From a spate of bank failures to rising interest rates, this year’s headwinds for smaller lenders have hurt but not halted Black-run banks’ progress.

Since Signature and Silicon Valley banks collapsed in March, followed by First Republic in May, many regional and midsize lenders have been on shaky ground. Some stock prices have wobbled as customers moved their money to Wall Street behemoths seen as safer options. Last month’s deal to combine two California banks has renewed worries of more mergers at a time when higher interest rates are squeezing lenders’ bottom lines.

Black-led banks have felt all of these shocks, but industry experts say they’re working to shore up their footing by doubling down on their missions and hidden strengths built up during the pandemic.

“Our core customers didn’t really leave us,” said Robert James II, president and CEO of Carver Financial Corporation, which operates Carver State Bank headquartered in Savannah, Georgia. “These are deep, deep long-standing relationships.”

The bigger challenge for Carver and other Black-led banks, James said, has come from rising interest rates. As the Federal Reserve has raised rates to the highest level in 22 years to battle inflation, many lenders have had to pass along higher borrowing costs in credit products, like loans, while also offering account holders more attractive interest payments.

“A handful of our more sophisticated customers who might have larger deposits are calling to get a better rate,” said James. “You can’t avoid it.”

Many Black-led banks are better positioned to weather such pressures than a few years ago. After Minneapolis police officers killed George Floyd in May 2020 and the pandemic highlighted long-standing racial inequities, minority lenders saw an influx of support, said Nicole Elam, president and CEO of the National Bankers Association, the top U.S. trade group for minority lenders.

Minority-led banks overall have grown by 35% in the last three years, with Black lenders’ asset size jumping 65% on average, Elam estimated. So while recent challenges are taking a toll, “it’s a much larger story of their unprecedented growth,” she said.

While that trend has provided some cushion from recent blows, James said he now finds himself working to persuade Carver’s large institutional investors to sacrifice some of their potential returns to execute its social mission — a common tension for minority lenders that often rely on external backing because average deposits tend to be smaller than the norm.

“When rates start going to four and five [percent], we’ve got to make the argument, ‘Hey, we can’t afford to pay you four and five, because we’ve still got to be able to lend this money back to these low-wealth communities,” said James, who also serves as chairman of the National Bankers Association.

As Elam put it, Black lenders “have to really find the sweet spot where they’re still lending to the communities that they know need it, but they’re not pricing them out of the cost to borrow, or their rates aren’t adjusting so much to where they can’t pay back their loan.”

James said he’s confident that by the end of the third quarter, fresh deposits will have replenished or exceeded recent withdrawals from Carver. In the meantime, he said, “we are seeing some corporates hear our message that we need some long-term, sticky deposits.”

Credit rating agency Moody’s warned this week of “a significant risk that systemwide deposits will resume their decline in coming quarters.” While Elam said the deposit flight at smaller banks “has since stabilized,” she remains worried about “this perception of a two-tier banking system: banks that are ‘too big to fail,’ and everybody else.”

Consolidation in the financial sector — which predates this spring’s banking crisis — hasn’t spared minority lenders. Two decades ago, there were 45 Black-owned banks nationwide, according to the Federal Deposit Insurance Corporation’s tally of minority depository institutions, or MDIs. Today there are just 22.

One of the newest is Adelphi Bank, which launched this year in the King-Lincoln Bronzeville neighborhood of Columbus, Ohio. Backed with $24 million from a consortium including Cincinnati-based Fifth Third Bancorp, which invested over $2 million, Adelphi opened its doors on May 1 — the same day the federal government took over First Republic in the second-largest U.S. bank failure.

While Adelphi had been in the works for years, “to stand it up in the challenging environment says even more about our ability to be successful,” said Vice Chair Kevin Boyce.

The company’s near-term aspirations are local. Its single branch sits across from the Lincoln Theatre, an iconic African American arts venue dating to the 1920s, when segregation kept Black residents from white-owned establishments. Adelphi takes its name from central Ohio’s first Black-owned bank, Adelphi Loan and Savings Company, which was founded in 1921 but collapsed during the Great Depression.

A top goal, Boyce said, is to bring more bank accounts and access to credit to a historically redlined community where mortgage lenders denied home loans to Black families, curbing decades of potential generational wealth building. In 2019, the latest data available, white U.S. households posted the highest median family wealth at $188,200, roughly eight times as much as the median Black family’s wealth of $24,100, according to Federal Reserve data.

“If you come in for a mortgage loan and your credit score needs some work and some other things need to happen, let’s not turn our back on you,” Boyce said. “Let’s figure out how to get you there.”

More broadly, Adelphi also wants to show it can survive in a difficult climate and encourage other minority-led lenders that they can, too. “We want to be a sound bank that operates on an even keel,” Boyce said.

For some MDIs, a strong mission can be a selling point, said Kenneth Saffold, co-founder and managing partner of o15 Capital Partners, which invests in and lends to minority- and women-led businesses. The firm, which is raising a $300 million fund with global management firm Invesco as a strategic partner, launched last year.

Initially, “we were very much going to use one large institution,” Saffold said, but after SVB’s high-profile meltdown, “we decided as a team that it would be most prudent to use several banks. In doing that, we have made a concerted effort to include diverse-led banks.”

The need to spread money across multiple banks was among the top lessons Black founders and investors drew after the startup-focused SVB fell, with many voicing fears about backsliding on hard-won gains. Saffold said that has been something o15 is determined to guard against.

“Because we are a minority-owned institution and fund manager, it’s important for us to share the wealth, if you will, to make sure that others in our ecosystem, including these Black-owned and minority-owned banks, can participate alongside us,” he said.

Saffold, who previously served as a managing director of BlackRock’s global credit platform and an investment committee member for its minority-focused fund, said more banks are “needing to be much more creative structurally and flexible with borrowers,” including by striking up partnerships they may not have considered in a less challenging market.

James said he has seen this firsthand. One of Carver’s recent partners is East West Bank, which was founded in 1973 to serve Southern California’s Chinese American community. The two lenders are now collaborating on about $5 million of loans, he said.