Kat Taylor’s Beneficial State Bank Offering Increased Access To Capital & A Triple Bottom Line Community Mission

Our interview coincides with your announcement of the merger of Beneficial State Bank—which you lead—with PanAmerican and Finance & Thrift. What goals inspired your involvement in community banking and willingness to take leadership of Beneficial State Bank?

Kat Taylor: The effort to create Beneficial State Bank sprang from the enormous progress that community banks had made to date—particularly the pioneers like ShoreBank in Chicago, Self-Help Credit Union in North Carolina, and even the Grameen Bank in Bangladesh.

Beneficial State is our effort to create the 2.0, or next-gen, version of those important community economic development organizations. It is a recognition that the banking system is enormously powerful, and that it belongs to us—meaning the people—and needs to work for us, which it has not been doing for some time. The mission of Beneficial State Bank is to change the banking system for good. Nothing else will suffice. 

Elaborate on the Beneficial State Bank’s mission statement: “to change the banking system for good.”

Beneficial State Bank, we believe, has to be a model that is resilient and change-relevant. But we can’t stop there.

$12 trillion of deposits flow through the American economy right now, which creates enormous societal outcomes—not just economic ones. The effort at Beneficial State Bank is to learn from the leaders of the past, but tweak the model in three important ways so that it can persist as a credible change agent in this system at large.

The first design change is the ownership model: 100 percent of the economic rights of Beneficial State Bank belong to Beneficial State Foundation, a public charity permanently governed in the public interest. We do not have a private shareholder who would otherwise insist on a “financial first” or “maximization of profit” agenda. We serve a triple bottom line of social justice, environmental wellbeing, and financial sustainability.           

The governance of the foundation is chosen by other public charities; no private individual can control it. And the bylaws of the foundation mandate that if and when it receives any profits from its economic interest, it can only reinvest those profits into the low-income communities that it serves and the environment upon which we all depend.

In a sense, banking is a form of crowd-funding. It’s not that a specific deposit funds a specific loan, but that FDIC insurance enables banks to finance the world we want to live in—the businesses we need, the nonprofits that help us, and even our own needs, like buying a home, a car, or sending a kid to college. That’s our money that’s rattling around in there, and we need to treat it as if it matters to our outcomes. 

Elaborate on the other two design changes, which were incorporated into the Beneficial State Bank model.

The second design feature of the bank is our very intentional lending practice, which preponderantly serves the new economy.

75 percent of our loans must be in the hands of borrowers who either: are producing something we desperately need—like affordable housing, renewable energy, or sustainable food; are organized similarly to the bank, in the public interest—like B corporations, values-driven companies, worker cooperatives, etc.; or are part of a community that the banking system has traditionally deprived of capital—like small businesses, low-income communities, women and minority-owned businesses, and the social sector at large. The other 25 percent, at the least, cannot be working against us.

This way, we know we’re moving toward an economy that’s fully inclusive, racially and gender just, and environmentally restorative—not simply reinforcing the old economy, which has not been serving us for some time.

The last design feature is radical transparency. We measure and broadcast where we’re lending, what it’s producing when it gets there, and where we’re trying to improve. There’s also the question of how we show up as an American corporation.

We’re a community development financial institution, and we were required to prove that we serve underserved communities to get that status. We’re the second highest rated in the whole constellation of B corporations, which requires an assessment, every other year, of everything from governance to procurement and labor practices. We’re Just-labeled; we pay 150 percent of the living wage in all markets, fully benefited.

We do all this not only to keep ourselves honest, but also to show, by comparison, how poorly the largest banks in the system perform. They can’t qualify for any of these commitments, but their constituencies need to understand that they should.

Our theory of change is that, over time, if we all insist—through the migration of our deposit capital and through the banks that we will agree to invest in, or even the banks that we will agree to work for—that banks make these large commitments, then we will ultimately get a banking system that truly serves the public interest. 

What does the merger with Pan American and Finance and Thrift mean for Beneficial State Bank and California going forward?

To us, this merger is a dream come true.

When we were born in 2007 as OneCalifornia Bank, we envisioned being half-consumer and half-commercial. But we couldn’t do consumer banking at scale because of the hit taken by the residential mortgage market, which was going to be our portal in.

We found an absolutely wonderful partner in Finance and Thrift, which is a scaled auto lender in five cities of the Central Valley; and in Pan-American, a historic minority deposit institution started in the 1950s in East LA by Romana Acosta Bañuelos, the first Latina treasurer of the United States. With these two banks, which understand and fairly serve low-income consumer markets, we can now become one holistic institution serving both consumer and commercial needs.

The merger also takes us into very important demographics and geographies. We previously had no presence in the Central Valley; now, we have branches in Fresno, Modesto, Visalia, Porterville, and Bakersfield. We had no presence in Southern California; now, we have an historic branch on First Street in Boyle Heights and one in North Hollywood. We intend to march south; half of Californians live south of Ventura Boulevard, so we need to be in the Inland Empire, the Imperial Valley, and San Diego. We’re moving into these important geographies.

Our client base has also shifted. 70 percent of clients in the Finance and Thrift and Pan American portfolios prefer to or only speak Spanish. They are prime candidates for determining the direction of beneficial banking, and helping us build out an even more robust product set for the needs that they actually have. It’s a very important day in our evolution.

We’re about $800 million in assets. That’s very small in the banking system, especially when you consider that Chase and BofA alone are almost $2.5 trillion in assets. With these partner banks, we can begin to punch over our weight. We are the David, and they are the Goliath. We can pivot and become a user-driven institution that meets the banking needs of the future on the best technology platforms—and show people that banking really can benefit them, their communities, and the planet. 

Given the growing demand for affordable housing in much of California, how and where is the bank investing via debt in affordable and multifamily housing?

It is a primary commitment of the bank. We were born into a housing crisis in 2007. We watched the mortgage markets burn down and 5 million households lose not only their housing stability, but also their nest eggs.

Early on, we made a commitment to housing lending. We couldn’t be a residential mortgage lender, because the system had blown that opportunity up, but we recruited and built one of the best teams in multifamily lending. We’ve put out $80 million in financing to multifamily in the last 18 months.

Small multifamily—50 units or fewer—is our focus. That’s very important housing stock, because it houses about 82 percent of low-to-moderate-income residents.

But we have to go further as well. We support affordable housing development with both grants and credit enhancements. We’re not a construction lender, but we support some of the pools and non-profits producing that important source of derestricted low-income housing.

We’re also busily at work on three pilots with investor groups who are willing, for a low cost of debt that we subsidize, to stabilize rents at affordable levels. This is a private contract, where they simply make up in the lower cost of debt what they’d lose in net operating income from not raising rents to market. We do it at any level of affordability. It’s what I might call “pay for performance” in the purely private markets.

It’s largely developers who share some of our values who are willing to look at this, but it’s great for them, in terms of tenant stability and community appreciation.

It’s important to blunt economic cycles with something like this. Private markets supply the lion’s share of housing, so we need to find an instrument that works there. We have to do something to make sure that the people who have lived and worked in low-resourced communities to see a better day don’t end up having to move 80 miles away to a miserable commute or worse job prospects. 

Is Beneficial likely to ever be profitable, in the classic sense, as a community development financial institution?

Yes. We have been reliably profitable on core earnings for the last four years, and will be this year as well.

First and foremost, we have to run a very good bank. If we aren’t reliably profitable, we will not get to be a change-maker at all.

We also need to counter the naysayers. One of the worst factors at play in both the economy and the world at large is cynicism. We reject that outright. We work hard to make a model that is credible and then run it well. That’s the basis to counter those who might say that we’re just a novelty bank and nobody else can afford to do this. 

Should the CEOs of Bank of America, Wells Fargo, and Chase be worried reading this interview?

In fairness, we’re still very dependent upon them as a banking system. They are way too big to fail, which is a tragedy.

If I could write the four simple rules of banking regulations, they would be: First, everybody has a 10 percent Tier 1 capital requirement as a buffer. It slows down the economy, but it creates a lot more safety.

Nobody trades securities; it’s wildly inappropriate to do that on the same balance sheet where you’re entrusted with people’s deposits.

Nobody gets bigger than a certain number that does not threaten the system entirely, and that number likely ends in a B, not a T.

And finally: Let them fail. Every single bank, even treasured community banks—let them fail. The equity shareholders do not assume their appropriate level of risk and responsibility unless they have a certainty of failure for mismanagement, or even just bad luck. 

They may not be worried, but I’m worried about the fact that we have banks as big as BofA and Wells Fargo and Chase. Our hope is that as a small actor, but one very aligned in the public interest, we will indicate those behaviors and commitments that deposit equity and human capital will increasingly insist upon, at first to the large regionals, we actually see them taking up some of these behaviors and commitments to win market share from these big banks.

That’s the way we think we’re actually going to change the banking system—not by replacing it, but by migrating those important forms of capital to the best acting banks. If the big seven wake up in time, maybe they’ll migrate too, but they’ve got their work cut out for them, because they are quite large and ossified. 

In addition to financing affordable and multifamily housing clients, BSB has reportedly targeted clean technologies, resource efficiencies, and conservation in the built environment for investment. Please elaborate.

We finance a fair amount of renewable energy—small hydro, solar, and also biogas digesters on dairy, which has a big footprint in the three West Coast states. Every year, we calculate the amount of renewable energy we’re able to finance on our Impact page.

It works out very well with us by dint of a lot of hard work. It’s quite bespoke lending, particularly in complex technologies, but it’s very worth doing to get to an advanced energy economy where these processes and methodologies become more standard, and not one-offs.

We participate in a number of energy retrofit finance and residential solar programs. It works out best for us when we can partner with a corporate sponsor and some public sources of either subsidy or credit enhancement, but these programs can scale, and they do have existing support.

We also run two venture funds alongside the bank: Brightpath Capital, which is the largest shareholder in Sungevity, and Radical Impact, which does commercial energy retrofit and monitoring, and invests in companies like Carbon Lighthouse. We learn a lot in these funds about new technologies and companies.

The start-up community is an essential part of the advanced energy economy, but banks are woefully inappropriate to fund start-ups. When we send our start-up friends to the venture funds, we get to learn from them at the bank, and they get to season, mature, and become eligible for bank debt. 

Lastly, Kat: You personally have shown great interest in “healthy soils” and recently led your bank to invest in a more sustainable food chain system. Could you elaborate on your interests and investments?

We’re trying to awaken the world to the repercussions of our food production system on energy, climate, health, justice, and jobs.

Healthy soils are perhaps our second-most important natural capital base, after the sun. We have degraded them over 100 years of industrial agriculture, and we need them back desperately to feed the world nutrient-dense food, and to act as one of the biggest carbon sinks on the planet. Soil is where a lot of the carbon that has been released to the atmosphere or the oceans properly belongs and can do no harm.

The bank is committed not only to procurement practices that support the regenerative agriculture sector, but also to new lending opportunities in that new supply chain of healthy and justly distributed food. The venture funds are also heavily invested in food tech and supply chain sustainability.

As a bank, we’ve been able to participate in the sustainable food supply chain in the middle—in aggregation and distribution, for example. It has been hard for us to do crop or land lending, and we hit concentration limits pretty quickly in retail, although we are present there.

We also run a working ranch in the name of regenerative agriculture. We do a terrific amount of experimentation on the ranch on practice, data collection, and ideation with many partners, including onsite scientific partners.