When community banking means easier access to loans
When community banking means easier access to loans
For this month’s Econ Extra Credit film, we’re diverging a bit from our regular documentary pick and instead watching a Christmas classic: It’s a Wonderful Life. In the film, protagonist George Bailey runs the Bailey Bros. Building and Loan, which operates as a kind of cooperative community financial institution.
While buildings and loans are all but gone nowadays, the concept of community-driven finance is not. In New York City, one such institution is Carver Federal Savings Bank, which is designated as a Community Development Financial Institution and a Minority Depository Institution by the federal government. The bank, formed in the 1940s by members of some of the city’s predominantly Black neighborhoods, is headquartered in Harlem and says it seeks to help develop traditionally underserved communities.
“We are very proud to say that 80 cents of every dollar we have on deposit gets reinvested in the communities that we serve,” Carver President and CEO Michael Pugh said in an interview with Marketplace’s David Brancaccio. “By having [a] customer make a deposit, trusting in Carver, those funds are going to be used to overall help the community continue to survive and thrive.”
The following is an edited transcript of their conversation.
David Brancaccio: So what you see in the movie — the famous holiday movie — these buildings and loans, those don’t exist. Among the things we have now — a community development financial institution, like the one you run. What does it mean to have a designation like that?
Michael Pugh: Sure. So Community Development Financial Institutions, CDFIs, are a United States Treasury designation. And one of the critical threshold requirements for a CDFI is 60% of every dollar you have on deposit must be reinvested in the communities that you serve, primarily designed to help with the economic empowerment and overall improvement of communities. We’re very proud to be a CDFI, but we’re also considered a minority deposit institution by the federal government standards because we happen to be a Black-managed financial institution. And so those two statuses for us — the CDFI, and the MDI — gives us a very, very unique position within greater New York City and arguably, across the country, because our core mission is to overall focus on economic empowerment.
Brancaccio: So from a practical point of view, if a savings customer came by and handed you 500 of her dollars for safekeeping, what might you do with that money? Would you make it easier for a local business to be able to get a business loan from you?
Pugh: Yeah, so within Carver, we are very proud to say that 80 cents of every dollar we have on deposit gets reinvested in the communities that we serve. And that’s going to be done through a few different ways, helping to provide loans at affordable interest rates to borrowers, especially small businesses within our communities. When we talk about that 80% reinvestment, we think about things like financial education programs, workshops for workforce development and by having that customer make a deposit, trusting in Carver, those funds are going to be used to overall help the community continue to survive and thrive.
Brancaccio: Mr. Pugh, is Carver a nonprofit or for-profit?
Pugh: So it is in fact, a for-profit entity. It’s a financial institution, and we are publicly traded on the NASDAQ. The benefit there is that anyone that is interested, especially members in our communities, get to participate in the growth of the organization by nature of us being a publicly traded company. But I think the unique proposition for us is that because we are for-profit, but we have this mission component, it allows us to continue thinking on both sides of our brain, being mentally ambidextrous, if you will, and considering the fact of mission and margin in every decision that we make. So when we provide loans, as an example, not only are we looking at the pricing that makes sense from a unit economics standpoint, but we’re also looking at critical things like how many jobs will the small business add to our core markets that we serve? We understand that the communities we serve are ones that have historically been underserved. And we have the opportunity to be a catalyst for change while delivering favorable shareholder value.
Managing risk with a community focus
Brancaccio: How do you think about risk when it comes to the investment the institution makes? I mean, if you’re just shopping for the lowest risk places to place the institution’s investments, it might not always be local, yet you have this filter for the community’s wellbeing. Might those be a little riskier in certain cases?
Pugh: Well, here’s what we found that’s interesting. Customers within our core market that choose to bank with us and really understand the mission and what we’re trying to do, when we deliver great service to them and we help them, they make a concerted effort, even in the tough times to pay. Our loss experiences as a financial institution, over the past 10 years, knock on wood, have been very favorable. And I often joke is that it’s hard for a small business owner to default on their loan if there’s a chance that they’re going to bump into me or one of my colleagues in the grocery store and you know that you haven’t paid your loan. Because we’re hyperlocal, our colleagues live in the communities that we serve. We believe that those personal relationships and the access to us really helps to significantly reduce the risks.
And let me add to that, just to give you an example. During the pandemic, many, many customers and many people within our community that chose to bank at some of the larger financial institutions —they’re great institutions and play a critical role in our nation’s economy — but those institutions that for many of our community [members] chose to bank at didn’t have access to decision makers in order to help them during their very tough times. So the Paycheck Protection Program was an example. Those that went to some of the larger financial institutions applied for the loan, wasn’t quite able to get the loan application completed, needed help with it. And so they were left out of that first round of funds that were made available.
When the second round of funds [was] made available, many of those same individuals came to Carver. And what they learned is that, you know, again, the power of having access to a decision maker is a critical part of what’s needed in order to help your business, your small business, thrive. And we were able to deliver $55 million and access to capital at a local level to small businesses, and more importantly, the preservation of more than 5,000 jobs. So when you tie that back to risk, all of those loans — 100% of them — have been either forgiven or are on the way of being forgiven or repaid. That risk for us was de minimis because we were focused on hyperlocal and our community trying to really help make sure that we met a need for them.
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