Minority banks: a search for identity

RMA Journal, The, Oct, 2003 by Fred H. Hays, Stephen A. DeLurgio

The ups and downs of a community bank serving a niche market are more pronounced through the built-in concentration inherent in this microcosmos. As niche markets grow more attractive to larger banks as well, some critical decisions must be addressed in minority bank boardrooms.

Once largely ignored, I minority markets have become big business. A 1999 report of the Minority Business Development Agency of the U.S. Department of Commerce estimated that the U.S. population will grow from 263 million in 1995 to 394 million in 2050. (1) Minority population growth will account for 90% of this increase. While the overall population increase is 50%, nonminority (white) population growth is only 7% compared with 83% for African-Americans, 95% for American Indians, Eskimos, and Aleuts, 267% for Asian and Pacific Islanders, and 258% for Hispanics. Businesses, marketers, and financial institutions are awakening to the implications of these forecasts. In August 2003, a CBS News report on the Hispanic market noted that "When it comes to U.S. Latinos, the only thing growing faster than the population is business' desire to grab a piece of the mushrooming market." (2) The report estimates that the current Hispanic purchasing power is a half trillion dollars. Similar business opportunities exist for other minority markets as well.

A Profile of Minority Banks

Of the 136 minority commercial banks reported by the FDIC in 2003, there are 59 Asian, 31 African-American, 28 Hispanic, and 18 Native-American banks. (This study does not include savings and loan associations or savings banks. It also excludes female-owned banks and multiracial banks due to the small number of institutions.) The banks themselves are as diverse as the ethnic populations that they represent. Some are a century old; others are newly formed. Some are very small; others have billions in assets. Some represent the only minority bank in their state; others are one of many in their home state. Table 1 shows the differences in size among the minority bank groupings. Average asset values are influenced by extremely large values for a few institutions. For this reason, median (middle) values are also included for comparison.

Age of minority banks.

Asian and Hispanic banks have been growing rapidly. Over 75% of Asian banks and over 66% of Hispanic banks have been chartered since 1980. By contrast, almost half of all Naive-American banks and over 25% of all African-American banks were chartered prior to 1960. Several of these were founded in the early 1900s.

Geographic location. California has the largest number of minority banks (22), including 16 Asian banks. Texas is next (19), followed by Illinois (12), Oklahoma (10), and New York (9). Georgia and Puerto Rico have seven minority banks each. No other state has more than four minority banks.

What Minority Banks Offer

Minority banks share many common attributes with other community banks. They tend to focus on strong customer relationships in a local market. Minority banks, however, go beyond this. They have a knowledge of the customs, traditions, and languages of their customer base. In the case of Native-American banks, there is sensitivity to and understanding of cultural heritage. Asian banks emphasize an ability to communicate with customers in numerous languages and dialects. They also are equipped to handle the special needs of customers engaged in global business. African-American and Hispanic banks are linked to customers through close relationships with churches, local news media, and local organizations.

Recent Minority Bank Performance

Studies of minority bank performance since the early 1970s have generally concluded that minority banks suffer from below average profitability, poor asset quality, excessive liquidity, and inadequate control of overhead. (3) Slim margins accompanied by low volume, as measured by the loan/deposit ratio, have narrowed profits. These studies have, however, tended to treat all minority banks collectively rather than separating them into individual groups. Competition for the low-to-moderate income markets traditionally served by minority banks intensified in the 1990s after passage of the FIRREA in 1989, which raised the bar for compliance with CRA. Suddenly, banks in general had incentives to "serve the underserved." This resulted in instances of "skimming the cream"--taking away some of the best customers of minority banks, leaving those banks with reduced asset quality. Even during the economic expansion of the 1990s, some minority banks faced extreme difficulties that resulted in several failures. Former FDIC Chairman Donna Tanoue, in a 2000 speech to the National Bankers Association, remarked:

   Minority banks generally have
   close ties to communities that
   have been traditionally underserved
   by other financial institutions--communities
   that are primarily
   urban and in our nation's
   largest cities--communities that
   are often poor and struggling to
   enter the economic mainstream.
   When a minority bank fails, neighborhoods
   lose, families lose, people
   lose. They lose the funding--and
   the services--that minority
   bankers provide--sometimes
   where no one else will. (4)