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Minority-Owned Institutions: Challenges and Opportunities

H. Robert Tillman, Special Advisor, Supervision, Regulation & Credit
Bob Rell, Supervisory Studies Specialist, Supervision, Regulation & Credit
Justin Scott, Intern, Supervision, Regulation & Credit

September 30, 2009


Although minority-owned institutions (MOIs) represent a relatively small segment (3 percent) of the overall banking industry, they play a significant role in the local communities they serve.

Today's economic environment presents MOIs with unprecedented challenges as well as unique opportunities. A prolonged and pervasive recession has affected the entire banking industry. Declining house prices and rising unemployment rates have stressed loan portfolios and considerably weakened the condition of some banks and the communities they serve.

Most MOIs are striking a delicate balance in this environment, however. They remain committed to fulfilling their mission and continue lending to creditworthy borrowers while ensuring that prudent measures are taken to bolster their ability to weather trying times.

In addition to the maintenance of financial strength and safe and sound operations, MOIs continue to provide an important source of credit for small businesses and consumers, a function that spurs job creation and benefits the broader economy. Their keen insights into the community's culture and preferences allow them to serve their customers well and to tailor products to specific needs.

The future performance of individual MOIs hinges largely on the competency and productivity of management and the board of directors, who must be actively engaged in strategic planning and oversight processes, interact frequently, implement sound policies, and promote strong internal controls.

MOI History

MOIs have been able to survive, and even thrive, during difficult economic periods in the past. The long history of the MOI serves as a testament to the resilience of the niche, with the spirit and concept of MOIs dating back to colonial times. In 1778, Richard Allen and Absalom Jones, two ministers who understood the connection between saving and investing and economic growth and stability, founded the first quasi-financial organization in Philadelphia — The Free African Society.1

Freedman's Savings and Trust Company, the first minority banking institution to operate in the United States, opened in 1865, but lasted only nine years. Over the next 125 years, the number of MOIs expanded at a slow but steady pace. By 1989, there were 103 MOIs in existence across the United States. A 20-year period of dramatic expansion ensued. During the 1989 and 2009 time frame, MOI ranks more than doubled to 214, and aggregate assets ballooned from $8.85 billion to $194 billion. This growth was particularly impressive, given that the number of institutions in the overall banking industry contracted by 44 percent during the same period.

Recent Performance

For the most part, MOI performance generally followed the overall industry trends during the past five years. However, there are some areas of notable exception. Asset growth has been slightly stronger than the industry norm. The most recent data may suggest that MOIs have been responsive to their communities' needs and have kept credit flowing throughout the business cycle.

MOIs have typically maintained higher levels of capital. The MOI's tier 1 risk-based capital ratio and leverage capital ratio have been 2 to 4 percentage points above the industry. The additional capital can provide a buffer for unanticipated losses and support future growth. Some banks have taken additional steps, such as substantially reducing common stock dividends, in an effort to preserve capital during times of market uncertainty. The profitability of MOIs has trailed behind the overall industry during the past five years. The return on average assets has been roughly 1 percentage point below the industry average and has been negative recently. The near-term earnings prospects are being tempered by rising credit costs, tight margins, FDIC assessments, and the need to boost loan-loss reserves.

Lessons Learned from Recent Failures

The entire financial industry has an opportunity to reflect on recent events, learn from past mistakes, and ultimately grow stronger from the experience. Regulatory reform will address gaps and weaknesses in the supervision and regulation process.

Few MOIs will escape the recession entirely unscathed but most will ultimately survive. Nevertheless, hurdles still remain on the road to recovery. The improvement in credit delinquencies typically lags economic recovery, and commercial real estate markets remain a concern.

About two-thirds of all MOIs are concentrated in just seven states (CA 47, TX 23, FL 21, IL 14, OK 13, NY 13, and GA 12). Nearly half of all MOIs are located in four states (California, Florida, Illinois, and Georgia) that had exceptionally weak housing markets, high unemployment, and more bank failures in 2008-2009 than the remaining states combined.

Six MOI failures have occurred since the beginning of 2008.2 It is a useful exercise to analyze the risk profiles of the failed MOIs, identify key contributors to their demise, and determine whether these factors could serve as leading indicators of potential problems.

Common traits and risk exposures noted include:

  • Lack of management and board oversight and failure to control risk
  • Commercial real estate concentrations, particularly construction and land development projects
  • Inadequate loan policies and insufficient loan-loss reserves
  • Material deficiencies and weaknesses in internal controls (increasing vulnerability to fraud)
  • Overreliance on noncore funding, particularly brokered deposits

Best Practices

It is equally important to consider the attributes of MOIs that have fared exceptionally well during the recession. Many banks have responded to the financial crisis by returning to fundamentals, emphasizing sound disciplined underwriting, and approaching risk management from an enterprise-wide perspective.

Characteristics of successful MOIs include:

  • Skilled management that interacts frequently with board members to strategically plan for the bank
  • Strong internal controls and up-to-date policies and procedures
  • Sound liquidity plans that demonstrate the capacity to withstand a prolonged period of funding illiquidity affecting both secured and unsecured funding
  • Comprehensive risk management reporting processes that are commensurate with exposures, including frequent status report generation to facilitate portfolio reviews at routinely scheduled board meetings
  • Independent internal audit function or capability that clearly identifies weaknesses and proposes corrective actions
  • Well-trained frontline staff who are customer focused, follow policies and procedures, and know management expectations

The Federal Reserve encourages bankers to maintain contact with their primary regulators and continue to consult with other bankers to gain additional insight into actions that may be most suitable for their institution. Additional guidance, management tools, and other resources are available on the Partnership for Progress website for minority-owned and de novo institutions.

Growth Opportunities

As the nation continues to recover from the most severe financial crisis since the Great Depression, stability will be restored and new growth will follow. MOIs should position themselves to capitalize on new opportunities that emerge from this transition.

A recent Associated Press study indicated that "banks expanded at a breathtaking pace over the past five years, adding more than 10,000 full-service branches, but barely 1 in 10 were in inner-city, minority neighborhoods." This suggests that a largely untapped and underserved market still exists. Whether focusing on underserved markets or markets with multiple bank competitors, MOIs can leverage their knowledge and understanding of cultural aspects and business dynamics in their local communities to attract new customers and foster loyalty. They can establish grassroots relationships with local consumers and businesses and even build multigenerational relationships.

MOIs may benefit from participating in programs offered by federal agencies, including the Small Business Administration and the U.S. Department of Agriculture, as well as the equivalent state agencies for small business and agricultural products. These programs offer subsidized loans or guarantees that may reduce the risk in credit transactions. Since many MOIs are situated in underserved areas, opportunities to participate in new market tax credit projects may exist.

Some MOIs have successfully focused more attention on core deposit relationships, including faith-based organizations, nonprofits, and foundations. Banks that serve a particular market niche may also benefit from a reasonable boost in net interest margin, as customers are often content to pay a small premium to enjoy more personal service or conduct business in their native language. MOIs are very much involved in sponsoring community events and making sure they are well respected in the community. Like many banking organizations today, some MOIs may also gain potential benefits by pursuing new forms of equity and attracting socially conscious investors, while being careful to avoid diluting their minority-owned status to fulfill their mission.


At the time of this writing, the recession appeared to be nearing an end. However, as Federal Reserve Chair Bernanke indicates, "It's still going to feel like a very weak economy for some time, as many people will still find that their job security and employment status is not what they wish it was."3 This is an ongoing challenge for policymakers, banks, and communities. The mission of MOIs remains an important one. During these challenging times, it is critical that MOIs continue to serve the needs of their customers and communities while making prudent lending decisions, ensuring the safety and soundness of the institution, and preparing for future opportunities that may emerge.

  • 1 Historical references for many events in the minority banking industry are included in the "Minority Banking Timeline" of the Partnership for Progress website. External Link
  • 2 The failed MOIs are Douglass NB (1/25/08), Haven Trust Bank (12/12/08), Mirae Bank (6/26/09), First BankAmericano (7/31/09), Mutual Bank (7/31/09), and Dwelling House Savings and Loan Association (8/14/09).
  • 3 Federal Reserve Chair Ben Bernanke, "A Year of Turmoil," speech, The Brookings Institution, September 15,2009, p. 36.