Perspectives 2020-2021 Public Sector

Citi Perspectives for the Public Sector 36 37 Large financial institutions can aid minority communities by supporting MDIs in their efforts to gain work for federal, state, and local governments, uncover new commercial opportunities to grow revenue, strengthen their capital positions and improve efficiency. The Financial Agent Mentor-Protégé Program Working with government at federal, state and local levels can provide a dependable long-term source of revenue. But for Black- and women-owned community banks, such opportunities are hard to access. In 2018, the U.S. Department of the Treasury decided to address this challenge. The Treasury’s Bureau of the Fiscal Service awards its Financial Agent designation to commercial financial institutions that support key government lines of citizen- and government-facing business. The Bureau created a Financial Agent Mentor-Protégé Program to pair Financial Agents with minority- and women-owned banks so that they can potentially receive this designation and participate in the Financial Agent selection process. The process enables commercial banks to bid on new work; it could therefore open up a valuable long- term source of revenue that would otherwise be unavailable. One of the first banks to benefit from the Mentor-Protégé Program is Industrial Bank, a large Black-owned and operated commercial bank. Working with Citi (which helped the U.S. Department of the Treasury to design the program), Industrial became the first Black-owned bank to serve as a federal subcontractor. Industrial Bank now supports Citi’s management of the Bureau’s OTCnet application, which processes $100 billion of deposits annually, through the critical, customer-facing task of Agency Adoption. In the third quarter of 2020, Industrial Bank also began support for electronic check processing implementation, including onboarding. Seven additional Protégé banks – Bank of Cherokee County (Talequah, OK), Citizens Trust Bank (Atlanta, GA), M&F Bank (Durham, NC), OneUnited Bank (Boston, MA), Optus Bank (Columbia, SC), United Bank of Philadelphia (Philadelphia, PA) and Unity National Bank (Houston, TX) – are now working with Citi to deepen their understanding of how to do business with the Federal Government: some or all of these banks may work with Citi on future federal business. These banks are also actively engaging with Citi to explore how working together can add value and facilitate new potential opportunities with the Bureau of Fiscal Service, as well as U.S. state and local entities. Gaining access to opportunities is not enough, however. Large banks, and especially those designated as Financial Agents, also need to recognize that they may need to provide accommodations such as back office support to enable banks owned or controlled by socially or economically-disadvantaged groups to gain access to federal opportunities. Opening up new business opportunities In order to grow sustainably, a key goal for community banks is to gain access to new commercial business opportunities, including loan participation and credit assignments, which generate critical fee and interest income. Large financial institutions have a responsibility to help MDIs to broaden their access to both borrowers and lenders while ensuring that such initiatives align with their business objectives and meet the needs of the communities they serve. Recognizing how important fee and interest income are for MDIs, and in addition to creating loan participation opportunities, Citi is working on new ways to increase access to both borrowers and lenders, which is informed by our partnerships with MDIs and the communities they serve. Opportunities can also emerge as a result of referrals of suitable business opportunities to Protégé banks. For instance, a Hispanic-owned company that approached Citi for a short-term loan was not a suitable lending candidate for Citi given its size. However, its strong balance sheet and portfolio of underlying assets made it a great opportunity for a Protégé bank, which subsequently syndicated the loan to other minority banks, increasing the bank’s assets and generating additional revenue. Scale and effective balance sheet utilization are critical Business success is not just about gaining access to opportunities. Community banks also need a wide range of support to help them transform their businesses. Most obviously, minority-owned and women-owned banks need help to grow their corporate and retail banking activities. Scale is critical in banking and with the exception of one institution, no community banks have assets of more than $1 billion, which is widely seen as a benchmark for the ability to operate efficiently. Scale is essential to ensure sufficient resources for the technology, compliance and other investments necessary to remain competitive, especially in a low interest rate environment. A number of Protégé Program banks (along with other MDIs) are working with Citi to determine suitable forms of equity to improve their Tier 1 and/or Tier 2 capital, which would increase their capitalization and enhance their ability to grow and achieve scale. Growing banks need to ensure that they allocate their balance sheets efficiently in order to optimize opportunities. Community banks were crucial for channeling government incentives such as Paycheck Protection Program (PPP) loans to small businesses to enable them to keep their workers on payroll during the onset of the COVID-19 crisis. However, these PPP loans consumed a sizeable part of some MDIs’ balance sheets and created considerable exposure. Protégé banks (and some additional minority banks) have reduced their exposure by selling the loans to Citi, freeing up their balance sheet for additional lending activity. Strengthening banks’ capabilities As well as greater opportunities, more capital, and stronger balance sheets, community banks need access to know-how and new technology to strengthen their capabilities so they can grow and provide greater support to the communities they serve. CEOs of Protégé Program banks have opportunities to meet with Citi seniors and discuss issues of their choice, such as bank strategy and stakeholder engagement. Protégé banks are also able to access information about their chosen topics and transfer knowledge, expertise, learning and skills. Over the past year, Protégé Program banks have attended comprehensive Citi training sessions in which leaders from Treasury & Trade Solutions Innovation, Public Sector Banking, Consumer Banking, Risk and Compliance, Inclusive Finance and Global Public Affairs shared valuable insights. Each of the Protégé Program banks have held cross-collaborative meetings with Citi to help them develop their skills – both to improve their ability to bid on federal contracts and also to increase non-interest revenue. Protégé Program banks also now have access to free services via a Technical Assistance Program, through a partnership between Citi and Deloitte that leverages Deloitte’s rich consulting expertise and tools to help banks better plan for future growth. Technology is critical to increased efficiency (and therefore profitability), improved visibility and control (and therefore enhanced risk management) and the ability to better serve (and therefore retain and attract) clients. However, developing platforms for mortgages, credit cards and other consumer and business products that would enable minority banks to diversify is costly and time consuming. To accelerate access to these opportunities, large financial institutions should make technology available via white labeling so that community banks can offer their clients the functionality they need. Talent acquisition and development is also a key need for MDIs. Prep for Prep, a New York based leadership development program, offers promising young students of color access to leading schools and the opportunity to be recruited by top tier corporate firms and financial institutions. As a result of a partnership between Citi and Prep for Prep, Protégé Program banks can engage with these students, providing opportunities for both, and helping to build stronger MDIs for the future. Making a difference in communities across the U.S. The Financial Agent Mentor-Protégé Program with the U.S. Department of the Treasury began with a straightforward ambition to bring federal contract opportunities to minority- and women-owned banks. However, community banks also need a broader range of capital, opportunities to grow and diversify their business, access to technology, and knowledge transfer in specific key areas. Large financial institutions have a responsibility to help MDIs achieve these goals. The Financial Agent Mentor-Protégé Program, which has evolved significantly since its launch, has delivered impressive results. Doyle Mitchell Jr., President and CEO of Industrial Bank, the first bank to go through the Financial Agent Mentor-Protégé Program – and the only one to win a federal contract to date – says the partnership initiative has opened doors for the bank that would otherwise be closed. Most importantly, it has enabled the bank to keep the doors open for its community. According to Laurie Vignaud, President and CEO of Unity National Bank, the program has transformed its business, enabling it to hire people and attract new customers. Yet despite these efforts, an existential threat hangs over many minority-owned banks. Speaking to American Banker, Vignaud explained: “Unless we look at how we leverage our relationships, position ourselves for growth and engage with the community, we could be a nonexistent institution in a few years.” 1 Large financial institutions still need to do more to help to empower minority institutions and their communities, promote racial and gender equity and help to create a fair and inclusive society. Their efforts could play an important part in helping these essential institutions to equip themselves for success in the coming years. Using the Banking Sector to Bring Opportunity to All 1 https://www.americanbanker.com/news/how-citi-is-helping-a-minority-owned-bank-get-back-on-its-feet