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For Release on Delivery
Saturday, December 28, 1968
10:00 a.m., C.S.T. (11:00 a.m., E.S.T.)




THE BANKING SYSTEM AND URBAN
ECONOMIC DEVELOPMENT

A Paper Presented by

Andrew F. Brimmer
Member
Board of Governors of the
Federal Reserve System

Before a Joint Session of the

1968 Annual Meetings of the
American Real Estate and Urban Economics Association
and the
American Finance Association

Palmer House Hotel
Chicago, Illinois

December 28, 1968

THE BANKING SYSTEM AND URBAN
ECONOMIC DEVELOPMENT
By
Andrew F. Brimmer*

Commercial banks, despite their generally strong desire to
contribute, actually can play only a limited and specialized role in the
national campaign to solve our pressing urban problems. While urging
bankers to demonstrate an awareness of the crisis confronting the cities
and the need to devise means of coping with the situation, many urban
developers tend to assign to commercial banks a much more critical
mission than the latter can perform.

Unfortunately, bank officers

themselves -- and even bank supervisors and elected officials responsible for banking legislation —

far too frequently fail to delineate

clearly those tasks which banks can (and should) undertake

while

resisting pressures to underwrite schemes which are obviously beyond
the proper scope of commercial banking.

^Member, Board of Governors of the Federal Reserve System. I am
indebted to a number of persons for assistance in the preparation of
this paper. Brenton C. Leavitt of the Board's Staff supervised the
survey of efforts to charter new banks in urban ghettoes which was
conducted by Bank Examination officials of each Federal Reserve Bank.
Jack M. Egerston and Hugh J. Maguire of the Board's Staff prepared the
assessment of performance of Negro-owned and operated banks as reflected
in the reports of examination. Jacqueline McDaniel did the computer
programming which made possible the analysis of the profit and loss
experience of all national and insured nonmember banks chartered in the
United States during 1952-64. Outside the Federal Reserve, a number of
bankers have been particularly helpful in the assessment of the performance of newly-chartered banks oxwied and operated by Negroes. My
assistant, Mary Ann Graves, worked on several parts of the project.




•

2Having made the above observations, let me hasten to say that

I am not suggesting that bankers are rushing into urban development
projects without due regard to the safety and soundness of their
institutions.

On the contrary, most bankers probably are skirting many

ghetto lending opportunities which they could exploit without going
beyond the boundaries of acceptable risks established for their regular
loans. Moreover, even today only a relatively small number of banks
have launched special lending programs designed to cope with the higher
risks inherent in the extension of credit to residents and business
enterprises operating in ghetto areas.
to make is this:

Rather, the key point I wish

the conviction is spreading among many observers,

and not exclusively among residents of ghetto areas, that banks (because
of their command over such a substantial share of the nation's financial
resources) possess a unique ability to pioneer urban reconstruction.
The strength of this conviction is illustrated by the current efforts
to launch new commercial banks in ghettoes -- with special emphasis
on their ownership and operation by Negroes -- and to enact Federal
legislation authorizing the creation of community development banks.
Despite the sincerity of the

persons making such efforts -- and

despite the powerful support they have attracted from numerous public
officials -- all of us should avoid fostering expectations about banks1
potential contributions to urban development which outrun their true
ability to respond.
On the other hand, we should encourage the banks to recast
their traditionally narrow conception of their functions and to




-3participate more fully in the process of urban development by concentrating in those areas where they have a comparative advantage:

that is, in

lending and credit financing. - But to accomplish this objective, the
banks will have to exercise much more imagination than in the past -- as
many of them are already, doing.

Moreover, the banks can also play an

enlarged role in the provision of equity capital in ghetto areas through
expanded use of existing financing arrangements, and their role could be
further enhanced by legislation permitting banks to acquire domestically
assets similar to those in which they can invest abroad.

Again, however,

we must avoid strengthening the unwarranted assumption that banks
the employment of some sort of miraculous financing schemes —

by

can

transform urban ghettoes into economic Edens.
The main issues raised in the rest of this paper and the
conclusions reached can be summarized briefly:




-

Many banks are amending their lending procedures
with the aim of extending more credit to ghetto
residents and businesses. However, even in the
case of Government-backed programs, progress has
been less rapid than many bankers had expected.

-

Banks owned and operated by Negroes are exhibiting
a mixed performance. In general, the older banks
are growing slowly and rendering moderately adequate
service to their communities. The banks launched in
the first half of the 1360fs typically have moved
aggressively to serve their areas -- but at the cost
of sizable and continuing loan losses. Several banks
opened earlier this year seen to be getting underway
reasonably well; they apparently have benefited from —
and thus have avoided — some of the difficulties
encountered by those banks started earlier in the
decade. A number of other banks (to be owned and
operated by Negroes) are in the process of organization
around the country; However the outlook for some is not

particularly pressing — especially where the
organisers are attempting to create all-black
institutions.
•

Because of the high costs of starting and operating
new banks — and because of the fairly long breakeven period they must ordinarily face -- it may be
well to search for other alternatives to meet the
banking needs of ghetto areas. Where State banking
laws permit, the expansion of existing banks into
the ghetto may be the best route.

•

Although it may be more efficient to invent new kinds
pf banking institutions to finance some urban development projects, one ought to be fairly certain that
this alternative is the only one available. One such
proposal is to create community development banks
which would be back-stopped by ear-marking the surplus
earnings of Federal Reserve Banks. While the suggestion has attracted considerable support ffrom some
members of Congress as well as from private groups,
in my opinion, it is not a good way to finance urban
development•

•

On the other hand, it may be possible to achieve a
substantial increase in the availability of risk
capital (which ghetto areas sorely need) by allowing commercial banks to expand their acquisition of
equity securities — as they can do now in their
operations abroad;

Expansion of Commercial Bank Lending in the Ghetto
As I stressed above, if commercial banks have a comparative
advantage in ujrban development, it lies in the field of credit and
financing.

But to exploit this advantage, banks are finding it

necessary to modify both their lending standards and their lending
practices.

For example, in attempting to play a greater role in home

financing in urban areas and depressed rural sections of California,




-5one large bank has set aside $100 million to be invested in real estate
mortgages.

To implement the program, it reduced its minimum standards

for homes by roughly one-third" in order to lend against a wider range
of structures.

In the past, to be eligible, a house had to include 3

bedrooms, 1-1/2 baths and 1,000 square feet; these requirements were
reduced to 2 bedrooms, 1 bath and 750 square feet.A^

In addition, a

special cadre of lending officers, with many years of experience in
minority areas, was created to work on the mortgage loan program.
Although the bank earns a profit under the program, the rate of return
Is less than that which could be gained from the acquisition of
mortgages on homes outside the ghetto.

Despite the special emphasis

put behind the program, however, the bank has fallen behind the lending
schedule projected.

It has found the obstacles to lending on ghetto

properties even more difficult to overcome than it had anticipated.
The need for many banks to review their lending policies in
the personal loan category is clearly demonstrated by the way in which
many of them have managed their share of the student guaranteed loan
program established by the Higher Education Act of 1965. According to
1/ The quantitative impact of such a change is hard to assess,
since there has been a clear trend of supply toward upper-graded
houses in recent years. For example, in the West, only 7 per cent
of the new homes sold in the last few years had 2 or fewer bedrooms
compared with 48 per cent of the stock of owner-occupied housing
in this category in I960. Of the 1960 owner-occupied stock in the
West, 66 per cent had only 1 bathroom and 4 per cent had none or
shared 1 bathroom; in 1967, only 11 per cent of the new supply
(excluding mobile homes) was in the "1-bathroom" category. Source:
Bureau of the Census, Census of Housing, 1960, and "Construction
Reports - Sales of New One-Family Homes,11 Annual Statistics, 1967.




-6a study of the program recently made by the Federal Reserve Bank of
Boston, the program works to the disadvantage of college students in
ghetto families.

This unintended effect (and perhaps unconscious result

from many bankers' point of view) comes about primarily because of a
shortage of loanable funds.

In order to ration such funds, many banks

restrict such loans to potential borrowers with previous deposit or
customer relations with the institution.

They also tend to give

preference to borrowers in the banks* immediate service area.

Both of

these criteria tend to favor the more affluent middle class and suburban
families -- and to put college students and their families who live in
the ghetto to a considerable disadvantage in the competition for
educational loans.
The criteria used by many banks to appraise loan applications
submitted by minority group businessmen have a similar effect.

Because

the operations of these entrepreneurs are usually small, under*
capitalized, and can exhibit a record of only indifferent performance,
they ordinarily cannot qualify for loans under normal terms. Yet, the
drive for business ownership in the ghetto is strong, and banks are
increasingly identified as a source of hope -- or frustration or both.
Recognizing this situation, many banks around the country (alone or in
cooperation with other institutions) are devising special screening
techniques and specialized loan programs which are beginning to meet
some of these loan requests.

The availability of Government guarantees

(especially those provided by the Small Business Administration)
has greatly enhanced banks9 willingness to take on loans originating




-7with ghetto businessmen.

Moreover, banks have discovered that, to

accomplish an even modest expansion of loans to such aspiring entrepreneurs, they must also provider considerable amount of counseling —
and in many cases outright basic training in business management
techniques.
Finally, numerous banks are also seeking new avenues of cooperation with minority groups in our central cities.

In addition to broaden-

ing employment opportunities, revising lending policies and participation
in community projects, some banks are inviting minority group members to
join their boards of directors or to sit on advisory boards for branches
located in areas populated primarily by minority groups. This approach
appears to be especially appealing to minority groups in those communities
where it has been tried.

In states where many of the banks have a large

network of branches, such representation may be a promising vehicle to
enable the banks to reach out to minority groups in the urban ghettoes.
The Black Banks: An Assessment
In the meantime, efforts to launch new, black-controlled banks
have grown into one of the most active movements on the urban development
scene.

So far during 1968, three banks have opened for business -- in

Boston, Seattle and Kansas City, Missouri.

In at least a dozen other

cities, planning for new ghetto banks is progressing x*ith different
degrees of assurance.JL^

The principal motivation underlying this

1/ The most advanced projects apparently are in Detroit and
Pittsburgh. Efforts are also reported in Cincinnati, Cleveland,
and Dayton, Ohio; Denver, Colorado; Dallas and Fort Worth, Texas;
Greensboro, North Carolina; Indianapolis, Indiana; Jackson,
Mississippi; Norfolk, Virginia; Oklahoma City, Oklahoma; Portland,
Oregon; and San Francisco, California.




•

8-

movement seems to stem from a conviction that only when Negroes own
and control a large number of strong commercial banks will they be able
to have access to bank credit on equal terms compared with other potential
borrowers.

This conviction also seems to be shared in varying degrees

by a number of civil

rights organisations, church groups, trade unions,

and others. Thus, Negro-owned and controlled banks are conceived of as
vital links in the process of urban development.
The extent to which this movement should be encouraged is a
matter of considerable importance from the point of view of public policy.
In order to improve our knowledge and understanding in this area, a major
effort hat been made in the last month*or-so to appraise the performance
of the existing Negro-owned banks and to assess the general prospects
for those about to be launched. As part of this inquiry, the examination
reports on each of the banks for the last few years were reviewed by the
Board98 Staff. The Examination Departments in each Federal Reserve Bank
were asked to provide an independent analysis of the experience of the
Negro-owned banks in their Districts (if any) and to report on plans to
start new Institutions with similar sponsorship.

In addition, a number

of commercial bankers with long experience in selected cities where
Negro-owned banks have been chartered recently (or are being planned)
were asked to share with me their personal appraisal of each situation.
By both written and oral comment, the views of those involved in the
planning» organization, or management of Negro-owned banks have been




•

9-

collectedJ/

Finally, the views of other Federal bank supervisory agencies

were ascertained.

The following analysis draws on all of these sources.

At the end of 1967,-there were 17 banks owned and operated by
Negroes> and three new ones have been started this year.
attached.)

(See Table 1

These 17 banks had total assets of just over $162 million

(and total deposits of about $147 million) at the end of 1967.

Thus,

their share of total assets represented 0.039 per cent of the total assets
of all insured commercial banks.

However, even this modest proportion

reflected steady improvement; in 1958 their share of total assets was
0.019 per cent, and in 1962 it was 0.026 per cent.
To a substantial degree, the more rapid progress of the Negroowned banks can be tracci to the recently chartered institutions. While
six of the banks were founded before the depression of the 1930fs, most
of them wers launched af-.er World Wcr II, particularly in the last five
years. Most of the new iastvuutions are national banks which obtained
their charters as a result of the more liberal policies followed by the
Comptroller of the Currency since the early 1960fs.

In the last few

years, a number of States have also chartered Negro-ownad banks.

It

should also be noted that -- while the older institutions were primarily
located in the South -- most of the new banks have been started in large
northern and western cities with heavy concentration of Negroes.
As shown in Table 2 the rate of growth of the Negro-owned and
operated banks has greatly exceeded that achieved by all insured commercial

1/ The Washington, D. C. office of the National Bankers Association
(under the direction of Dr. Edward D. Irons) has also been particularly
helpful through sharing statistics, analytical material and personal
comments on Negro-owned and operated banks.




•

10-

banks and by thd smaller Federal Reserve member banks. Again, however
as the atatiatie* in Table 2 also imake clear

the faster expansion is

due primarily to the recently chartered Negro banks.
The general character of the banking business as conducted by
Negro institutions can be seen in Table 3, which compares several key
ratios for Negro banks with those for all insured commercial banks and
the smaller Federal Reserve member banks.

It will be noted also that

the typical Negro bank is quite small; at the end of last year, the mean
of their asset holdings was $9.5 million compared with $33.2 million for
all insured commercial banks.

In relation to total deposits, the Negro

banks tend to be more liquid than banks generally — but not much more
than other small banks.

The share of their resources placed in loans is

substantially below that for the banking system as a whole
well below that for other small institutions.

and also

On the other hand, as

shown in Table 1, there is wide variation among the Negro*owned banks in
the proportion of their assets employed as loans to local customers.
The Negro banks seem to rely on time deposits as a source of
funds to a much greater extent than do other banks. Moreover, their
time accounts include a far greater proportion of small, individual
savings accounts and consumer-type time deposits; they tend to have only
a few of the large demonination negotiable certificates of deposits in
which many corporate treasurers invest their liquid balances.

On the

other hand, some of the Negro banks (and especially some of the newer
institutions) have sought actively to obtain corporate and public demand




•

11-

deposits, and they have been reasonably successful.

Yet* the relatively

large number of modest time accounts in the Negro banks necessarily
imposes on them substantially higher operating cost — without providing
a commensurate volume of earning assets^
While this global view is interesting, it does not yield much
information about the performance of the Negro-owned banks.

For this

purpose, it is necessary tp rely on the bank examination report^ on each
institution. While the details relating to individual banks cannot be
revealed, it is possible to comment on the general conditions and performance of the banks as a group.

The net evaluation of Negro banks by the

Federal Reserve Board's examination staff is shown in Table

In the

examination process, banks are appraised against three general criteria
(capital adequacy, asset quality, and management performance) and are given
an overall score. Capital adequacy is measured by the ratio of capital to risk
assets; the higher is the ratio, the more adequate is capital, and the
bank is rated in Group 1. Asset quality is judged primarily in terms of the
size of loanlosses written off and the volume of loans that are of somewhat less than good quality or in respect to which repayment is doubtful —
compared with the bank's capital.

Class A banks are those whose assets

are of the highest quality, A bank's management team is evaluated in terms
of its effective control over banking operations as well as its ability to
employ the bank's assets profitably.

Finally, the overall evaluation is

1/ For example, one of the larger Negro owned banks reports that
its average time deposit is about $300, while it typically needs the
earnings from a minimum account of $600 just to break-even.




the result of weighing each of the three separate criteria.

It is

stucmarised by assigning to the bank a composite rating, with a Group 1
rating suggesting that the bank is in the top category with respect to
each of the standards.

It is possible for a bank to be weak in one area

but strong in the other two; such a situation might result in a Group 2
composite rating*

On the other hand, banks in Group 3 demonstrate weak-

ness in more than one area and may well be classified by examiners as
problem banks, which means they require extra attention from supervisory
authorities.

Batiks with a composite rating in Group 4 are those facing

particularly serious difficulties.
On balance, as one can see from Table 6, most of the Negro-owned
banks have adequate capital.

However, in the last year or so, their capital

positions have weakened somewhat. Much of this reflects the rapid growth
of some of the institutions — particularly of the recently chartered
banks.

But some of it also reflects the sizable loan losses written off --

again mainly by several of the banks launched during the last few years.
The assets of the Negro-owned banks must be classified as of
only fair quality.

Generally, the volume of loan losses or loans about

which repayment is doubtful is moderate.
losses have been heavy.
management control.

However, in several of the banks,

In one case, the problem was traced to poor

In another case, the bank (a recently chartered one)

made a major effort to grow by expanding loans to local borrowers.

However,

because of the low family incomes and the marginal character of most of
the businesses in its market area, the bank ran into serious difficulties.




•

13-

Host of the banks spend a substantial amount of time and effort (not
always with success) trying to collect on defaulted or delinquent loans.
Past due paper in the group averages 10 per cent, with the range being
from 1 per cent to 25 per cent. While this situation is partly a legacy
of general ghetto conditions, collection policies in seme of the banks
could also be strengthened.
The lack of management depth (the absence of competent junior
officers) is common to most of the banks.

In fact, the severe shortage

of management talent is the outstanding problem facing them.

For example,

in two of the four banks whose management was rated as poor, the top
executives were judged to be fairly good; but beccuse of excessively small
or weak staffs, the bank's overall performance w&* unsatisfactory.

The

average age of the chief executives in the Negro-owned banks is about
55, and the range is from 31 to 77. However, the younger officers tend
to be concentrated in the recently chartered banks.

In several of the

older banks, the chief executives are well beyond normal retirement age.
These banks in particular suffer not only from

currently serious operating

handicaps but they also face major questions of management succession.
The board of directors (especially in small institutions) can
play an important part in strengthening the management of a bank.

In a

few of the Negro-owned banks, the bank examiners found this to be the case.
However, in several of the banks, the directors relied heavily on active
officers.

In practically every report, the directors were described as

capable men with independent judgment. At the same time, however, in several
of the banks the directors lacked any banking experience, and policies and




•

14-

operations were left entirely to active officers. Moreover, while businessmen constitute the majority of most of the bank boards, there is also
a heavy representation of professional men whose experience (which may be
broadly based in their own areas) gives them little basis for guiding
bank management^ In one of the banks (where several of the directors
were in their 709s and 801s), seven new board members were added in 1968,
all of whom were about 50 years of age.

This move is expected to result in

substantial improvement of the bank.
One of the greatest deficiencies commented on in most of the examination reports was in the field of operations and controls. Again, the
primary cause was the lack of experienced personnel.

Partly in response to

urgings by supervisory authorities, efforts are being made in several banks
to remedy the situation.

For instance, one of the banks recently hired a

CPA firm to work with its auditor and, in effect, to train him.

In another

instance, a correspondent of one of the banks examined all phases of the
bank98 operations and made specific recommendations to the board of directors;
it is expected that most of these will be carried out. A few of the banks
have arranged

(or are comtemplating

the move)

to have a correspondent

handle demand and time deposit accounting on the latter9s computer.
In Table 5, the asset evaluation and composite rating of Negroowned banks are compared with those for a sample of Federal Reserve State
member banks.

Because of the small number of Negro-owned banks, one must

be cautious in drawing conclusions from these data.

However, the typical

1/ For example, in 1967, the boards of 15 Negro-owned banks were made
up as follows: 1 architect; 4 attorneys; 1 professional athlete; 3 contractors; 23 businessmen and merchants; 4 educators; 24 finance and insurance
men; 1 professional politican; 3 publishers; 22 physicians; 7 ministers;
and 8 retired persons.




•

15-

Negro-owned bank does seem to have assets of a quality somewhat lower than
that characteristic of the average Federal Reserve State member bank. Their
overall performance as measured by the composite rating also appears to be
less strong. 4gain, as mentioned above, some of the difference can be
traced to inherent difficulties of trying to conduct a banking business
in the ghetto, but some of the divergence also reflects the present shortage
of management personnel in the Negro-owned banks.
Earnings and Profitability of the Negro Banks
Generally earnings of the Negro-owned banks are poor.

This is

due to a number of circumstances of which the following are of most importance:
a large number of employee^, insufficiently controlled expenses, high
interest expense, and heavy loan losses*

While the first three factors

apply to all the Negro-owned banks, the heavy loan losses are concentrated
in the recently chartered banks.
In Table 6, several measures of bank profitability are summarized.
The experience of Negro banks is also compared with that for all insured
commercial banks.

It will be noted that expenses in the Negro-owned banks

are especially burdensome.

In 1967, for them, expenses as a proportion of

current operating income ran almost 20 percentage points higher than for
ail insured commercial banks.
widened appreciably.

In the last five years, the differential has

Most of the relative acceleration can be traced to the

recently chartered Negro-owned institutions.

£11 except a few of these have

opened in large northern and western cities where labor and other costs are
much higher than in the nation as a whole.
This is reflected in the fact that salaries and wages as a percentage of current operating income have been lower for all banks than for




•

16-

the Negro banks. Moreover, in all insured banks taken as a group, the
percentage has been generally declining while the reverse is true for the
Negro institutions.

Not only do the latter seem to have a relatively large

number of employees for banks of their size, but they must also pay higher
wages per employee.

For example, in 19671 Negro batiks with total deposits

between $5-$l0 million paid employees an average salary of $3,965, or 7 per
cent more than the average of $3,707 paid by all insured banks.

In Negro

banks with total deposits between $10-$25 million, the average employees
salary in the same year was $4,290, compared with $3,796 for all insured
banks

a difference of 13 per cent.

In contrast, officers salaries in

Negro banks were lower than in all insured banks of comparable size*

For

Negro banks with total deposits between $5-$10 million, officers1 salaries
averaged $9,340, or 2-1/2 per cent less than the average of $9,567 in all
insured banks.

In institutions with total deposits of $10-$25 million, the

average was $9,319 for Negro banks and $10,568 for all insured banks —

a

difference of 12 per cent.!/
Negro banks obtain a higher proportion of their current operating
income from service charges than do all insured batiks. While the relative
importance of this source has been declining in all insured institutions,
it has become of greater significance in the Negro banks.

Again, given the

heavy costs of handling a large number of small transactions, the Negroowned banks (and particularly the recently chartered ones) have found it
necessary to apply service charges to a much larger proportion of their
accounts.

On the other hand, Negro banks receive a somewhat smaller share

1/ These salary figures were compiled by the National Bankers Association from data supplied by the Federal Deposit Insurance Corporation.




• 17of their current operating income from loans than do all insured banks*
Moreover, for them the proportion has remained relatively static while it
has been rising for banks generally.

rate of return on loans has been

typically higher for Negro banks than for others —
formers* somewhat heavier reliance

perhaps reflecting the

real estate loans.

But in recent

years (partly because of the loan losses sustained by the recently chartered
institutions), the profitability of loans made by Negro banks has drifted
downward -- while the reverse is true for all insured banks.
In fact, because of the adverse loan experience of the recently
chartered banks, the Negro-owned institutions as a group have had no aftertax profits during the last three years.

Their net income after taxes as

a percentage of capital was 5.6 per cent in 1962 just prior to the opening
of the first of the new banks.
each year:

Subsequently, the rate of return declined

1963, 5.2 per cent; 1964, 2*1 per cent; 1965, -1.0 per cent;

1966, ^5*0 per cent, and 1967, -5.4 per cent. A similar pattern has emerged
with respect to their net income after taxes as a percentage of total assets.
In contrast, over tite same period, the rate of return after taxes in all
insured commercial banks has remained in the neighborhood of 9 per cent.
If we distinguish between the recently chartered Negro banks and the older
ones, quite a different picture emerges. While year-to-year variations are
observable, the rate of return in tiie older institutions has continued
about as before —

averaging about 5 per cent of capital.

But for each of

the recently opened Negro banks (with one exception), net losses have
occurred each year, and the one exception has enjoyed only one year of




profit, and that was 1967.

In relation to capital, these losses have

averaged almost 12 per cent per year.

But for several individual banks,

the loss rate has been not only greater but has become progressively
larger each year.
Here, then, is the most disturbing aspect of the movement to
launch new Negro-owned banks.

Because of exceptionally high operating

costs and adverse lending experience, they have found it extremely difficult
to develop into viable institutions.

The natural question to ask is whether

these difficulties are unique to new ghetto banks or whether they are
characteristic of new banks generally.

Economics of De Novo Banking
To answer this question, the operating and income experience was
analyzed for all the new banks chartered in the United States during the
three years 1962, 1963 and 1964.

The results of this analysis are

summarized in Tables 7 - 1 1 . T h e banks were classified by source of
charter (national vs. State) and size of deposits.

During the three years,

a total of 430 new national banks began operations, and 355 State-chartered
2/

insured nonmember banks opened for business.—'

However, because of mergers

1/ Ihe data employed were derived from the "Report of Income and
Dividends,1! by calender years for all insured commercial banks collected
by the Federal Deposit Insurance Corporation.
2/ There were two or three State chartered banks which opened
as cambers of the Federal Reserve System during the three years
under review. However, these were eliminated to simplify the
computer programming task.




and other changes, the final sample contained 399 national banks and 338
1'
State insured nonmeinber banks*—'
As Tables 7 and 8 show, the vast majority of newly chartered
banks incur losses from current operations and in net income after taxes
during the first year of operation. About three-quarters of both national
and State banks experienced net current operating losses in their first
year.

One would expect this result as operating expenses are incurred

before deposits are accumulated and employed in income producing loans
and investments.

However, during the second year of operations, roughly

two-thirds of the banks had developed their operations to the point where
their total operating earnings exceeded total operating expenses.

From the

third year on, all except a few of the banks had reached this stage.
With respect to net income after taxes, about four-fifths of the
newly chartered banks experienced losses during the first year of operation,
but in the second year, well over half of them had shifted to a profitable
position.

Here, however, a somewhat larger proportion of the banks were

still experiencing

net losses after taxes from the third year on than

was the case with respect to current operations.

This mainly reflects the

impact of charge-offs for loan losses net of recoveries.
1/ The 31 national banks which were eliminated from the sample
included 26 mergers; 3 banks were declared insolvent, and one each was
involved in the absorption of another bank or a shell reorganization.
The merged banks were in existence for an average of just under 4
years. Among the 17 State banks eliminated from the sample, 14
involved mergers, with the average longevity being about 3 years.
The other 3 banks were shell reorganizations.




The magnitude of the operating and income results for the newly
chartered banks are shown in Tables 9, 10, and 11.

National banks as a

group, ran a current operating deficit during the first year which averaged
about $12 thousand, and the average for State insured nonmember banks was
about $14 thousand.

In the second year of business, net current operating

earnings averaged $31 thousand for national banks and $24 thousand for the
State chartered institutions*

For both groups, the average margin of

earnings over expenses widen steadily through the sixth year

to $103

thousand for national banks and to $93 thousand for State banks. With
respect to net income after taxes, both national and State banks experienced
an average loss of approximately $20 thousand during the first year of
operations.

In the second year, both groups recorded an after-tax profit

of just under $10 thousand.

Subsequently, however, average profits of the

national banks rose much more rapidly than did the profits of State chartered
institutions.

Some of the difference is explained by the larger relative

size of the national banks. As indicated in Table 11, in the fourth year
of operation, the typical newly chartered national bank had. total deposits
between $5-$10 million, compared with average total deposits between $2-$5
million for the typical State bank.
Finally, Table 11 also shows the performance of the newly chartered
Negro-owned banks compared with that of banks in general-

The first thing

to note is that the average deficit from current operations {$30 thousand)
and the average after-tax loss <$31 thousand) for the Negro-owned banks
were substantially larger during the first year they were in business than




for the other two groups of banks.

It will also be noted that, in the

second year, the Negro banks also shifted to a positive net operating
earnings position. Moreover, -their margin of earnings over operating
expenses was higher -- and rose more rapidly -- than that registered by
ail new national and State banks.

For example, in the fourth year of

operations, the Negro banks had net current operating earnings which
averaged $125 thousand —

compared with $75 thousand for national banks

and $70 thousand for State institutions.

It should be observed further

that by the fourth year of operations, the five hew Negro banks had total
deposits which averaged between $5-$10 million.
Nevertheless, the final outcome for the Negro banks —

as

measured by after*tax income < - was quite different from tbe results
»
achieved by the other banks:

not only did they record net losses each

year but the average size of the losses rose steeply < - from $400
in the second year to $23 thousand in the third year and to $154 thousand
in the fourth year.

The main factor behind this unfavorable result is

the heavy volume of loan losses which the Negro banks incurred.

For

example, in the second year of operations, these banks had net loan writeoffs which averaged $9 thousand.

In the third year, such loan losses rose

to an average of $60 thousand, and in the fourth year they climbed to $180
thousand.
From the foregoing analysis, one must conclude that new Negroowned banks do face a much more difficult task than do new banks generally.




•

22-

Obviously, the difficulties do not spring from the fact that the banks
are owned and operated by Negroes.

Rather, the problems seem to arise

partly from the fact that the market for their services is circumscribed
by the general conditions in the ghetto — high unemployment, low incomes,
a low rate of savings and the marginal character of local businesses.

But

these obstacles are reinforced by the severe shortage of trained manage*
ment personnel*

While the latter difficulty must be faced by all batiks

(and especially by new ones), it is a particularly heavy burden for the
Negro-owned banks. Moreover, when the latter attempt to build their staffs
entirely from within the black community (as several have tried' to do)*, an
already difficult mission is made even less promising.

Alternative Means of Providing Banking Services in the Urban Ghetto
If newly chartered independent banks are likely to face extreme
difficulties in trying to meet the banking needs of ghetto residents, what
reasonable alternatives are there?
First of all, we should take note of the fact that some of the
recently chartered banks owned and operated by Negroes are beginning to get
better control of their internal operations. Several of the measures being
taken were discussed above. Moreover, in at least one instance, a decision
was made recently to bid less aggressively for time deposits -- although
it meant the bank would face a slower growth rate for a year or so. This
particular bank had built up a sizable volume of relatively large denomination certificates of deposit on which it was paying a high rate of interest.




By allowing that block cf time deposits to run-off, the bank expects to
achieve a considerable improvement in its current operating earnings.
Moreover, the new banks which opened this year seem to be getting
off to a reasonably good start.

They were able to raise more than the

minimum initial capital required, and their banking quarters are well
located.

Their staffs have been chosen on the basis of available skills —

which has meant the%employment of white persons and orientals as well as
black people.

The inflow of deposits has been fairly good, and in one

case the buildup

has already exceeded the level the bank's management

expected to reach in the third year of operations.

There is a clear

indication that efforts are being made to keep operating expenses under
close control from the very beginning.

Of at least equal importance, the

banks seem to be screening loan applications with special care to minimize
the future incidence of losses.

In at least one case, this has meant the

employment of a significant share of deposits in participations with
correspondent banks rather than in outlets carrying particularly high risks
in its immediate market area. While this newest group of Negro-owned and
operated banks has not acquired enough experience to enable one to predict
their clear success, they have made a promising beginning.

Thus, on the

basis of thorough planning and careful operation, banks of this character
may be able to contribute significantly to urban economic development.
Other approaches are available as well.

One of these is the

expansion of services in the ghetto through the building of new branches
of large commercial banks where State laws permit*




For example, one large

•

24-

Califomia bank has decided to establish another office in South Los Angeles -although it already has several branches in that part of the city.
the new branch will be rather unique:

However,

for practical purposes, it will be

essentially a de novo bank planned, developed and operated in close coopera~
tion with the residents of an area populated almost entirely by Negroes,
The land on which the branch will be located has been assembled by a Negro
real estate firm; a Negro architect will design the building, which will
be constructed by a Negro contractor.

The branch will be managed by a

Negro who has acquired considerable experience as an officer in a number of
the bank's existing branches in different parts of the city.

The staff

will be integrated; while some of them will be experienced employees
transferred from other offices, several will be recent graduates of the
bank's special training program aimed at persons of limited skills living
in the neighborhood.

So far, the area's reaction to the project appears

to be quite favorable, and it will undoubtedly meet a significant part of
the community's banking needs.
Still another approach has been developed in Minneapolis.

In

that city's Near North Side (which -- on a smaller scale — has many of
the characteristics of an urban ghetto), one of the large bank holding
companies in the State will establish a de novo bank whose business is
expected to come almost entirely from local residents.

A number of banks

have offices on the fringes of the Near North Side, and three are located
in the area itself. However, partly because of new highway and urban
renewal projects, the three banking offices within the area will be relocated —

in at least one case beyond the generally recognized boundaries

of the community.




•

25The application of the holding company to acquire the new bank

presented the Board with a number of conflicting considerations*

The

applicant already controlled a significant share of the State's banking
resources; together with a competing bank holding company based in
Minneapolis, it also controlled a substantial portion of the Twin-Cityfs
deposits.

Thus, by statute, the Board was required to determine

whether the evidence established that the adverse competitive consequences
which appeared inherent in the proposal were "clearly out-weighed" by
likely benefits to the community.

Such a clear out-weighing was not

sufficiently demonstrated in the application itself*

Indeed, the

applicant's contention gave rise to conflicting judgments about the
nature and scope of the needs of the community and the extent to which
applicant's proposal xrould successfully serve these needs*
Only after further and extensive staff inquiries addressed to
applicant's representatives, personal interviews with residents, businessmen and community workers in the area did there emerge a clear indication
that numerous banking requirements of the ghetto community within the
Near North Side were not being served in adequate measure*

Having

identified more clearly the particular deficiencies in the coioomunity's
banking services, the Board was able to evaluate the validity of the
proposals advanced by the holding company —

especially more convenient

banking hours and an integrated staff, headed by a Negro president, whose
training and experience would permit them to cope with the type of social
and economic problems that would accompany loan applications from the




•

26-

community. Moreover, the staff was expected to take the time and steps
required to encourage and develop loan applications.
On a weighing of the foregoing considerations, the Federal
Reserve Board approved the acquisition of the new bank by the holding
company.

The Comptroller of the Currency had earlier granted a charter

for the new institution, and the Federal Reserve Bank of Minneapolis
had recommended approval of the application.
Here, then, are promising examples of the way in which large,
existing banking institutions can help in the economic development of
our urban ghettoes — while at the same time involving the ghetto residents
in a meaningful fashion.
Proposals for Community Development Banks
Earlier this year, still another approach was advanced to expand
banking services in the ghetto*

This one involves the creation of

"Community Development Banks,91 and it appeared in several bills introduced
in the last Congress; most of these bills also contained a number of
proposalis to foster community self-help efforts.

One provision contained

in virtually all of them would set aside a substantial share of net earnings of the Federal Reserve Banks to back-stop the newly established
community development banks.
For example, Si.3875 (f,The Community Development Bank Act of
1963") would authorize the establishment of local community development
corporations (CDCfs) to be chartered by an independent Federal agency -the National Community Corporation Certification Board.




The CDC9s would

*27*
apparantly represent a blending of profit-making entrepreneural skills
and non-profit social development arrangements*

They would be eligible

for certain grants and tax exemptions until the local community developed
to the stage where such assistance was ho longer needed.
The bill would also provide for Community Development Banks
(CDB's); these local institutions would be organized by CDC's and chartered
by the Comptroller of the Currency.

These banks in turn would make loans

to individuals and businesses related in various ways to the GDC's that
formed them. A U. S. Community Development Bank would be established to
serve as a secondary banking institution for the local community development banks: the nation-wide institution would also help develop areas that
do not have local banks organized by CDC9s.
There would also be established a National Community Development
Bank Guarantee Fund, of which the Federal Reserve Board would be trustee.
The resources of the Guarantee Fund would be provided by having the Board
make available no less than 90 per cent of the aggregate net earnings of
the Federal Reserve Banks when needed to back up the debt obligations
issued by local community development banks.

The Fund would be maintained

at 25 per cent of the principal amount of these obligations falling due in
any subsequent year.

The Fund would also have available the earnings from

investing its excess resources in U. S. Government securities.
If the bill were enacted, and using projected Federal Reserve
Bank net earnings in 1968, the System would be required to pay approximately
$2 billion annually into the proposed Guarantee Fund.




While I personally have serious reservations about the efficacy
of trying to attack urban problems in the manner contemplated in the
proposal, I will not attempt to assess its soundness or the desirability
of the legislation as such.

However, I think it would be helpful to

inquire as to benefits and detriments of the suggested arrangement for
using the Federal-Reserve System1s aggregate net earnings as the source
of a Guarantee Fund for the obligations of community development Banks.
The System's gross earnings are derived principally from its
portfolio of Government securities, etc., and to a much lesser extent
from interest on advances of Federal Reserve credit.

The considerations

that lead to System actions that diminish or increase income are numerous
and complicated, but they relate directly to economic phenomena.

If the

earnings of the System were used as guaranty obligations of CDB9s, however,
a political bias might be introduced.

The scope of the functions of CDB1*

might then depend on the amount of funds derived annually from the Federal
Reserve.

In other words, actions tending to increase System income, such

as expansion of the portfolio or increase of discount rates, wmld expand
the potential of the CDB's, whereas action with the opposite effect would
limit that potential.

In my opinion, it would be undesirable to inject

this factor into Federal Reserve deliberations.
By its very nature, the amount of the proposed National
Community Development Bank Guarantee Fund would be an arbitrary amount,
in no way tailored to the estimated needs or appropriate limits of the




•

29-

program8 embodied in the proposed Community Self-Determination Act. The
amount of the Guarantee Fund - and the consequent range of potential
activities of CDB's — would vary with monetary policy actions.

Thus,

the variations would have no necessary relationship to the intended scope
and extent of the Community Self-Determination programs*
Consequently, I would urge those supporting this approach to
urban development to re-examine it closely, t y hunch is they will find
t
it not so appealing after all.

Commercial Banks and Equity Financing
Finally, while I have doubts about the potential contributions
of proposed community development banks, I believe there is need for a
new vehicle through which commercial banks may participate more effectively
in programs for urban development, including not only the financing and
development of low-income housing projects but the financing of small and
medium-size businesses, particularly through the purchase of equities.
At present, there are, of course, a number of programs
provided by Federal law for private financing, with Government sponsorship and stimulus, of low~income housing developments, the most recent
of which were incorporated in the Housing and Urban Development Act
of 1968. There is also a program for the financing of small businesses
through State-chartered small business investment companies under the
supervision of the Small Business Administration.

Banks are authorized

to invest in the stock of corporations organized pursuant to Title IX




*30*
of the 1968 Housing and Urbati Development Act and to invest, to a
limited extent, in stock of small business iiivestmeiit companies.
However, there does not exist any program under Federal law
that is aimed solely or primarily at participation by commercial banks in
the financing of urban renewal projects and small business enterprises,
particularly through the purchase of equities• With certain limited
exceptions, banks may not themselves directly purchase corporate stocks.
A precedent exists in the foreign area for indirect investment by banks in equities of business enterprises.

Since 1919, a

section of the Federal Reserve Acti^has provided for the chartering by
the Board of Governors of corporations to engage in international or
foreign banking ot other international or financial operations and for
the purchase by member banks of stock in such corporations.

Because

the law was sponsored by Senator Edge, these corporations are generally
referred to as "Edge" corporations.

In addition, under another section

of the Federal Reserve ictlf9 member banks may invest in stock of similar
corporations organized under State laws, subject to an agreement by the
corporation to restrict its operations in accordance with limitations
prescribed by the Board*

These corporations are generally referred to

as "Agreement" corporations.
At the present time, there are 57 such foreign banking or
financing corporations organized with the approval of the Board. As

JL/ Section 25 (a); 12 U.S.C. 611-631
2/ Section 25; 12 U.S.C. 601-604a




•

31-

permitted by the law and subject to regulations of the Board, these corporations have made equity investments in a wide variety of business enterprises in foreign countries• Their total equity holdings as of June 30,
1968, were about $275 million*

Only a small part of these holdings

represents stock in non-financial businesses*

Nevertheless, they include

stock of appliance companies, steel mills, hotels, realty companies, sugar
and flour mills, tobacco growers, concrete and cement companies, restaurants , tanneries, and breweries*
If American banks are thus enabled to assist indirectly in the
equity financing of businesses abroad, in my opinion there is no logical reason
why they should not be permitted to do likewise in the United States*
Following the precedent of Edge corporations, legislation
might be enacted that would authorize national banks, as well as in*
sured State banks to the extent permissible under State laws, to sub*
scribe to stock of domestic corporations chartered by the Federal
Reserve with authority to extend financial assistance through direct
loans and equity financing to housing projects and to retail and
wholesale business enterprises necessary to the improvement of living
conditions and economic development in our large cities*

While such

a corporation might be wholly owned by a single large bank, there would
be no reason for which a number of banks might not join in its
organization.
Because by their very nature the projects and businesses
to be financed by the corporations would involve more-than-normal




•

32-

credit risks, it might be necessary to provide certain tax incentives
for the organization of the corporations similar to those now provided
for small business investment companies*

Moreover, in order that the

corporations might be enabled to raise necessary funds in addition
to capital through the issuance of debentures, it might be necessary
to require such debentures to be guaranteed in whole or in part
by the organizing bank or banks*

Consideration might even be given

to such guarantees by Federal Reserve Banks*

It will be recalled

that under former section 13b of the Federal Reserve Act, repealed
in 1958, the Reserve Banks were authorized to make loans to and
purchase obligations of established industrial or commercial businesses
and to participate with commercial banks, up to 80 per cent, in extensions of credit made by banks to such businesses.
Any legislation of the kind here suggested should be
relatively simple and uncomplicated by unnecessary restrictions.
The proposed corporations should be given lending, investment, and
other powers necessary to accomplish their purposes, subject to
regulation by the Board*

At the same time, it might be desirable

to provide some statutory limitations upon the percentage of a
banks's capital and surplus that may be invested in the proposed
corporations, upon the amount that may be invested by the corporations in a single enterprise, and upon the aggregate amount of




•

33-

debentures or other obligations that may be issued by the corporations.
Equity investments by the corporations might be made subject, like
those of Edge corporations, to approval by the Board.
To make the corporations truly effective, they should be
chartered only if they have a substantial minimum capital.

Small business

investment companies may be organized with a capital of only $150,000.

In

contrast, an Edge corporation is required to have a minimum capital of $2
million.
Uhile I do not advance the above suggestion as the best -- or
only -- vehicle through which commercial banks can enlarge their contribution to urban economic development, I am convinced that the approach is
sufficiently promising to warrant consideration.

Concluding Comments
The main theme of this paper was outlined in the first section,
and the principal conclusions were also stated.

However, so that my

argument will not be misunderstood, let me reiterate my basic view:
I believe that commercial banks, while responding in a constructive
way to the rising demands that they play a more active role in the quest
for solutions

to our urban problems, should concentrate on those areas

.in which they have a comparative advantage. While the opening of a greater
number of jobs to minority groups (and helping to train them to fill such
openings) is to be encouraged, the bank's most significant contribution is
in the area of lending and credit financing.

By imaginative modifications

of their traditional lending practices, they can expand the availability




•

34-

of credit in urban ghettdes -- although to do so will require a considerable
effort.
While I support the movement to charter banks to be owned and
operated by Negroes, I also think each new project should be undertaken
only after exceptionally careful planning.

In the process, the availability

of managment talent should be assigned especially significant weight.
Obviously, I am not suggesting that Negroes cannot manage banks successfully.

Rather, I am simply recognizing that -- partly because of the

legacy of racial discrimination and segregation in this country -- very
few Negroes have had an opportunity to acquire the experience called for
in bank operations. While they are making strides in closing the deficit
in skills, the rate of progress is not rapid enough to generate a supply
of talents sufficient to enable staffing a large number of Negro-owned
banks primarily with black people.

In the meantime, if progress in the

launching of such banks is to continue -- and even accelerate (as it should),
the institutions must be willing to employ technical skills where they can
be found -- even if they are embodied in members of other races.
Moreover, because of the high costs involved in launching small
de novo banks, it is also desirable that alternative approaches be tried -such as the opening of ghetto offices by the large established commercial
banks.

To me, this approach is certainly more appealing than an easy

granting of new charters —

some of which might become primarily instruments

for accumulating heavy loan losses resulting in the erosion of capital.
This becomes especially significant when we recall that a good share of
the capital of the new banks being chartered in the ghetto is obtained
from investors who are far from rich.




•

35I think the expansion of the opportunities for established

commercial banks to cooperate with ghetto residents in the development
of their areas is also preferable to the creation of local community
development banks -- which would also encounter the same severe shortage
of skilled managerial talent. My doubts are further strengthened by the
conviction that the net earnings of Federal Reserve Banks should not be
used to underwrite the activities of such institutions.

Finally, I think

it would be desirable to enact legislation which would authorize commercial
banks to meet a larger share of the equity capital needs in urban areas -via means similar to those which they can now use abroad.
Less some one get the opposite impression, let me hasten to
say that I do take the problem of urban financing seriously, and I
strongly favor an innovative search for means of quickening the pace of
urban development.

I suggest only that, while we face the issues with

a sympathetic spirit, we also face our task with a clear head.




Table 1

Banks Owned and Operated by Negroes, by Year Founded and Comparison of
Selected Asset Data with All Insured Commercial Banks, December 31, 1967.
(Negro*owned banks: millions of dollars; All banks: billions of dollars)

Name and Location of Batik

Year
Founded

Total
Assets

Loan Deposit
Ratio
(Per cent)

Liquidity
Ratio
(Per cent)

1. Consolidated Bank and Trust Co.
Richmond, Virginia

1903

9,334

57.0

21.5

2. Citizens Savings Bank and Trust Co.
Nashville, Tennessee

1904 , 4,797

42.3

56.2

First State Bank
Danville, Virginia

1919

3,693

61.8

18.0

Citizens Trust Co.
Atlanta, Georgia

1921

16,998

37.6

29.2

5. Mechanics and Farmers Bank
Durham, North Carolina

1921

19,223

39.0

39.4

6. Victory Q ^xngs Bank
Colur>
South Carolina

1921

2,007

49.0

46.5

1934

17,477

45.6

25.3

8. Tri-State Bank
Memphis, Tennessee

1946

6,898

56.5

33.8

9. Carver State Bank
Savannah, Georgia

1947

2,594

37.2

50.0

10. Douglas State Bank
Kansas City, Kansas

1947

7,493

58.6

26.4

Riverside National Bank
Houston, Texas

1963

4,744

54.5

33.0

Bank of Finance
Los Angles, California

1964

6,951

44.5

36.8

Freedom National Bank
New York, New York

1964

27,210

46.0

50.0

3.

4.

7

11.

12.

13.

tadustrial Bank of Washington
Washington, D. C.




Table 1

(continued)
Year
Founded

Name and Location of Bank
14.

Independence Bank of Chicago
Chicago, Illinois

Total
Assets

Loan Deposit
Ratio
(Per cent)

Liquidity
Ratio
(Per cent)

1964

9,023

37.8

58.5

15. United Community National Bank
Washington, 0. C.

1964

5,766

52.0

41.2

16. Gateway National Bank
St. Louis, Missouri

1965

5,286

41.5

42.0

1965

12,685

48.0

46.7

18. Liberty Bank of Seattle
Seattle, Washington

1968

n.e.

n.e.

n.e.

19. Swope Parkway National Bank
Kansas City, Missouri

1968

n.e.

n.e.

n.e.

20. Unity Bank and Trust Co.
Boston, Massachusetts

1968

n.e.

n.e.

n.e.

162,177

46.0

38.5

448.9

65.0

31.0

17.

Seaway National Bank
Chicago, Illinois

Negro-owned Banks: Total
(Millions of dollars)
All Insured Commercial Eanks:
(Billions of Dollars)

Total

Source:

Federal Deposit Insurance Corporation; Annual Report, 1967 and National
Bankers Association.

n.e.

Not in existence as of December 31, 1957.

-




Table 2

Annual Average Rates of Growth of Total Assets of Selected Banks,
1957-66 (Per cent)

Tvpe of Bank

1957-66

1957-63

1963-66

All Insured Commercial banks

5.0

3.2

8.9

Federal Reserve member banks vrith
total deposits between $5-10
million

2.2

1.4

3.9

11.4
-

9.0
-

16.6
5.8

Negro-owned banks
Excluding recently chartered banks

Source:

Federal Deposit Insurance Corporation; Annual Reports.
Governors of the Federal Reserve System.




Board of

Table 3

Selected Comparisons of Negro-owned and Other Banks, December 31, 1967

Ratios (Per cent)

Negro-owned
Banks

F.R. Members with
Deposits of $5-10
million

All Insured
Commercial
Banks

Cash and U.S. Gov't/
total assets
Cash/total assets
U.S. Gov't/total
assets

38.5
13.7

35.0
13.6

24.8

21.3

Loans/total deposits

46.0

53.6

Time deposits/total
deposits

54.9

50.9

46.8

Capital/risk assets

5.8

23.6

24.3

9.5

8.0

33.2

Memo:

Mean asset size
of bank (millions
of dollars)




31.1
17.2
13.8
59.8

Table 4

Supervisory Evaluation o£ Nepra-owned Banks, 1967 and 1968
Rating Category

Criteria
Capital Adequacy
1967
1968
Asset Quality
1967
1968
Management Performance

Group 1

Group 2

Group 3

10
7

3
4

2
4

Class A

1967
1968




15
15

Class C

Class D

3
4

1
1

6
3

5
7

Satisfactory

Fair

4
5

10
6

1967
1968
Composite Bating

Class B

Total

Total
15
15
Total

Poor

15
15

1
4

Group 1

Group 2

Group 3

Group 4

3
4

7
5

4
6

1
0

Total
15
15

Table 5

Asset Evaluation and Composite Rating; of Negro-owned Banks
and a Sample of Federal Reserve State Member Banks, 1967

Category

Rating Class

Composite Ratine:

1

F.R. Members Sample: Number
Percent

677
100,0

Negro-owned banks:

15
100.0

Number
Percent

439
65.0
3
20.0

2

3

211
30.8

24
3.6

0.

7
46.6

4
26.7

6.

Asset Rating
A_

B_

C

F.R. Members Sample: Number
Percent

677
100.0

536
79.5

106
15.7

25
3.7

1
1.

Negro-owned Banks:

15
100.0

5
33.3

6
40.0

3
20.0

6.




Number
Percent

Table 6

Profitability of Negro-owned Banks Compared with All Insured
Commercial Banks, 1958-1967.

Class of Bank and
Profit Variable

1958

1962

1967

66.0
76.2

70.3
84.4

76.0
95.3

34.0
23.8

29.7
15.6

24.0
4.7

60.5
56.8

63.2
57.8

67.2
56.1

5.7
9.3

5.6
10.6

4.5
14.4

25.7
31.7

21.3
33.2

Total expenses as per cent of
total current operating income
All banks
Negro banks

Net current operating earnings
before taxes as per cent of
total current operating income
All banks
Negro banks
Income on loans as per cent of
total current operating income
All banks
Negro banks
Service charges as per cent of
total current operating income
All banks
Negro banks

Salaries and Wages as per cent of
total current operating income
All banks
Negro banks




28.8
30.1

Table 6

(continued)

Class of Bank anu
Profit Variable

1958

1962

1967

16.2
22.8

23.3
26.6

33.9
30.6

Interest paid on time arid savings
deposits as per cent of total
current operating income
All banks
Negro ban&s
Net income after taxes as per cent
of total assets
All banks
Negro banks

.75
.66

.73
.48

.75
-.41

Net income after taxes as per cent
of capital account
All banks
Negro banks

9.6
7.6

8.8
5.6

9.6
-5.4

5.4
6.7

6.0
8.0

6.5
7.1

Rate of return on loans
All banks
Negro banks

Source:

National Bankers Association.




Table 7

Current Operating Experience of Newly Chartered Banks, by Year of
Operation (Number of Banks)

Number
of Banks
in
Sample

YEAR OF OPERATION
Net
Result

1

2

3

4

5

6

Profit
Loss
Break-even

19
47
2

51
15
2

64
3
1

63
5
0

64
3
1

68
0
0

Profit
Loss
Break-even

25
123
3

101
48
2

134
17
0

143
8
0

145
6
0

Profit
L08S
Break-even

Type of Charter

40
137
3

107
71
2

164
14
2

171
9
0

Profit
Loss
Break-even

14
81
6

67
31
3

95
5
1

98
3
0

1.00
1
0

Profit
Loss
Break-even

Year
Chartered

23
89
5

91
23
3

107
9
1

112
5
0

114
3
0

Profit
Loss
Break-even

20
95
5

81
33
6

111
8
1

116
4
0

National Banks
1962

1963

1964

68

151

130

State Insured
Nonmember Banks




1962

1963

1964

101

117

120

98
3
0

Table 8

Net Income Experience of Newly Chartered Banks, by Year of Operation
.^ankjO

Number
of Banks
in
Sample

YEAR OF OPERATION
Net
Result

1

Profit
Loss
Break-even

13
53
2

Profit
Loss
Break-even

Type of Charter

Year
Chartered

2

3

4

5

48
19
1

55
12
1

57
9
2

57
9
2

19
129
3

84
60
7

111
30
10

123
26
2

130
21
0

Profit
Loss
Break-even

29
149
2

82
S5
3

130 152
39
27
1
1
5

Profit
Los 3
Braak-everi

14
81
6

63
36
2

89
11
1

88
11
2

99
2
0

Profit
Loss
Break-even

24
89
4

ao
30
7

95
21
1

101
16
0

105
12
0

Profit
Loss
Break-even

17
99
4

70
46
4

103
17
0

107
12
1

National Banks
1962

1963

1964

68
64
4
0

151

180

State Insured
Nonmember Banks




1962

1963

1964

101

117

120

91
10
0

Table 9

Average Net Current Operating Earnings of Newly Chartered Banks, by
Year of Operation
(Thousands of Dollars)

Type of Charter

Year
Chartered

Number
of Banks
in
Sample

YEAR OF OPERATION
1

2

3

4

5

6

National Banks
1962
1963
1964

68
151
180

- 7
-14
-14

40
18
35

55
41
79

63
61
100

81
80

103

1962
1963
1964

101
117
120

-18
- 6
-17

11
39
22

44
57
58

60
78
71

78
92

93

State Insured
Nonmember Banks

Table 10

Average Net Income of Newly Chartered Banks, by Year of Operation
(Thousands of Dollars)

Type of Charter

Year
Chartered

Number
of Banks
in
Sample

YEAR OF OPERATION
1

2

3

4

5

6

National Banks
1962
1963
1964

68
151
180

-13
-18
-29

19
5
0

25
18
28

29
25
41

35
37

57

1962
1963
1964

101
117
120

-19
-16
-23

2
22
5

21
24

23
33
34

28
42

31

State Insured
Nonmember Banks




27.

Table H

Average Profitability of Newly Chartered Banks, by Year of Operation
(Thousands of Dollars)

Type of Charter
and
Measure of
Profitability

Number
of
Banks

Negro-owned Banks

5

Average
Deposit
Size: 4th
Year of
Operation
(millions
of dollars)

5-10

Average net current
operating earnings
Average net income

National Banks

"30.2 39.4 80.A 125.4
-31.0 -0.4 -23.0 -154.0
399

5-10

Average net current
operating earnings
Average net income
State Insured .
Nonmember Banks
Average net current
operating earnings
Average net income

-12.0 31.0
-20.0
0.0
330

58.0
24.0

75.0
32.0

80.0
36.0

103. r
57.0

-14.0 24.0
-19.0 9.0

53.0
22.0

70.0
30.0

85.0
35.0

93.0
31.0

2-5

Note: Net income is after payment of income taxes.




YEAR OF OPERATION