A CRA partnership case study

By Cheryl Winokur Munk

In 2017, $20 billion-asset BancorpSouth Bank in Tupelo, Miss., invested $8.5 million of capital in Liberty Bank and Trust Company, a minority depository institution, or MDI, in New Orleans. The transaction infused needed capital into Liberty Bank and had the added benefit of boosting BancorpSouth’s Community Reinvestment Act (CRA) rating.

BancorpSouth’s interest in $625 million-asset Liberty Bank was motivated in part by a little-known provision in the CRA that credits banks that collaborate with minority banks. There were 148 MDIs as of the first quarter of 2019, according to the FDIC, and many bankers may not be aware that their organizations can receive CRA credit for partnering with these minority banks.

Liberty Bank reached out to BancorpSouth and other banks about their interest to invest in its company, which was looking to redeem about $8.5 million of its cumulative perpetual preferred stock that was issued in 2010, says Mike Meyer, BancorpSouth’s chief banking officer and director of community lending. Finding a more attractive, lower-cost source of funding was an important initiative for Liberty Bank, a community development financial institution (CDFI) that also does business in BancorpSouth’s home state of Mississippi, Meyer adds.

For their part, leaders at BancorpSouth saw an opportunity to simultaneously expand its investment portfolio beyond mortgage-backed securities and boost its CRA rating. In January 2017—the date of the community bank’s last exam was released—its rating had improved to “Satisfactory.”

Besides Liberty Bank, BancorpSouth has made CRA investments in financial institutions including Southern Bancorp, a $1.2 billion-asset CDFI in Arkadelphia, Ark., and LiftFund, a nonprofit in San Antonio, Texas, that provides small business loans.

“We were excited to partner with a minority institution and gain their perspective on how they are able to tap into the communities,” says Tricia Bellamy, BancorpSouth’s chief compliance officer. “We were able to leverage their expertise, and they were able to leverage ours.” After Liberty Bank’s initial contact, members of BancorpSouth’s management and CRA teams traveled to New Orleans for an initial meeting with the smaller bank’s management team. It was a chance to make introductions and discuss some initiatives they had in place. “It was important for us to figure out if we had some common ground,” Meyer says.

From there, things progressed smoothly, both banks say. “I don’t think we had any concerns or sticking points, particularly because our footprint crosses over a little and they also provided us with access to some other markets,” Meyer says. “This investment allowed us to continue our focus on supporting the revitalization of underserved communities, as well as opportunities to leverage the loan product set and banking services that both institutions have to offer.”

Todd O. McDonald, senior vice president at Liberty Bank, says the transaction went especially quickly in part because BancorpSouth understood the “tremendous benefit” to be gained through its capital injection.

Players from both banks say they’re pleased with the collaboration, especially since the relationship has led both parties to other business opportunities, including loan participation possibilities, McDonald says. He predicts the partnership between BancorpSouth and Liberty Bank will be a harbinger of things to come in the banking industry.

“More banks than ever before are starting to collaborate with one another. The banking industry is changing and, especially with fintech firms having great services and products that ultimately need a bank behind them, it’s all about coming together,” McDonald says. “Collaboration is going to be key for the future of banking.”

“Collaboration is going to be key for the future of banking.”
—Todd O. McDonald, Liberty Bank and Trust Company

Liberty Bank’s mission to serve the underserved

Liberty Bank and Trust Company, the first multiracial bank in New Orleans, has come a long way since 1972, when it started operations out of a trailer because its founders couldn’t afford a traditional building. It has grown from a small, scrappy bank into a thriving community development financial institution (CDFI) with locations in eight states and $625 million in assets.

From the start, Liberty Bank’s mission was to improve the financial standing of African American consumers, a sorely underserved market at the time. The bank initially sought to provide African Americans with consumer loans, mortgages and other products and services that they might not otherwise have fair and equal access to, says Todd O. McDonald, Liberty Bank’s senior vice president. He’s also the son of the bank’s cofounder and CEO, Alden McDonald, Jr., the longest-tenured African American financial executive in the U.S.

Since its founding, the bank has broadened its focus to underserved markets in general, whether this is rural, urban or any community that does not have access to mainstream financial products, McDonald says.

There are still too many people who don’t have access to fairly priced loans or credit cards, he says, and many are stuck using costly payday loans or nontraditional financial services that aren’t geared toward their financial well-being. “Our goal is to change that,” he says, “and we’re really good at it.”

Partnership advice

For other banks interested in exploring opportunities to invest in an MDI, finding a partner with the right chemistry is a critical component, says Bellamy. She recommends seeking out a bank with a similar business philosophy or goals.

Banks should also understand what the investment is going to be used for. If it’s being used for CRA credit, “you definitely have to make sure it has a CRA benefit,” Bellamy says. “You also want to make sure that you’re going to be investing in a strong company. Look for companies that have longevity in the market and that are serving the needs of the community.”

“Look for companies that have longevity in the market and that are serving the needs of the community.”
—Tricia Bellamy, BancorpSouth Bank

This is particularly important, because any investment you make is a reflection of your community bank.

“As an investor, you want to work and deal with companies that have a very high, earned reputation and a good track record,” Meyer says. “The investment goes beyond just dollars and cents. It’s an investment in each other, and so it’s important that both parties see it as a win-win.

“In this instance, the investment and the partnership it has created has the added benefit of having a positive impact on the communities both institutions serve.”

What you need to know about the CRA

The Community Reinvestment Act (CRA) isn’t new, but bankers should be aware of all the potential benefits it offers. Here is a brief history.

In 1977, the CRA was created to ensure that all financial institutions met the credit needs of the communities in which they operate. What many bankers don’t realize is that it was amended in 1992 to include a provision that allowed majority banks to receive consideration for CRA credit for helping minority banks. They can do this in a variety of ways, including:

  • direct investment in a minority depository institution (MDI)
  • loan participations, other lending arrangements and sharing of loan servicing
  • sharing of bank staff and resources
  • technical assistance

A bank that is interested in collaborating with one or more minority institutions should reach out to its regulator’s minority bank program, which include the FDIC Minority Depository Institutions Program, the Fed’s Partnership for Programs and the Office of the Comptroller of the Currency (OCC) Minority Bank program. These programs keep in close contact with most minority banks, so they are aware of collaboration opportunities, and they can help vet proposals to determine whether activities are worthy of CRA credit.

The FDIC also has a national director of minority and community development banking, several regional MDI coordinators and regional community affairs specialists that can help. Majority banks can also reach out to minority banks directly. Go to bit.ly/FDICMDI to find an FDIC list of MDIs.

Cheryl Winokur Munk is a writer in New Jersey.