Merger Leads to Largest Black-Led Bank in U.S.

Kate Cooney (00:00):  

This is CitySCOPE. 

Eun Sun Cho (00:01):  

A podcast on cities and inclusive economic development from the Yale School of Management. 

Kate Cooney (00:07):

Are we ready? 

Manuel Morales (00:08):

Let’s go.

Kate Cooney (00:24):

Welcome to episode 10 of season 3 of the CitySCOPE podcast. I’m Kate Cooney, senior lecturer at the Yale School of Management. Today, we talk with Brian Argrett from City First Bank in Washington, D.C., about his work at City First and about the merger with Broadway Financial, which resulted in the largest Black led bank in the United States.

Brian Argrett (00:47):

I’m Brian Argrett. I’m the President and Chief Executive Officer of City First Bank of D.C.

Kate Cooney (00:53):

Brian and I both grew up in the D.C. area.

Brian Argrett (00:55):

Washington was quite a bit different than it is today. First of all, it was a majority African-American city in terms of the demographics. In fact, it was called Chocolate City, even through song and other media, just because of the unique aspect of it being majority African-American. It also was experiencing a number of different dynamics that had started years earlier. You had a lot of the Caucasian population which was moving out of the city or had moved out of the city. You had the inner city core was beginning to suffer from disinvestment, which accelerated later. You had challenges as well from both what later became the crack epidemic, but also the reaction to that, the war on drugs came as a result. So it was a very different city, a beautiful city. You know, a wonderful place to be from. But I think it’s more marked by the change that we see today in Washington, D.C. and how it looks and feels and its prospects.

Kate Cooney (02:00):

One thing that I’ve realized as I’ve gotten older is just how sort of close in time my life is to Martin Luther King Jr’s life who growing up I tended to think of that as history. And yet I was born in 1971, grew up in in D.C. and just a few years earlier, he had been killed. D.C. was one of those cities where there was a lot of civil unrest, and in fact, I just recently heard a paper looking at how there were some neighborhoods in D.C. that many, many decades later, after 1968 still had vacant lots at the locations where those ‘68 uprisings they had come down at that time.

Brian Argrett (02:42):

My office is at 14th and U Streets NW, which is literally where folks had gathered, post-assassination and rage was present. The whole genesis and purpose of my bank, City First Bank of D.C., came out of the disinvestment and the real scars that the African-American community was experiencing in Washington, all directly linked, at least in terms of the physical real estate to the assassination of Dr. King and most importantly, all of the gaps and challenges that caused that in addition to his death. It’s become such a critical issue in the community. My family has always been involved in how do we create equity and opportunity within the African-American community. My father was a city planner. I’m very much focused on issues of how do we use policy and design better conditions for African-Americans and everyone within a city. And my mother was a lawyer who worked at the Justice Department, but also was general counsel to a company that was focused on the very same thing, capital flowing into underserved communities.

Kate Cooney (03:59):

So you went on after high school to UVA, right away focusing on business and finance and real estate, and then on to Berkeley with the joint JD MBA. Is that right?

Brian Argrett (04:13):

Undergrad at the School of Commerce, I certainly knew I was going to go into business. I thought it would be in the marketing realm or finance or real estate realm, I wasn’t quite sure then. When I went on to grad school, I was focused on real estate and on corporate areas, and I really became very, very interested in real estate, specifically transactional real estate. The idea of creating something that was tangible and permanent as opposed to a security and obviously using that for any number of different purposes.

Kate Cooney (04:40):

Let’s talk about some of those early work you did in private equity and some of the early work you did in the thrift banks. 

Brian Argrett (04:48):

I started in private equity working at a small business investment company, so this was, by its nature, a public-private partnership. You had governmental capital that was leveraging private capital to invest in small businesses. It was an amazing and fascinating experience that I ended up really participating in for over 20 years. So a lot of my reference and frame is around private equity REITs, around private equity finance. Now what we did and what was so important and now central to me was we were focused on wealth creation, and we were focused on it specifically for underserved, historically underserved communities, so we were looking at minority-owned businesses, minority entrepreneurs, women-owned businesses. The thinking here was how do we use this tool to, quite frankly, really create empowerment within individuals who then can take that power and extend it within their communities, whether that’s by business ownership that by a large margin out hires within its own community or promotes, whether it’s wealth creation that leads to political power that allows you to participate more fully in the system. So that was the theory. But you know, to be frank, it was clearly from a capitalist basis working within the system also to try and create some change in the system. The one thing that I always enjoyed more than anything else was sitting across the table from the entrepreneur and them coming in, and they’re pitching their idea and you’re just hearing how did you get started, what is it you want to do. The level of passion and enthusiasm and just all the ideas that you would never have thought about on your own, like fasteners. OK, well, I guess somebody has to make those. I guess there’s a business there, right? And we start to appreciate those individuals, their passion, what it takes to build something. So we weren’t in venture capital. This was really more private equity focused on a more mainstream types of businesses and helping them to expand.

Kate Cooney (06:59):

And was that in Los Angeles?

Brian Argrett (07:01):

Yes. We were based in Los Angeles, but we really were investing across the country. So it really was about finding the right entrepreneur and the right industry segment and where we thought we could add value. So part of the idea, in particular with minority owned businesses, was how can we be a connector, both of capital and capability and relationships? So we were primarily investing subordinated debt with equity features for business that was growing and that was going to take on bank debt. We were both the risk cushion, but also the party that could help the business manage now a leveraged company, and the bank to feel a bit more comfortable about the underlying business that they were lending to as well. So very much a connector in that way and helping hopefully to take our experiences from other companies and supplement what the entrepreneurs already were doing in leading their business. So we might have a little insight into one area. We could bring it over and say, “Hey, here’s what we see.”

Kate Cooney (08:04):

Right, what did you learn about where the needs were? Was it just purely access to capital? Was it access to markets?

Brian Argrett (08:14):

I’d say on the capital front, it’s from seed capital, really all up, until you really scale the business and where I think your access begins to open up a little differently because of the successes and the scale that the businesses have. And I’m talking about much larger than anything we were looking at. But it’s everything from the startup capital that you might need, and you know, I think we’re going to talk, I hope, a little bit about the racial wealth gap and community wealth and the challenges in that context of how do you, how do you fund a business? How do you start a business? How do you go to friends and family if there’s not tremendous wealth in your friends and family to go forward? So I think that was one of the things. But the other thing we saw was really, “I can be the greatest widget maker and widget salesperson.” But I also, that connection to the capital markets and to the financial markets is something that many of the entrepreneurs, I think this is true broadly, but I think certainly with, had been the case in the African-American and minority communities, even less so the connection because there were just less professionals who were in those spaces as well. So that connectivity was really one of the most important things that we were trying to bring to the table as well. 

Kate Cooney (09:26):

So were you in a kind of broker position where you were creating those relationships on the capital side and leveraging a position in the middle for it?

Brian Argrett (09:37):

Well, we were alongside the entrepreneur first and foremost, so we weren’t, you know, broker in the sense that we weren’t engaged. We weren’t vested, we didn’t have money on the line and our interests were with the underlying business. But in that capacity then, we could help. For example, let’s say they needed senior financing. We could say, “OK, well, let us go to these several banks we know, or let us help evaluate those who are coming in and figure out what’s the best opportunity for you.” So that’s one where we could be of additional assistance. Or let’s say they had, now they had grown and it was a private equity round, and now they needed to raise more capital and maybe we were past our limit with them. And then it would be introducing them to others within the space, who might come together to try and help finance the business. Lots of things like that. 

Kate Cooney (10:29):

So at some point you jumped into banking, which was a thrift bank.

Brian Argrett (10:33):

Yes. So I was still at Fulcrum running SBIC. And when I jumped into banking, I really didn’t jump into it as my profession. I was on the boards of these several banks. At the time, I considered myself to be a bank customer in my day job, right? We were the ones who were alongside the business, talking to the bankers and then on this governance level, right, where I was on at the board, but I was never in the bank as a banker per se, even though we were a lender. So it was kind of an interesting, kind of sandwich approach. But as to thrifts, thrifts were essentially organizations that were set up for really kind of two purposes. They were to really aggregate savings. So kind of you think of the classic savings account and lending for home ownership, so single family home ownership. So that’s really kind of their lane and their focus. They wouldn’t have done lending to small business. They really would have done lending to us as individuals to then purchase a home.

Kate Cooney (11:38):

The thrift industry was really, went through a lot of crises in the 80s and the 90s. A lot of consolidation, a lot of failure. Is there still a foothold in the market? Has that kind of business been absorbed by fintech or other banks?

Brian Argrett (11:57):

It’s changed a lot dramatically. So the classic thrift doesn’t really exist more than in name only. It might be a business focused, but really kind of the classic thrift doesn’t exist, and there are a couple of reasons for that. Some of it is regulatory in terms of the infrastructure. There was a whole separate infrastructure for thrifts, funding mechanisms like the Federal Home Loan Bank, but also regulatory entities, first, like the Federal Home Loan Bank Board and then subsequently like Office of Thrift Supervision, which is now then folded into the OCC, Office of the Comptroller of the Currency. So you really saw a convergence of commercial banks and thrifts of those distinctions no longer being relevant and no longer being an advantage as a thrift. And so it kind of fell away that way. I think Rocket Mortgage is the largest originator, right? So, you know, when you start looking at just how much the business has changed in terms of single-family lending, a lot of it has have a fintech basis to it and whether it’s a large firm, financial technology firm or a smaller one. So it’s really changed quite a bit. You don’t see a lot of just pure thrifts anymore.

Kate Cooney (13:09):

Coming forward in time, you were appointed by President Obama to the Community Development Advisory Board at Treasury. Tell us about your work on this board and tell us a little bit about CDFIs. Why are they needed? What value do they create? Can you give us an animating intro?

Brian Argrett (13:29):

I joined City First Bank of D.C. Seven years ago, I’m here in Washington, working at City First, which is a CDFI. As you mentioned, appointed to the Community Development Advisory Board, that’s an advisory board of private citizens from industry, as well as members from the cabinet, so across the administration. The point of it is to advise the CDFI fund director and the administration more broadly on strategies around community development. Kind of a silo breaker is one way to think about it. You know, what’s happening over here in HUD that could be useful over here in SBA, et cetera. And more importantly, what is industry telling us? What are the practitioners telling us that would be useful? Our job was to try give on the ground counsel and advice to the director of the CDFI fund.

Kate Cooney (14:21):

I asked Brian to give us an overview of CDFIs.

Brian Argrett (14:25):

CDFI stands for Community Development Financial Institution, and I think the way I would describe that is, first of all, it could be any one of four different kinds of organizational structures. So it’s not just the bank. It’s not just a credit union. It’s not just a nonprofit loan fund. It’s not just a venture fund. It could be any of those that receive the certification from Treasury that essentially says that 60% of our activities, of our credit activities will be devoted to LMI, low and moderate income communities. So they’re very focused financial institutions that by charter, by certification, by intention, are focused on assisting low and moderate income communities. And so that distinction is huge. These are the institutions that are focusing on the spaces that, quite frankly, the mainstream institutions have not focused on or are not able to properly reach, or that the shadow banking system in some instances has found an opportunity and is exploiting. Right. These are the institutions in the middle that really have an opportunity to be transformative in those communities. And so City First Bank, which I joined was one of those institutions focused just in that way.

Kate Cooney (15:49):

Tell us a little bit about what you were able to do. You’re no longer lending to small businesses in the same way. That’s not as much the focus of the bank. Is that correct? You’re more thinking about neighborhoods or are you still interfacing with the business community?

Brian Argrett (16:04):

The great part here. Remember when we were talking about private equity and I was saying you asked me which part of it did you see the need? And I said every part, right? So from a capital provision, we’re just in a slightly different lane to the same end. So now we’re a bank, so we’re providing obviously senior credit facilities as a bank as opposed to subordinate debt, which we were doing as a small business investment company. And while the CDFI designation says low and moderate income communities and while at Fulcrum we were talking about historically underserved communities or communities of color, the truth is the convergence between the two is frightening in most cities and most urban areas across the country. When you look at urban environments in particular, the overlay in my city of where, I had a map that I just bring out all the time that would show the racial composition of our city and the bright lines between that racial composition and then the income composition. And it was literally like a direct overlay that you could see. So I say all that to say it’s the same communities that we’re trying to empower and to raise up. The techniques are different in terms of the type of capital. Now we’re using a banking structure with the benefit of leverage around deposits and other mechanisms at a bank. At City First, we’re financing affordable housing, small business finance, right? So that’s that same lane, and then also nonprofits, particularly those that are providing safety nets within the community.

Kate Cooney (17:43):

One of the books that we read by Andre Perry talks about the devaluation of assets, Black owned assets in majority Black neighborhoods. And we looked at for today, Mehrsa Baradaran’s book on banking in particular, and she talks about this challenge where the assets that when you’re focusing on a community that’s kind of been contained to a certain area that that containment itself creates this devaluation process. What’s your take on that or how do you serve that dynamic? And what’s the challenge on the investment banking capital deployment side? 

Brian Argrett (18:29):

There’s another book. I suggest The Color of Law. The Color of Law, fantastic book around the history of segregation that has occurred in the country. But looking at the systems that we’ve heard little bits and pieces of but kind of tying it all together that has led to the very segregated geographies that we that we have today. So if you take that as a backdrop, the issue is kind of multilayered. So if you, if I think there was a recent article looking at Atlanta, looking at the African-American communities in Atlanta and looking at, I believe appreciation and the dynamics, the differences between how those communities and thus the residents within them fare. And if the primary difference is race, then we’ve got to really dig deeper and talk about that. Race led to this segregation is inherently we’re talking about race, and if the assets have both more pressures on them from a financing perspective, higher cost to them and the opportunity for less appreciation within, even if you think homeownership is the answer, then catching up in the wealth gap becomes really hard to see. So yes, I’m a homeowner, but I’m paying more for my house, controlling for everything, I’m paying more for it. My house is appreciating less. I likely had less family wealth inherited, and I can give you some stats on that, it’ll blow your mind. The cycle is quite difficult, so we’re financing, for example, within some of the African-American communities in southeast Los Angeles, homeownership with very high quality products. It also happens to be a neighborhood that is changing. So there will be appreciation, you know, which is both a blessing and a curse, right? So both financing the developers who are often persons of color to help create wealth and opportunity for them, but also the underlying homeowners to the extent it’s for sale versus rental housing. Those are some of the ways we touch those aspects or witness those aspects in finance.

Kate Cooney (20:50):

One thing that The Color of Money, one of the things I’ve heard her mention in her talk about her book is about Atlanta with the redlining maps. She uses the example just to highlight how much it was about race and only race. She showed the neighborhood where Morehouse and Spelman are on those HOLC maps, those old redlining maps. She shows the analysis and how this was a heavily homeowner, you know, people owned homes. They had good jobs. They were working either in clerical occupations or even teaching, and it was red lined. That whole neighborhood was a giant red mark, and it was talked about as probably the best or the finest African-American neighborhood in the country at the time.

Brian Argrett (21:40):

I think one of the first steps as shocking as it is, really learning how we got here is so important you can’t change or dismantle or tweak or, you know, if you if you don’t acknowledge and recognize, “OK, why is this the case?” And it’s not simple enough to say, “Oh, race, right?” But what happened and over what time period? And how did this morph? What was the banking system’s involvement? What was the government’s involvement? What was the real estate industry and thinking through those and hopefully not getting depressed in that process because of the enormity of the challenge. But you have to appreciate. And so I think her book, The Color of Law is another striking one where you start to see just systemically things again that I don’t think we may not have connected all of those dots and say, “Well, wow, OK, everything from public housing, which was a positive thing when it was first created to what it became.” So GI Bill, I mean, there’s a million different things that we can go through that are interesting and informative.

Kate Cooney (22:46):

One of my students this semester had the same reaction I had, which was just what a missed opportunity we had at a time when we had all of these working class jobs. The Black working class could have just as easily afforded those suburban houses, as well as the white working class, and we didn’t take that opportunity that we had. What a different world we would live in. We would be inheriting if we had. Let’s skip to the merger. How did this come about? What are some of the things you’re hoping to do by joining forces with Broadway Federal? 

Brian Argrett (23:17):

We’re very excited about it. So why are we excited? Who’s our partner and what are we trying to do? The first thing is why are we excited that goes to what’s the rationale for this? What are we trying to do here? So I think there’s a couple of levels. One, I think in banking, you need to understand just the massive amount of consolidation that has occurred in community banking. And forgetting what’s your business strategy is, there significant pressures on efficiency and scale to be able to serve your customers well. So on one hand, there’s just the general sense of, you know what, you need to continue to grow. City First has been growing very nicely, but you need to do it in some stair steps to continue to be relevant and to continue to be of service. If I can help one business owner, that’s great. But if I can help, you know, 100, isn’t that better and how much better is that? So scale for us also relates to our service and what we can provide in terms of capital. And so the combination of itself does some of that, but then there’s also what do you do with this enlarged entity? The third part is we felt it was really important that we demonstrate. It’s an element of leadership as well to bring two institutions together and try and make one plus one equals five or seven or whatever number you’d like to choose, really showing and demonstrating as an example of here’s some of what we can do. Let’s get to scale. Let’s make this work and let’s make this work more powerfully. It was all of that, but it was also a series of relationships and a wonderful balance sheet match and a wonderful operations match that made it make both mission and service sense. Both banks are commercially focused. So we’re in this thing where neither is focused on the consumer per say. We make our impact through financing businesses, developers, and that sort of thing. So Broadway is a large, affordable multifamily lender. We do that and the other two spaces I also mentioned small business finance and nonprofit finance. And so there’s a there’s a real natural combination between the two. Both entities while founded 50 years apart, they’re both CDF eyes. Broadway also happens to be an MDI, so again, that intent. Broadway was founded as veterans were coming back from, let’s see, ‘47 from the war, the Second World War and facing these very dynamics we were talking about earlier where while they may not have had GI Bill access, they may have had means and the opportunity to buy a home, and they were unable to do so. And so Broadway came in to step in to provide that access to capital. Broadway Federal is a thrift, a former thrift, as well. So we have the same regulator as well. So when we come together, we’ll create an entity at scale will be at the largest African-American-led MDI, Minority Depository Institution, which is an FDIC term in the nation, about at over a billion in assets. We raised additional capital that we’re going to close next week alongside the merger. So another $33 million capital, which will take our capital base to about $130 million and the asset base I just mentioned. So the other thing is our partner’s publicly traded company on Nasdaq. So we’re providing now liquidity. We’re bringing the business aspects that allow us to continue to raise capital, right, and continue to serve. So it’s also the evolution and growth and maturation of the business model. Within the segment, we operate community banking and within the lane in which we operate and that service to low and moderate income communities and communities of color. Right off the bat, some things that’ll be immediate and my team’s really excited about, so our ability to finance a growing small business previously at City First was capped at about $4.3 million in any one business. OK, so if we’ve got somebody who’s successful and or they’re doing multiple projects, you know, we’re all of a sudden not able to continue to help them, and that’s all pegged off of your capital base. So when we grow, that number legally will go all the way up to $20 million. Now on the ground, we may pull that back a little bit, but the amount of capital now to any one business or any one, the large nonprofit that’s expanding its facilities is significantly enhanced, and that’s a big win for both us and for those business owners.

Kate Cooney (28:02):

That’s interesting. So I was just looking at this L.A. Times article around the time that some of the announcing was coming out and they had some really, I thought, striking statistics about African-American owned and led banks. First of all, we’re talking about there is only 21 in 2019, down from 48 in 2001. So that recession, that housing related recession really hit this part of the industry. I mean, that’s half. 

Brian Argrett (28:33):

So you have a couple of things going on. You have just the general trend where all banks these sizes have dramatically reduced during the same time period. So community banks have consolidated. Many of them actually did not survive. In a state like Georgia, for example, during the financial crisis, exacerbated with the Black owned and Black led banks and the MDIs more specifically. And so you go back to the same issue, and this is really important. So when you look at a Black owned business or you look at the Black community and you look at a Black owned bank, there’s a lot in common here. A lot of it goes back to the wealth gap. So just like there’s a gap between Black and white households, right 10x is the number often used. I can tell you, it’s 81 times here in Washington, D.C., $284,000 in wealth for a white household versus, I guess, $4,300 in an African-American. So you start there, you start with the individual families and communities and then you say, “OK, so now if I capitalize the business, what does that look like?” Well, I can tell you they’re going to be underfunded, less resilient. We saw this in the financial crisis and they, depending on how capital intensive the business is and its growth prospects, they’ll be hit particularly hard in an economic recession or in a COVID type of scenario like we had. So you had a huge drop off in this past year in Black owned businesses not surviving just like you had a huge death rate in that same disparity. Again, all tied to the very same thing, the very same thing at its core, which is wealth and the ability to improve one’s condition. So the banks are no different. The Black led banks in particular have been, access to capital has been their biggest challenge, so they have been undercapitalized in many cases, limiting their growth. And again, that growth in general is needed for success, but also in a consolidating market is even more needed. The trillion dollars of loss in Black home ownership equity, right, during the financial crisis and the loss of Black businesses. And if these are the communities you’re financing, and if your balance sheet doesn’t have ready access to capital, then you get threatened as well. The real takeaway is that the very same issues that the businesses face and the community face, the banks face. The other thing, of course, is that the more mobile the population becomes, then of course, you also have the issue of the customers may have access elsewhere, which then again, makes that some of the original reason for some of the bank’s founding more difficult to sustain.

Kate Cooney (31:24):

One of the stories that Baradaran tells is in that, this is in the New Deal era. Maybe she talks about the banks taking Harlem deposits, but investing them downtown. And this interpretation that there’s not an entrepreneurial spirit up there. So there’s no capital being lent. So there’s no evidence that there’s entrepreneurial spirit because there’s no entrepreneurs being invested in. 

Brian Argrett (31:49):

This is at its best the whole rationale for CRA. If you’re taking deposits from a community, are you investing, lending in that community so that you’re not extractive? Right. And I think that is exactly part of the challenge now. Part of it is, if you’re not part of the community and if you’re not able to see past what I’ll call the infrastructure and historical remnants within a community, you just view it as risk. It’s all risky. We don’t know you and you’re not entrepreneurial, which doesn’t make any sense because our communities have survived and sustain themselves by being just that, entrepreneurial because of being historically excluded from these very same services elsewhere. Black banks are in and of themselves entrepreneurial entities. You noted my story about how Broadway was founded. You know, these were African-American entrepreneurs who wanted to serve their community and saw that it wasn’t being served. What’s more entrepreneurial than that? I think there’s both a little bit of the perception of risk and then there’s the realities of capital outflow, which is very damaging to the community without a corresponding investment in. And so I think that’s again back to CDFIs and MDIs. This is the gap where they and we have really stepped in and saying we’re bringing capital in that really can be of service to the entrepreneurs and individuals within that community.

Kate Cooney (33:21):

So just building on the Community Reinvestment Act, the CDFIs that you are scaling through this merger. Is this going to be enough given everything we’ve been talking about in terms of understanding of just how systematically we’ve arrived at where we are? I was reading one statistic it would take 238 years to have the Black community achieve the levels of what wealth on average of the white community. And that doesn’t say anything about the gap, that’s just getting to the current level. What do you think will be key to closing the wealth gap?

Brian Argrett (34:01):

We’ve talked about the gap and we’ve talked about the trajectory, but I want to pause there for a moment. But that doesn’t mean that we shouldn’t be all in in trying to figure out either how to narrow that gap or to narrow that spread. And so this is the space I’m in. Every day waking up thinking, OK, we know even if we were, you know, 10x or 100x larger, we can’t close that gap. First of all, we can’t close it just in finance because that’s only part of the challenge. You’ve got to talk about education, healthcare, politics, and all of the systems that are intertwined. And, of course, social aspects. But we have to all within each of those systems and in the collective and even as individuals be focused and intent on, “I’m going to do something, right, or I’m going to pair up or I’m going to figure out my role in this issue of reconciliation.” So I think that’s just incredibly critical and important. And I think I see those of us in this space see the results of that, and it’s amazing. Again, if it’s one family or one business owner or 10, the difference that makes and the multiplier of that over generations is phenomenal. But no, it’s absolutely not enough. We have the greatest opportunity we’ve ever had right now is this acknowledgment and awareness. Let’s start with that. Let’s double down on that. Let’s be honest. Let’s be hurt. Let’s be whatever it is, you know, let’s be uncomfortable. Let’s understand where we are and how we got there. And then let’s start to think about reconciliation. And then let’s, as we do that, let’s not do it in one lane. Let’s think about all of the systems that are contributing to that gap and say, “OK, Kate, you do this one. I’m going to go over here and do this one. “We’re going to coordinate so that we know what each other is doing and that we’re being effective and we’re going to learn from each other. It is such a collaborative and large process. It requires government. It will not occur without governmental intervention. It requires the private sector, it requires philanthropy, and it requires actors who just have learned and are saying, “Hey, I want to do something very different.” One can say unbuild our legacy. One could say alter, but we’ve got it. We got to change it. Within finance, the barriers that we’re trying to change are one, just the access, and what I’ll call the fair shake, someone who can evaluate the risks, make the right calls, and provide the capital at the level that it is needed, as one component. We have to go backwards and look at the banking system, the broader banking system, and say, “What’s our role here? Are we transparent where we’re hurtful? Are we intentional where we’re hurtful?” And start to think through and saying, you know, “that’s got to change?” So again, that may come to the regulatory bodies, that may come to the shareholder base, changing its perspective or the phenomenon we’re seeing now, particularly with the workforce saying,” Wait a minute, you know, we’re looking at the board and we don’t understand why women on the board isn’t the bigger priority. You know, we want you to change it or we don’t like this practice.” I went to a conference two years ago, I think, NACD, National Association of Corporate Directors, and I was blown away because this whole conference and this is, these are mostly like, you know, Fortune 500 directors and that whole group of people, right? The whole focus was on these radical ideas around social justice and climate. But the impetus for it, in large part, was the workforce, and it really threw me a little bit. I mean, we know this to be true, but you know, corporate America is looking saying, “OK, it’s sometimes it’s the customers, but it’s also the workforce.” 

Kate Cooney (38:05):

We’re going to end with a round of technical questions for Brian. On the technical side, on that point about risk, are there certain things you’ve learned over the decades of working in this space where you’ve been able to understand that in the same way that you might think about, why isn’t rent payment count toward a credit score, that there are certain sort of indicators that mitigate what would look like a riskier investment, tricks of the trade on the technical side that if others understood that, more capital might flow to Black owned businesses. 

Brian Argrett (38:41):

I think the way I’ve thought about that over the years has really been around, I call it fingers on the trigger and who’s making the call, and can we at least eliminate the bias, unconscious or otherwise, where I’m presuming because you’re coming to me as a woman with a startup in biotech that, yeah, that’s maybe good, but I’ve got these other six over here, and for some reason, they seem more appealing. And it’s no different in neighborhoods or race. It’s no different in hiring. It’s no different in any number of different places. And so I do think it is very important and part of what I think the CDFIs and in corporate America as well, you do need greater representation in the decisioning lanes. That’s the whole corp and that’s from the board down to who is the chief credit officer? Right? And how are they looking at things and is it only purely analytical? I think if we could just get to that. That would be a big change from where we are, either with that or without that, how do we use other tools to measure one’s credit worthiness? We’re involved even though we’re not on the consumer side, there’s a lot of work being done around this. This is not my expertise, particularly around credit scoring and credit scores and alternative methods. Can we use flows within bank accounts to predict someone’s creditworthiness? Again, our work is more on the commercial side where you can still do some of that, but it’s typically those business owners will be a little further along in terms of some of those traditional measures that you can measure.

Kate Cooney (40:18):

OK, next technical question. Do you consider the loans you make more difficult or risky? And what is it that allows you to extend these risks other than higher interest rates? 

Brian Argrett (40:27):

Yeah. So first thing I’d say is we don’t think they’re riskier loans, and that’s back to the question of perception. So just so you get an appreciation, so my bank has the same regulator as Wells Fargo or Bank of America or you name your local bank, it’s the same body. And they measure us and our loans essentially the same way. And so I can’t make a bunch of risky loans and stay in business. And the question is, well, then how do you do what you do if others perceive it to be risky or if they’re actually inherent risk due to the balance sheets might look different. They may have less equity on their balance sheet because of wealth in the community or in the family. So how do you, how do you get past that? Because that sounds like risk to me. So what are we do? We try and bring other tools to the table. A lot of times to try and increase the probability of success if it’s a real estate project or for that entrepreneur. I’m the chairman of City First Enterprises, which is a nonprofit loan fund that’s connected with us. Also happens to be a bank holding company. Don’t get lost in that, but it’s a CDFI loan fund. It’s capitalized by philanthropic dollars, largely. So if you think about it, I’m capitalized by private dollars at the bank and I have a regulator. They’re capitalized by philanthropic dollars. They can actually come in and do a junior or a subordinate debt piece in a deal where we do a senior piece that’s less risky. They can take a riskier loan, if you will, because they can afford it by their capital stack, their capital structure. But unlike a third party lender, that’s going to say, “Well, I’m going to price to that risk. And instead of that being a 5% loan because it’s deeper in the stack, I’m going to charge you 16% or 32%, right?” These are the, what I’ll call the more predatory ones that are taking that risk piece. Because of our capital, we’re able to charge, let’s call it 6%. And then you blend that with, let’s say, the 4% that the bank is lending on the senior piece. And all of a sudden now you’re financing at a possibly below market rate to a business where the bank risk is more protected because it’s complex. It’s not. It’s not just straight banking, right? That’s easy as compared to what we do. We’re swimming upstream. We’re trying to figure out how to plug the risk here or how to get it done. And so it’s much more intellectually engaging and it’s incredibly fulfilling. But that’s how we, that’s one of the ways in which we do, in which we look at those things.

Kate Cooney (43:27):

Is that a fairly unusual structure to have a nonprofit holding company? 

Brian Argrett (43:31):

There are three banks in the country that I know that have a nonprofit in their ownership structure, Purcell’s Southern Bancorp in Arkansas, Beneficial Bank in Oakland. But it’s a unique thing that we’re able to use to benefit the community, and it’s fantastic.

Kate Cooney (43:52):

You know, that’s something that you see emerging in the social impact bond space. But here you’re really consolidating that under one ownership structure. 

Brian Argrett (44:03):

Yeah, it’s risk sharing or risk splitting. But again, what you don’t want to do is risk split and then charge an exorbitant rate because then you put risk back. It’s great for the investor, but you actually put risk back on the company, now which again, by the way, that’s the housing crisis, right? Well, that’s another story. So let’s go back to the problem, wealth gap, particularly in the African-American community. Let’s go back to the business owner who shares that problem. And let’s say. I’ll give you the solution, so now I’m an African-American developer in the city and I’m trying to produce affordable housing, so developers are the most leveraged. They need debt to finance the projects. It doesn’t matter if it’s affordable housing or not. So the entrepreneur themselves, the developer, and let’s say they’ve been at it 10 years, but you know, they’re still relatively small. They don’t have the balance sheet that will support a massive expansion of delivery of affordable housing. So it’s difficult to underwrite them to provide that capital as a commercial bank. So the city of Washington, D.C., came up with an incredible financing program to which we’re, I think, the sole lender that’s participating in. And what they do is they say, “OK for the emerging developer, we’ll come in and provide some capital, essentially in a partnership with the developer.” So now the developer, plus the city money, which, by the way, has a preferred return on it. I mean, you know, it’s a decent, not extractive, but a decent economic deal. But what it does is it, now it’s bolstered the balance sheet of that developer for that project. And then we can come in alongside being familiar with the complexity of the capital stack and the project. And by the way, the city is not going to guarantee anything. That’s another hurdle we got to get over. And then we can finance that production of affordable housing. So now what does that, just think about the outcomes that produces. So now we have production of affordable housing, which is critical. That’s one of the things we’re trying to do to help solve for it. Now we’ve also financed an African-American business owner, and now he can, after he satisfies whatever the preferred piece is to the city. Now he’s increasing his own balance sheet over time and doing multiple projects. One of the greatest examples that we have H2 development, a guy named Harvey Yancey. I smile every time I think about him. Do you know what his mindset is? He’s a mentor to other businesses in the construction trade, so he’s bringing them along and he’s serious about it. He’s focused. We talk about and he’s like, “No, I got this guy and I’m doing X, Y and Z, and he’s, now look at him now, he’s doing X, Y.” And so you see that multiplier of impact when you can create opportunity and bridge that wealth issue of how that can transform not just that one business now, but families that bought in oh, by the way, I didn’t mention that, the city’s program also has a first time buyer program where they do an equity share for the purchaser. So they say, “OK, we’ll do an equity share,” but they cap it. So meaning the buyer of the unit has appreciation opportunity there as well again, wealth creation. So none of this happens without socially conscious, focused, intentional government action that says, this is why we’re here. There are two different programs. One of them is for the developer, where they’re basically becoming a partner in the project, providing near equity. And then the other is their normal shared equity program effectively for the home buyer. That’s the thing. When you start talking about shared appreciation, you want to benefit more the owner.

Kate Cooney (48:02):

But that also helps the developer. Well, there’s always demand, but it still helps on the, on sell out. 

Brian Argrett (48:11):

So if you think through it, it’s really quite brilliant. I wish I knew how many units they’ve been able to produce and we’ve been able to lend on. But this is the kind of thing that I think again it would requires the district government is financially in very good shape in terms of the surpluses it’s been running, so it has the means to be able to devote resources to affordable housing. It is going to be difficult in a city that is itself its own balance sheet is strained because, you know, these things take capital.

Kate Cooney (48:41):

How do you balance the two banks’ very localized lending with a national bank post-merger? 

Brian Argrett (48:48):

We’re creating a national aggregation platform and a local deployment. So think of it that way. So the public company status really being able to tap into the impact capital markets. All of these things, which the national or bicoastal scale enables, and the absolute scale enables even more so. But you have to deploy locally. The essence of every CDFI is exactly what you said. We understand this community, how it operates, what its needs are, and I can assure you that Los Angeles, its needs, its demographics, is completely different from Washington, D.C. Now they’ve got some things in common, incredibly high cost markets from a real estate and living situation, incredible segregation in both of those cities, and incredible opportunity in both of those cities. Right. So those are things that are somewhat in common, but how we deploy on the ground will be very, very different. So even when we’re thinking about, that is Broadway was historically and now the multifamily lender, versus the more, broader commercial banking platform that City First has. But as we start thinking about small business lending in Southern California, we’re going to go very slow and go backwards from the standpoint of what are the needs of the community there and how do we address those? So I agree it’s a big question, and let’s say we go to the third or fourth market, which certainly is the intention over time. You know, how do you keep that local orientation and it’s going to be with local leadership, local boots on the ground that are connected, not coming in from some corporate somewhere and saying, you know, what works in Houston is good for Chicago because it is not, it’s not going to work. 

Kate Cooney (50:39):

Last question. Let’s talk more about the economics and business in a CDFI model, where typically loans are provided alongside additional services. How are those costs covered? And does the amount of resources needed affect the rate? 

Brian Argrett (50:56):

The business model of the CDFI because they’re all different. Remember, I mentioned the four different categories: the credit union, the commercial bank, the VC fund, or the nonprofit loan fund. All of them are accessing different types of capital to drive their business, while they’re all focused on LMI communities, their models are again very, very different in terms of how, the economics of their model. But regardless of it, let’s take banks and credit unions to being more similar, in terms of their capitalization. What are they doing on interest rates? And then, quite honestly, how are they subsidizing the additional services that they’re providing to help support those low and moderate income communities? So you see that in a lot of different ways as to the subsidy or the additional technical assistance, it’s either deeply built in to the way in which the customer is approached. So like at my shop, we don’t have separate TA, technical assistance, right, which is often funded from philanthropic dollars to provide some of those services, it’s literally built into our whole team. So we’re going to spend the time with the entrepreneur. We’re not telling anybody no when they first come in. We’re trying to understand, give them some advice, give them some counsel, walk them through, lots of hand-holding along the way, which then kind of goes to your second part. Well, that’s kind of screws with the business model, because banking, even if they call it relationship banking, is still relatively low touch, high volume versus private equity, right? Which is higher touch, low volume, high margin. So inherent in that is that there is subsidy that is being provided. The process that come from, it depends again, if it’s in your capital base, if your nonprofit loan fund, you’re funding it partly out of philanthropic dollars. If you’re a CDFI, you’re getting some of that from the CDFI fund through grants, BEA grants and other grants that help with those operating costs or against that risk. So there’s a lot of different techniques. It’s also why you see sometimes a lot higher efficiency ratios. You want the efficiency ratio to be lower because a lot of the additional services, if you will, or structure and the scale are smaller on some of the bank CDFIs and MDIs. And so it actually impacts the profitability of them. It’s a lot of balance in there to try and achieve a measure of serving all of your stakeholders, including your shareholders. 

Kate Cooney (53:34):

OK, well, that is where we’ll stop. We have so enjoyed our time with you, Brian, and I want to thank you so much.

Brian Argrett (53:41):

Hey, thank you. Great to see you again. And we’ll do it again. 

Kate Cooney (53:45):

Join us next week where we continue the conversation on supporting and scaling Black owned and Black led businesses. See you then. 

Manuel Morales (53:58):

This podcast was created by Kate Cooney in collaboration with James Johnson-Piett and the students of the Spring 2021 Lab.

Eun Sun Cho (54:06):

All engineering and production by Ryan McAvoy and Kate Cooney.

Kate Cooney (54:10):

Special thanks to Rhona Ceppos for administrative support and to Ryan Carpenter for assistance with Zoom.

Eun Sun Cho (54:17):

Music from the album City Trees, composed and performed by the artist K-Dub.

Manuel Morales (54:22):

For more information and show notes, visit our website at IEDL.yale.edu.

Eun Sun Cho (54:28):

Thank you for listening.

[Music]