios; share expertise on compliance issues or specialized lending such as Small Business Administration (SBA), Federal Housing Administration (FHA) or U.S. Export Import Bank lending; create technology platforms or use their purchasing power to modify existing technology platforms to meet their unique needs; or develop shared mechanisms to raise capital.
Roundtable participants discussed the challenges of moving to a shared service platform. Many bankers in the room had experience with mergers and acquisitions and the resulting lengthy and difficult consolidation of back room operations. One banker indicated that even within the holding company, independent banks found it difficult to build a case for sharing compliance, audit, deposit operations, and loan operations. But another banker described his institution’s successful 20-year consolidation with 13 different markets in two states. This bank was able to tie the incentive for consolidation – cost savings and efficiency – to the CEO’s bonus. While there may have been operational inconveniences, in the end the bank presidents came around to see how productive it can be.
Despite the perceived difficulties of moving to a single information technology core processing platform, participants acknowledged that MDIs and CDFIs could reach out to smaller core processing vendors to express their common operational needs in an attempt to garner attention to their specific needs. This approach, leveraging the buying power of multiple MDIs and CDFIs to influence the development of IT platforms to meet the unique needs of the mission banking sector, generated significant interest among participants. Other alternatives participants might consider would be to come together to separately capitalize an entity to provide backroom services. For example, MDIs and CDFIs could create a multi-bank Community Development Corporation. Both the Federal Reserve and the Office of the Comptroller of the Currency permit these entities, subject to a variety of regulations depending on ownership structure, through their application processes. Another option would be to bring in venture capital funding to invest in a multi-bank joint venture that is governed and managed by the banks with a stake in the entity.
Participants suggested that another opportunity for collaboration would be to work together to “balance our balance sheets.” Many MDIs and CDFIs specialize in a particular type of lending in their communities. For example, mission banks have concentration risk both in terms of geography (serving a small neighborhood within a city) and by underwriting specialized loans (such as church lending, SBA lending, FHA lending). Mission banks could collaborate to separate out the customer piece and assets from the portfolio management. Banks could exchange different pieces of earning assets to balance out the balance sheet.
Participants also expressed a desire to collaborate with larger financial institutions and to develop partnerships beyond simple Community Reinvestment Act relationships. The Urban Markets Group at Morgan Stanley indicated that there are opportunities to collaborate on income generation. Another possibility would be to partner with Industrial Loan Companies (ILCs). MDIs and CDFIs could consider collaborating among themselves on FHA or SBA platforms. Banks also could collaborate with local universities to create technical assistance incubators.
The unique mission focus of MDIs and CDFIs – banks that interact deeply within their communities with a high personal touch – creates a common purpose for collaboration. Benefits include increasing scale to attract investors and reducing costs. MDIs and CDFIs agreed that multiple approaches to collaboration will be needed, with a high degree of flexibility so that banks can still maintain control of their business models to enable them to continue to best serve their communities. Mission banks also recognize the need to look beyond their current models to capitalize on new markets that may be available through greater collaboration. For example, many minority populations are growing faster outside traditional minority centers where MDIs are located. There are multiple vehicles that can be used to discuss next steps, including the National Bankers Association, the Minority Bank Council of the Independent Community Bankers of America, Community Development Bankers Association, other trade groups, or the National Community Investment Fund. The participants committed to collaborate based on need. The next steps are to identify needs, create urgency, make a case, and invite others to participate.