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July 1, 1990

eOONOMIC
GOMMeNTORY
Federal Reserve Bank of Cleveland

Minority-Owned Banks:
History and Trends
by Douglas A. Price

Xhe Greater Cleveland community
was informed on March 9, 1990, that
the Office of the Comptroller of the
Currency had moved to close First Bank
National Association, the fourth
minority-owned financial institution to
fail in the Fourth Federal Reserve District in the last three years. Currently,
only one minority-controlled bank
remains operating in the Fourth District.
The total number of minority-owned
banks nationwide has remained steady
during the past seven years, as the number of new entrants and banks gaining
minority status has almost kept pace
with the quantity of banks that have
failed, merged, or lost minority status
after a change in ownership.

ing in the United States by highlighting
selected balance-sheet items for both
minority- and nonminority-owned peer
banks. These items are then interpreted
against the background of previous research studies on minority banks. The
most important implication is that
minority-owned banks, because they
are essentially "niche institutions,"
operate with different marketing plans,
personnel, and customers than do nonminority banks of comparable size.

Minority-owned banks have been
operating in this country since 1866,
and their performance characteristics
have been the subject of numerous
studies. In general, results indicate that
minority-owned banks differ from
other banks in many important
respects, not the least of which is bank
profitability. Compared with their
peers, minority-owned banks have
generated weaker profits, on average,
for a considerable period. This continuing record of poor profitability suggests that many of these institutions are
indeed still struggling for survival.
This Economic Commentary discusses the current health of minority bank-

ISSN 0428-1276

• Identification and Classification
of Minority Banks
Minority institutions experienced significant growth during the 1970s—
growth that was assisted, in part, by
social legislation. During 1969 and
1971, President Nixon signed Executive
Orders #11458 and #11625, which were
designed to develop a program to
strengthen minority business. As a
result of these directives, the Commerce
and Treasury Departments established
the Minority Bank Development Program (MBDP).' The MBDP publishes
a roster of minority banks that is distributed to public and private organizations to encourage use of minoritybank services. Whether a bank
participates in the MBDP is a common
standard used to gauge its ownership
status as a minority institution.
For purposes of eligibility, a minorityowned institution is classified as any

The minority banking industry,
which experienced significant growth
during the 1970s, remained strong
through the 1980s, with a 71-percent
increase in total assets between 1983
and 1989. But hidden in that figure is
a dynamic process of growth and
change resulting not only from
minority banks' efforts to adjust to
deregulation, adverse macroeconomic conditions, and increased
competition—factors with which all
U.S. banks must deal—but also from
their efforts to deal with the specific
environmental factors and risks that
they alone face.

institution owned or controlled by one
of the following groups: black
American, native American, HispanicAmerican, Asian-American, Eskimo,
Aleut, multiracial, or women. The
diversity of ownership is worth noting,
because some researchers think that
bank performance varies with the identity of the controlling group.
According to Treasury officials,
approximately 150 U.S. financial
institutions are minority owned or controlled and therefore eligible for the
MBDP program. Government agencies
such as the Department of Housing and
Urban Development (HUD), the Internal Revenue Service (IRS), and the
Department of Defense are encouraged
to place federal and other Treasurycollected funds into minority institutions. HUD and its grantees and
recipients have provided $125 million
to $140 million annually in deposits to
qualifying institutions.
Minority-owned institutions are also
currently receiving deposits of about
$35 million annually through the
Department of Energy (DOE), which
has established escrow accounts to
hold fines assessed against energyrelated companies for alleged violations of federal laws and regulations.
The DOE's program is in the process
of being expanded.
In addition to the adoption of social
legislation designed to aid all minority
banks, government assistance beyond
the apparent norm has also been given
at times. Irvine H. Sprague, in his book
Bailout: An Insider's Account of Bank
Failures and Rescues, describes how
the Federal Deposit Insurance Corporation (FDIC) utilized the "essentiality
doctrine" for the first time during
1971. A provision of the Federal
Deposit Insurance Act—informally
called the essentiality doctrine—gives
the FDIC's board of directors the
authority to prevent a bank from failing
if its services are regarded as essential
to its community.
The FDIC first used this power to
prevent Unity Bank of Boston from

failing at any cost, because its services
were determined to be essential to the
community. In this case, "community"
was defined as the black community
that relied on the bank's services. The
essentiality doctrine was also used in
1972 to assist the Bank of the Commonwealth in Detroit. More recently,
a combined effort by the National
Bankers Association, state regulators,
and the FDIC enabled the successful
recapitalization of a failed minority
bank in Seattle, while allowing it to
retain its minority ownership.
Not surprisingly, minority-owned banks
tend to be located where minoritygroup populations are large. Assets of
most minority institutions are concentrated primarily in just three Federal
Reserve Districts: San Francisco, Dallas, and Atlanta. These three areas
account for 53 percent of all minorityowned banks and 63 percent of the
assets held by such banks. AsianAmerican-owned institutions are
located primarily in southern California,
while the majority of HispanicAmerican banks are located in southern
Texas. The assets of black-owned institutions are found primarily in the
Chicago, Richmond, and Atlanta
Federal Reserve Districts, which collectively house 61 percent of black-owned
banks and 68 percent of black-ownedbank assets.
• Recent History of Bank
Performance
During the 1980s, the financial industry began to face deregulation, adverse
macroeconomic conditions, and
increased competition. Many changes
in legislation and regulation were
passed with the intention of "leveling
the playing field" for all financial
institutions. However, the overall quantity of minority banks remained steady.
In 1983, 105 minority banks existed;
by the third quarter of 1989, that number had declined only to 103, a 2percent decrease. Within each ownership group, however, the growth in
number, as well as in assets, has varied.
For example, during this seven-year
period, the number of Asian-American
and Hispanic-American banks

increased 71 percent and 21 percent,
respectively, while the number of blackowned banks declined 22 percent. By
comparison, the total number of
insured banks in the United States
declined 12 percent (from 16,112 to
14,108) over the same period.
Despite a slight decline in the number
of minority banks, their aggregate
assets reflected strong growth from
1983 to 1989, increasing from $5.18
billion to $8.85 billion, or 71 percent.
Hispanic-American institutions
enjoyed the largest asset growth—$2.3
billion, or a 116-percent increase.
During the same period, asset growth
of black-owned banks increased only
$231 million, or 14 percent. By comparison, the aggregate assets of all
insured banks grew 38 percent, from
$2.49 trillion to $3.43 trillion.
• Measuring and Comparing
Performance
Factors contributing to the success of
minority-owned banks are the same as
those for any banking institution: (1)
banks must target specific community
needs and service them, (2) the directors and management must work
together toward achieving common
goals and objectives, (3) prudent levels
of risk should be taken, and (4) operations should be run efficiently. But
because there appear to be fundamental
distinctions between the balance-sheet
profiles of minority and nonminority
banks, strategies implemented by their
respective directorate and management
teams may need to vary with the type of
institution.
Previous research on the operations
and performance of minority-owned
banks indicates that, compared with
nonminority banks, these banks tend to
rely more heavily on government
deposits.7 As a consequence, minority
banks also hold fewer loans and more
liquid assets. The loan portfolio itself
has traditionally shown a strong reliance on real estate, while commercial
loans have been underrepresented.
Studies have also found that these
banks have a more labor-intensive
production process, possibly because

TABLE 1

BALANCE-SHEET COMPARISONS
(Averages for banks in operation for at least three years)
Peer Group
$10-$25 Million
Minority

Nonminoritv

Peer Group
S25-S50 Million

Peer Group
$50-$300 Million

Minority

Nonminoritv

Minority

Nonminoritv

49.6
21.4
9.1
10.2
32.1
5.0

56.0
30.9
15.3
9.5
20.8
5.9

51.7
24.8
10.3
10.5
31.2
5.0

55.3
29.6
19.2
6.4
24.7
7.9

57.1
29.2
13.0
11.9
26.8
5.0

SELECTED LIABILITIES (PERCENT OF TOTAL DEPOSITS)
7. Domestic
81.7
90.7
8. Government
2.7
0.1
9. State/political subdivision
12.5
8.1

86.3
1.5
8.4

91.2
0.2
7.4

88.5
1.8
7.0

91.7
0.2
6.4

SELECTED ASSETS (PERCENT OF TOTAL ASSETS)
1. Net loans and leases
52.0
2.
Real estate
27.3
3.
Commercial
12.6
4.
Consumer
12.8
5. Securities
22.8
6. Federal funds sold
9.3

SELECTED RATIOS (PERCENT)
10. Equity capital/total assets
11. Net income/total assets (ROA)
12. Net income/equity capital (ROE)
13. Loss provision/loans and leases
MEMO ITEMS
14. Numbers of employees/
millions of dollars in assets
15. Number of banks

7.6
(0.1)
(1.0)
0.9

9.3
0.4
4.4
0.4

6.9
0.2
2.5
0.5

8.9
0.4
5.1
0.4

7.0
0.4
6.3
0.4

8.1
0.5
6.1
0.3

1.0
23

0.6
2,874

0.9
23

0.6
3,156

0.7
39

0.6
4,509

SOURCE: Consolidated Report of Condition, Board of Governors of the Federal Reserve System, June 30, 1989.

their depositors tend to keep accounts
with small balances and high activity
levels. Current data suggest that
most of these previous research findings remain valid.
The distinction regarding government
deposits still exists: Last year, the
average minority bank relied more
heavily on deposits originating from
the federal government than did nonminority banks. Such deposits as a percentage of total liabilities are several
hundred basis points greater for the
average minority bank than for its nonminority peer (table 1, line 8)." The
average minority bank also holds between 9 and 54 percent more in
deposits from the state government
(line 9). Reliance on governmentgenerated deposits is probably due to
the MBDP.

Compared with its nonminority peer
group, the typical minority bank with
assets of less than $50 million has a
slightly greater percentage of its assets
tied up in loans, whereas the average
minority bank with assets of more than
$50 million holds a slightly lower percentage in loans. The distribution of
these loans by type (for example, commercial, consumer, and real estate) is
also quite different when comparing
the loan portfolios of minority and nonminority institutions. One example is
that the average minority bank generally holds 40 to 50 percent more commercial loans as a percentage of total assets
(line 3).
Although data presented in table 1 are
a snapshot of the industry as of June
1989, it does appear that minorityowned banks may have, over time, increased their holdings of commercial

loans while decreasing their holdings
of real estate loans. This may signal a
shift in the primary mission of
minority-owned banks from making
loans to individual consumers to concentrating on business loans.
The liquidity profile of the average
minority institution still differs from
that of its nonminority peer group. The
former owns fewer securities as a
percentage of total assets (line 5) than
does the latter. The average minority
bank also continues to hold more of its
assets in federal funds sold than does
the average nonminority bank (line 6).
Federal funds are highly liquid, but the
rate of return is likely to be lower than
that of longer-term securities. Bates
and Bradford found that because the
demand deposit accounts of blackowned banks are more variable than
those of nonminority banks, such

banks must hold a higher percentage of
assets in liquid form (such as government securities and federal funds sold)
to be able to meet withdrawals. 12
Minority banks also exhibit varying
degrees of performance success as
measured by return on assets (ROA)
and return on equity (ROE)—lines 11
and 12, respectively. The average
minority bank with assets of less than
$50 million generated lower ROAs and
ROEs than did the average nonminority bank of comparable size.
Note that ROEs may vary considerably
by ownership type. One study suggests
that profitability problems of minority
banks can largely be attributed to blackowned institutions. However, as a
minority bank's assets increase, performance measures become more
favorable and more similar to nonminority-bank averages. The average
minority bank with assets of more than
$50 million earns about the same ROE
as does the average nonminority bank
of similar size.
The ROE results can be explained, in
part, by differences in capital levels.
Capitalization (line 10) is important because it is the buffer that allows banks
to remain viable in the face of unexpected loan losses. With the advent of
risk-based capital guidelines, it is
believed that banks with riskier asset
mixes should possess higher levels of
capital than should banks with higherquality assets. Considering that the
average minority bank has a higher
ratio of loss provision to total loans
(line 13), indicating a weaker or riskier
loan portfolio, it should have a higher
level of capital. Unfortunately, the
average minority bank is more thinly
capitalized than its nonminority peer.

Current data indicate that operating-cost
differences among institutions remain
notable. One proxy for measuring the
efficiency of a bank's operations is its
ratio of employees to assets (line 14).
Although the average minority bank
tends to have more employees per million dollars of assets than do nonminority banks, it becomes more efficient and more closely resembles its
nonminority peer as its assets increase.
Minority-owned banks may also benefit
from reducing expenses related to bank
premises, state and local obligations,
and real estate and commercial loans.

• Conclusion
Smaller minority banks, on average, are
less profitable than nonminority banks
of similar size, primarily due to a variety of market-area weaknesses. As a
counterbalance, various government
programs have been designed to
increase the services demanded of
minority institutions, but despite this
assistance, some are still struggling.
Deregulation, the increased competitive
environment, and other market forces
are pressuring all banks to focus on segments of their potential customer base
and on specific products.

• Black-Owned Banks
The earliest research studies of
minority-owned banks implicitly
focused on black-owned banks because
they represented most of the assets controlled by minority-owned institutions
at the time. As mentioned previously,
the ownership mix of minority banks
has become more diverse. Nevertheless, black-owned banks remain a subject of interest in their own right, especially in areas with large black
populations. The recent closing of
another black-owned bank in the
Fourth Federal Reserve District has
caused some to question the long-term
prospects of these banks.

During this period of upheaval and consolidation in the banking business, it
appears to be especially important that
minority-owned banks target specific
community needs, define an exact mission, retain strong management, risk
capital prudently, and establish proper
controls. With recognition of the
peculiar risks and environmental factors
they face, it seems likely that small
minority banks can remain viable and
can continue to contribute to the
economic progress of their communities.

Although black-owned banks do have
a slightly lower ROA than do all banks
collectively, a study by Robert T. Clair
submits that their long-run viability is
unthreatened. Clair's results show
that loan losses and operating expenses
are no higher at black-owned banks
than at nonminority banks operating in
the same specific neighborhoods. This
suggests that the lower ROAs of blackowned banks are due to the location of
the bank, not to ownership or management. Another study finds that minority
bank presidents are well educated, possess a broad range of banking experience, and can be expected to contribute
positively to bank performance. This
finding is significant, because several
previous studies reported that experienced managers were in short supply at
minority-owned banks.

To the extent that bank location
accounts for performance problems,
especially for black-owned banks, one
strategy may be to broaden the geographic market of the institution.
Otherwise, managers may need to run
their banks even more conservatively,
given their thinner capitalization,
greater loan-loss provisions, and higher
cost structures. Relying on stringent underwriting guidelines may conflict with
these banks' missions to provide
greater banking resources to the communities that they serve. But management teams at the weaker minority
banks may have to forgo short-term
goals for profit and growth in order to
ensure another implicit longer-term
goal: continued viability of the bank.

• Footnotes
1. Section 1204 of the Financial Institutions
Recovery, Reform, and Enforcement Act of
1989 (FIRREA) appears to reaffirm the
federal government's role in the development
of minority-owned financial institutions. One
of the provisions states that "the Secretary of
the Treasury shall consult with the appropriate federal banking agencies and the National Credit Union Administration Board on
methods for increasing the use of underutilized minority banks, women's banks, and
limited-income credit unions as depositories
or financial agents of federal agencies."
2. Minority banks are classified based on
ownership and control issues, not on the
presumption of limiting the customer base to
the same segment of the population.
3. The Treasury's list of minority-owned
or -controlled financial institutions also
includes savings and loans, mutual savings
banks, and credit unions, while the Federal
Reserve's list includes only commercial
banks.
4. Another organization that services
minority-owned or -controlled financial institutions is the National Bankers Association
(NBA). The NBA was incorporated in 1972
as a national trade association for minorityowned institutions. It provides a forum for
sharing information and resources and also
actively solicits deposits from government
agencies and major corporations for its members.
5. See Irvine H. Sprague, Bailout: An
Insider's Account of Bank Failures and Rescues, New York: Basic Books, Inc., 1986.
6. The legal basis for the FDIC's decision
was the bank's service to the black community and the exposure to loss of the city
government's own deposits.
7. See John T. Boorman, "The Prospects for
Minority-Owned Commercial Banks: A Comparative Performance Analysis," Journal of
Bank Research, vol. 4, no. 4 (Winter 1974),
pp. 263-79.
8. See John T. Boorman and Myron L.
Kwast, "The Start-Up Experience of
Minority-Owned Commercial Banks: A Comparative Analysis," Journal of Finance, vol.
29, no. 4 (September 1974), pp. 1123-41.
9. See Donald L. Kohn, "Minority Owned
Banks," Monthly Review, Federal Reserve
Bank of Kansas City (February 1972), pp.
11 -20, and Boorman (footnote 7).

10. See Edward D. Irons, "Black BankingProblems and Prospects," Journal of
Finance, vol. 26, no. 2 (May 1971), pp.
407-25, and Boorman and Kwast (footnote 8).
11. The table pertains to banks with assets of
less than $300 million. Typically, banks of
this size would be called "small" banks and
banks with greater assets would be called
"large" banks. However, because the data set
contained just three banks with assets of
$300 million or more, only the smaller banks
were analyzed.
12. See Timothy Bates and William Bradford, "An Analysis of the Portfolio Behavior
of Black-Owned Commercial Banks," Journal of Finance, vol. 35, no. 3 (June 1980),
pp. 753-68.
13. See David R. Meinster and Elyas
Elyasiani, "The Performance of Foreign
Owned, Minority Owned, and Holding Company Owned Banks in the U.S.," Journal of
Banking and Finance, vol. 12, no. 2 (June
1988), pp. 293-313, for findings that "...performance problems found in the aggregate
minority banks are primarily due to the performance of black owned banks." (p. 307)
14. See Myron L. Kwast, "New MinorityOwned Commercial Banks: A Statistical
Analysis," Journal of Bank Research, vol.
12, no. 1 (Spring 1981), pp. 37-45. Also see
William L. Scott, Mona J. Gardner, and
Dixie L. Mills, "Expense Preference and
Minority Banking: A Note," Financial
Review, vol. 23, no. 1 (February 1988), pp.
105-15, for another viewpoint about why
minority-owned banks have higher operating
costs. The authors contend that banks that
fully utilized the MBDP do not have higher
salaries or occupancy expenses, "...but did
engage in nontraditional expense preference
by offering relatively low loan rates to their
customers over the period 1977 through
1983." (p. 114)
15. See Robert T. Clair, "The Performance
of Black-Owned Banks in Their Primary
Market Areas," Economic Review, Federal
Reserve Bank of Dallas (November 1988),
pp. 11-20.
16. See Mona J. Gardner, "Minority Owned
Banks: A Managerial and Performance
Analysis," Journal of Bank Research, vol.
15, no. 1 (Spring 1984), pp. 26-34, for the
suggestion that bank profitability and a bank
president's formal education are positively
related.

Douglas A. Price wrote this article while he
was an economic analyst at the Federal
Resene Bank of Cleveland. The author
would like to thank Mark S. Sniderman,
Ray ford P. Kalich, and Lawrence Cuyfor
helpful comments and suggestions.
The views stated herein are those of the
author and not necessarily those of the
Federal Reserve Bank of Cleveland or of the
Board of Governors of the Federal Reserve
System.

Economic Commentary is a semimonthly periodical published by the Federal Reserve Bank of Cleveland. Copies of the titles listed
below are available through the Public Affairs and Bank Relations Department, 216/579-2157.
Inflation and Soft Landing Prospects
John J. Erceg
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Setting the Discount Rate
EJ. Stevens
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Mergers, Acquisitions and Evolution
of the Region's Corporations
Erica L. Groshen and
Barbara Grothe
August 1, 1989
LBOs and Conflicts of Interest
William P. Osterberg
August 15, 1989
Have the Characteristics of HighEarning Banks Changed?
Evidence from Ohio
Paul R. Watro
September 1, 1989
The Indicator P-Star: Just What
Does It Indicate?
John B. Carlson
September 15, 1989
Forecasting Turning Points With
Leading Indicators
Gerald H. Anderson and
John J. Erceg
October 1, 1989
Breaking the Inflation-Recession
Cycle
W. Lee Hoskins
October 15, 1989

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101

Address Correction Requested:
Please send corrected mailing label to
the above address.

Material may be reprinted provided that
the source is credited. Please send copies
of reprinted materials to the editor.

Foreign Capital Inflows: Another
Trojan Horse?
Gerald H. Anderson and
Michael F. Bryan
November 1, 1989
How Soft a Landing?
Paul J. Nickels and
John J. Erceg
November 15, 1989
Monetary Policy and the M2 Target
Susan A. Black and
William T. Gavin
December 1, 1989
Making Judgments About Mortgage
Lending Patterns
Robert B. Avery
December 15, 1989
Does The Fed Cause Christmas?
Charles T. Carlstrom and
Edward N. Gamber
January 1, 1990
Can R&D Be the Rx for the Midwest?
Julia Melkers and Randall Eberts
January 15, 1990
Is Current Fiscal Policy an Obstacle
to Sound Monetary Policy?
W. Lee Hoskins
February 1,1990
How Are Wages Determined?
Erica L. Groshen
February 15, 1990

The Economic Outlook: Growth
Weakens, Inflation Unchanged
John J. Erceg and Paul J. Nickels
March 1, 1990
The Case for Price Stability
W. Lee Hoskins
March 15, 1990
The High-Yield Debt Market:
1980-1990
Richard H. Jefferis, Jr.
April 1, 1990
Standardizing World Securities
Clearance Systems
Ramon P. DeGennaro and
Christopher J. Pike
April 15, 1990
A Monetary Policy for the 1990s
W. Lee Hoskins
May 1, 1990
A Critique of Monetary
Protectionism
W. Lee Hoskins and
Owen F. Humpage
May 15, 1990
Making Sense of the Moynihan
Gambit: A Perspective on the Social
Security Debate
David Altig
Junel, 1990
Current Outlook: Sustained Growth,
Sustained Inflation
John J. Erceg and Paul J. Nickels
June 15, 1990

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