Board of Governors of the Federal Reserve System

Errata

The Federal Reserve revised this report on May 30, 2019. The revisions are listed below.

On p. 6, under Table 2:

• In column three, the column head was changed from “Total assets (millions of dollars)” to “Total assets (thousands of dollars).”

On p. 15, under Table A.1:

• In column five, the column head was changed from “Assets (millions of dollars)” to “Assets (thousands of dollars).”

On p. 24, on Figure A.3:

• The labels for the bar graphs have been reordered so that “2014 SMB” is the top label, followed by “2015 SMB,” “2016 SMB,” “2017 SMB,” and “2018 SMB.”

Preface: Implementing the Dodd-Frank Act

The Board of Governors of the Federal Reserve System (Board) is responsible for implementing numerous provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), including mandates to preserve and promote Minority Depository Institutions (MDIs). The Dodd-Frank Act requires, among other things, that the Board produce reports to Congress on a number of topics.

The Board maintains a Regulatory Reform website, which provides an overview of regulatory reform efforts implementing the Dodd-Frank Act and a list of the implementation initiatives completed by the Board as well as the most significant initiatives the Board expects to address in the future.¹

Abbreviations

BSA/AML

Bank Secrecy Act/Anti-Money
Laundering

CD

Community Development

CDFI

Community Development Financial Institution

CECL

Current Expected Credit Losses

CICD

Center for Indian Country Development

CRA

Community Reinvestment Act

C&CA

Consumer and Community Affairs (Federal Reserve Board Division)

FIRREA

Financial Institutions Reform, Recovery, and Enforcement Act of 1989

FRB

Federal Reserve Bank

LMI

Low- and moderate-income

MBDA

Minority Business Development Agency

MDI

Minority depository institution

NBA

National Bankers Association

PFP

Partnership for Progress

SMB

State member bank

S&R

Supervision and Regulation (Federal Reserve Board Division)

Executive Summary

The Board submits this report pursuant to section 367 of the Dodd-Frank Act. Section 367 of the Dodd-Frank Act requires the Board to submit an annual report to the Congress detailing the actions taken to fulfill the requirements outlined in section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, as amended by the Dodd-Frank Act in 2010 (see appendix B). In addition to the annual reporting requirement, FIRREA section 308 requires the Federal Reserve System (System) to devote efforts toward preserving minority ownership of minority depository institutions (MDIs). Comments on the System's efforts to fulfill the requirements of
FIRREA section 308 are included in the 2008 through 2012 annual reports of the Board to the Congress. Beginning with the 2013 report, the Federal Reserve issues the annual report in separate form to align Board practice with that of the other agencies with section 367 responsibilities.

The System's Partnership for Progress (PFP) program was established in 2008 because the System recognized the importance of MDIs and wanted to independently take steps to preserve and promote these institutions. The System supports an inclusive financial system and understands the challenges inherent in providing access to credit and other financial services in traditionally underserved areas. As such, the System remains committed to identifying additional opportunities to support the preservation of these organizations.

At the beginning of 2018, the System supervised 16 MDIs with combined assets of over 92 billion. In 2018, one Asian American MDI merged with another Asian American MDI, hence retaining its MDI character and customer base. Additionally, a Hispanic American MDI merged with a non-MDI. These two mergers brought the year-end total to 14 MDIs supervised by the System, which collectively represented approximately 2 percent of the 794 community and regional banks in the System's community and regional banking organizations portfolios. To support these institutions and to accomplish the broader minority depository-related FIRREA goals, the System continues to dedicate resources to engage in outreach and technical assistance activities. Throughout 2018, staff from the Board and PFP-dedicated staff from each of the 12 Federal Reserve Banks (FRBs) engaged in activities to support MDIs. Highlights of those activities included

• creating and convening a peer-to-peer meeting for Native American Banks, Native American Credit Unions, and Native American Community Development Financial Institutions (CDFIs) to discuss financial access and innovation, along with the Center for Indian Country Development at the Federal Reserve Bank of Minneapolis;
• hosting MDI leadership at the inaugural MDI Leadership Forum that took place April 19 and 20, 2018, in Washington, D.C.;
• presenting at the Native Banks Gathering II in Shawnee, Oklahoma, which was a collaborative assembly of Native-owned banks sponsored by the Citizen Potawatomi Nation, the Federal Reserve Bank of Minneapolis's Center for Indian Country Development, and the Board in conjunction with the Office of Indian Energy and Economic Development (OlEED), a division under the U.S. Department of Interior-Indian Affairs;
• attending the annual National Bankers Association (NBA) meeting in Washington, D.C., and hosting an exhibit table;
• providing a Systemwide internal training webinar that focused on educating Federal Reserve examiners on the mission of the PFP program;
• co-sponsoring Banking and the Economy: A Forum for Minorities in Banking, which was partnership between the Board and the Federal Reserve Banks of Kansas City (lead sponsor), Philadelphia, Richmond, Atlanta, Chicago, St. Louis, and Dallas;
• providing technical assistance to MDIs on a wide variety of topics, including improving regulatory ratings, navigating the regulatory applications process, questions on the Bank Secrecy Act (BSA), understanding changes to the Community Reinvestment Act (CRA), and refining capital-planning practices; and
• maintaining a public website, which provides a full menu of banking resources—including regulatory guidance—relevant to MDIs.²

State-Member MDIs

During 2018, the System retained primary supervisory responsibility for 16 state-member³ MDIs, which, with few exceptions, are community banks,⁴ having total assets of $10 billion or less (see table 1). As a result of merger activity, the System ended the year with responsibility for 14 MDIs.⁵ The decline in state-member MDIs was due to the merger of two Asian-owned MDIs and the merger of an Hispanic-owned MDI with a non-MDI. Both merged state-member MDIs were located in California. In reviewing a bank merger, the resulting bank's effect on the community is a statutory factor that must be taken into consideration before approving any bank merger. It is expected that these resulting mergers would not diminish the level of products and services provided to the local communities. (For more details on the 14 state-member MDIs discussed in this report as well as a comparison of the number, assets, and demographics of state-member MDIs from 2013–17, see appendix A.) Accordingly, the System's community banking organizations program,⁶ which is responsible for the risk-focused supervision of state-member banks (SMBs) with less than $10 billion in total assets, maintains supervisory responsibility for the System's portfolio of MDIs.

Table 1. Asset distribution of state-member MDIs

The PFP program is jointly managed by the Community Banking Organizations (CBO) section of the Supervision and Regulation Division (S&R) and the Community Development (CD) section of the Consumer and Community Affairs Division (C&CA). The CD function within the System—consisting of individual community development departments at each of the 12 FRBs and at the Board—promotes economic growth and financial stability for lower-income communities and individuals through a range of activities, including convening stakeholders, conducting and sharing research, and identifying emerging issues. The two divisions share in the staffing of the PFP program and have appointed senior officers from both divisions to co-chair the program's Executive Oversight Committee. In addition, at each FRB, the PFP program has designated a District coordinator(s) who communicates regularly with the MDIs in their district and assists with carrying out the mission of the PFP program. The 2018 PFP programming reflected the strengths of both divisions and emphasized coordination between the two functions in the Reserve Bank Districts. The System also worked to encourage partnership between examiner and community development staff at the FRBs to bring additional resources to MDIs around the country.

Geographic Dispersion

At year-end 2018, state-member MDIs were located in seven of the 12 Reserve Bank Districts⁷ with assets concentrated in the New York and San Francisco Districts (see table 2). State-member MDIs in these two Districts accounted for 98 percent of the total SMB assets domiciled in the System's MDI portfolio.

Table 2. State-member MDI distribution

Minority Ownership Type

The System's MDI portfolio includes banks representing all minority ownership categories as defined by FIRREA. Consistent with national demographics for all MDIs, as of year-end 2018, most state-member MDIs were under Asian American ownership (figure 1).

Research on MDIs and Low- and Moderate-Income Communities

Continuing with the Federal Reserve's commitment to understanding the challenges minority banking institutions face and their local market areas, in 2017 the Board commissioned two new pieces of research⁸ on MDIs. This research was completed in 2018 and a webinar on the findings was held in November 2018. All research is available on the Partnership for Progress website.⁹ Below is a short abstract of the papers:

Ethnic Banks' Logic of Reinvestment in Post-Crisis California: A Case Study of Minority Depository Institutions in Los Angeles, Melody Chiong, University of California, San Diego, Gary A. Dymski, University of Leeds, Jesus
Hernandez, University of California, Davis

Minority residents and businesses have had to contend with segregation and with exclusion from access to finance during the long trajectory of U.S. urban development. Historically, minority depository institutions (MDIs) have been at the forefront of efforts to revitalize disadvantaged communities by providing access to finance for minority-owned businesses and minority households. The approach taken by MDIs in supporting inclusive growth in the communities they serve can be termed their "logic of reinvestment." While the goal of meeting community needs for access to finance is a constant, the historical context of racial/ethnic economic inequality is a moving target: in recent years, urban racial/ethnic inequalities have been profoundly affected both by the subprime crisis and by the continuing cross-border flows of people, goods, and capital across borders. So contemporary efforts by MDIs seeking to serve the interests of the racial/ethnic communities they serve must be both backward looking and forward looking, taking into account inherited and emerging inequalities pertinent to economic development.

This study analyzes the dynamic racial/ethnic context for different MDIs confronted by ethnic banks associated with different ethnic communities in contemporary Los Angeles. We contrast the "logic of reinvestment" pursued by an African-American bank in South Los Angeles, pre- and post-crisis, with the circumstances of Asian-American banks serving a dynamic customer base with substantially higher levels of economic resources.

Minority Owned Banks Impact on Community: Three Case Studies, Russ Kashian, University of Wisconsin Whitewater

As of 2001, there were 164 Minority Depository Institutions (MDIs) in the United States. By 2017, this figure dropped to 155, but throughout the years, the numbers have fluctuated, with 2013 having 174 MDIs reported. Although MDIs have many similarities in terms of their general make up and missions of their community, the ways through which they help build their communities can differ drastically. This analysis examines three different MDIs, discussing their contribution and interactions with their community and the different strategies these MDI's employ.

This report pursues detailed questions on how minority owned banks serve their community by giving examples of minority owned banks and projects they have completed that serve their community. Banks included in this study are: United Bank of Philadelphia, a Black-American owned bank in Philadelphia, PA; International Bank of Commerce, a Hispanic-American Owned Bank in Laredo, TX; and CBW, an Asian-American owned bank in Weir, KS.

Additionally, Robin Newberger, a Federal Reserve economist at the Federal Reserve Bank of Chicago, released a new research paper on MDIs titled "Capital-raising among minority-owned banks before and after the financial crisis" in November 2018.¹⁰ The abstract of her paper is below:

The financial crisis and recession of 2008-2010 made the availability of capital a significant area of concern for community banks, and led many of these institutions to seek out sources to rebuild their equity. The need for capital may have been even greater for some minority-owned financial institutions. Minority-owned depositories are a small subset of financial institutions, most of which are also community banks, reflecting either black, Hispanic, Asian, or Native American ownership, or majority minority board members and a mission to serve minority populations. Regulators have long supported the existence of minority-owned institutions as a way to promote the economic viability of minority and underserved communities. The analysis explores capital access in the context of recapitalization efforts at minority-owned financial institutions.

In mid-2018, the Board also commissioned two new pieces of MDI research, which will be delivered in mid-2019. Jesus Hernandez will author a study titled "Minority Depository Institutions: Evolving Financial Technologies and the Challenge of Governance," and Joanie Buckley will author a study titled "Is the Community Reinvestment Act Effective for Indian Country?" Both studies will be presented at the 2019 MDI and CDFI Interagency Conference.

In addition, throughout 2018, FRB staff published articles and surveys that both evaluated conditions in low- and moderate-income (LMI) communities and described efforts to support them, including by community banks. Much of this research came out of the community development function at the Board and Reserve Banks. Because the success of MDIs is often dependent on the health of the communities they serve, these articles are particularly relevant to the MDI business model. In addition, several of these articles noted the difficulty minority and LMI populations have accessing credit from mainstream financial institutions. These articles intend to provide service providers, policymakers, and others with a way to assess the needs of these communities and to evaluate changes in the economic conditions of these populations.

The following list highlights some of the articles and surveys published during 2018:

• Low- and Moderate-Income Surveys:¹¹ Several FRBs, including the Federal Reserve Bank of Kansas City, which retains a large number of state-member MDIs, publish quarterly results from surveys designed to measure the economic conditions of LMI populations and the condition of organizations that serve them.
• The Tribal Leaders Handbook on Homeownership: A comprehensive resource to unlocking the homeownership potential of Indian Country.¹² This handbook is a guide to the new mortgage programs (government and private), the new kinds of lenders (loan funds and Native CDFIs), and the new energies that are transforming Indian housing.
• Small Business Credit Survey Report on Non-employer Firms: Timely information on small business financing needs, decisions, and outcomes is critical to understanding and fostering the sector's health and growth. This is especially important for MDI banks, many of whom specialize in small business lending to minority-owned businesses. To provide these insights to policymakers, researchers, and service providers, the Small Business Credit Survey is a national collaboration among the 12 FRBs. Fielded in Q3 and Q4 2017, the survey yielded 5,547 responses from nonemployer firms, which are businesses in the 50 states and the District of Columbia that have no full- or part-time employees. This report provides an in-depth look at these firms' needs, decisions, and outcomes. One of the findings was that potential employers, in particular early-stage potential employers, are more likely to be owned by someone younger than 46 or from a racial or ethnic minority group.¹³

Partnership for Progress Programming

The System supports MDIs primarily through its PFP program, a national outreach effort to help MDIs confront unique business model challenges, cultivate safe banking practices, and compete more effectively in the marketplace. Through this program, the System strives to provide MDIs with resources supportive of sound banking operations.

The PFP program is centered on three main objectives:

• Connection: Facilitate relationship building, engage industry stakeholders, and develop relationships to support the preservation and creation of MDIs.
• Capacity Building: Provide organizational development and technical assistance to MDIs through Federal Reserve resources and in collaboration with the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC).
• Research and Thought Leadership: Produce high quality research discussion papers that enhance our understanding of the business models of MDIs and how they serve their communities.

Throughout 2018, the System conducted a number of programs specific to MDIs, including the following:

• Inaugural MDI Leadership Forum

  MDI leaders were invited to meet with Vice Chair for Supervision Randal K. Quarles and other senior Federal Reserve staff in Washington, D.C., on April 19 and 20, 2018. At this forum, MDI leaders were able to hear directly from Federal Reserve leadership about their commitment to the preservation and promotion of MDIs. Going forward, the MDI Leadership Forum will be a biennial opportunity to host CEOs from state-member-bank MDIs.

  The goals for this forum were to

  • provide MDI leadership an opportunity to meet Federal Reserve staff members who are engaged in MDI work as well as meet other top MDI execute leadership;
  • hear directly from MDIs on the challenges and opportunities they face and how the Federal Reserve can help MDIs better address these challenges; and
  • provide targeted regulator updates on Current Expected Credit Losses (CECL), BSA, and other relevant topics.

• A Convening of Native American Financial
  Institutions

  On August 27, 2018, the Center for Indian Country Development (CICD) at the Federal Reserve Bank of Minneapolis and the Board conceived a first-of-its-kind gathering that brought together over 100 Native American Financial Institutions (NAFIs). NAFIs are defined as Native-owned or Native-serving banks, credit unions, and community development financial institutions.

  The goals of this convening were to foster networking, learning, and collaboration among Native community-serving financial institutions; create development opportunities to leverage capital; and elevate best practices that foster growth and sustainability. The daylong meeting was held on the Flathead Reservation of the Confederated Salish and Kootenai Tribes in Montana. The following day, meeting attendees were invited on an optional half-day tour of the Reservation, which included a visit to the headquarters of Eagle Bank, a Native-owned MDI.

  Following the convening, PFP staff have continued to communicate with staff at the CICD to discuss how to keep the momentum going from the event. Some of the ideas that came out of these conversations include working with CICD to identify Native tribes that may have the capital and capacity to create tribally owned de novo banks, fostering additional research on Native MDIs, and convening NAFIs regionally.

• Minorities in Banking Forum

  The Federal Reserve Bank of Kansas City, in partnership with the Board and the Federal Reserve Banks of Atlanta, Dallas, Minneapolis, Philadelphia, Richmond, and St. Louis, hosted the third annual forum designed to provide minority bankers with industry knowledge and development to enhance their careers and grow their professional networks. Banking and the Economy: A Forum for Minority Bankers was held in September 2018 at the Charlotte branch of the Federal Reserve Bank of Richmond. The forum featured insights from leaders across the System and the financial services industry on topics including cybersecurity, leadership development, cultural intelligence, and more. Forum sessions included discussions on banking trends, effective leadership, and the economic outlook for banks nationwide. All MDI banks were encouraged to attend and several sent representatives to the conference.

• Collaboration with trade groups and other partners

  PFP also participated as subject matter experts at the following conferences that were related to MDI topics:

  • In April, PFP participated on a panel discussion about supervisory and regulatory issues at the Native Banks Gathering II, which was sponsored by the Citizen Potawatomi Nation and the Center for Indian Country Development in conjunction with the Office of Indian Energy and Economic Development (OIEED), a division under the U.S. Department of Interior-Indian Affairs.
  • In August, PFP connected the Department of Commerce's Minority Business Development Agency (MBDA) with the Federal Reserve researchers who produced the 2016 Small Business Credit Survey Report on Minority-Owned Firms.¹⁴ At an MBDA conference, Federal Reserve researchers presented their findings and then broke into groups to discuss the experiences of MBDA firms and how this research represents, or does not represent, their individual experiences.
  • In October, Board and Reserve Bank staff represented PFP at the annual National Bankers Association (NBA) conference in Washington, D.C. The NBA is a trade organization for minority- and women-owned financial institutions that serves as an advocate for the nation's MDIs on legislative and regulatory matters concerning and affecting its members and the communities they serve. The NBA also offers a number of services, including lobbying services, vendor financing, cash management services, and corporate trust accounts, among others. The annual conference attracts dozens of MDI leaders and PFP hosted an exhibit booth at the conference.

Efforts and Initiatives

Preserving the Character and Number of MDIs

To preserve the character and number of state-member MDIs, staff from the Board's mergers and acquisitions function coordinate with the FDIC to help identify healthy minority banking organizations capable of acquiring or merging with state-member MDIs that are in troubled condition. To this end, PFP staff provide the FDIC with a quarterly list of all MDIs under System supervision. The Federal Reserve's mergers and acquisitions function continues to offer a pre-filing option for banking proposals, which provides critical feedback on potential issues and potentially shortens the review period for many formal proposals. Finally, whenever the System receives a proposal involving an MDI banking organization, every effort is made to ensure that the institution is preserved and that its future prospects are enhanced.

Promoting the Creation of MDIs

The System strives to promote the creation of new MDIs by providing guidance via public websites about regulatory procedures for minority bank ownership, informing MDIs of advantageous federally sponsored programs, and promoting community development. These web posts also provide guidance about financial institution development, including information about the process of starting a bank, managing a bank through the de novo period, and growing shareholder value while ensuring safe and sound operations. Further, District coordinators from each FRB periodically discuss emerging issues, attend conferences, serve on local exam teams during examinations, and collect feedback from MDIs on what they are seeing and how the PFP can provide additional assistance.

Training, Technical Assistance, and Educational Programs

District coordinators from each FRB meet regularly with MDI management to discuss emerging issues and provide technical assistance, especially to those in troubled condition, to explain supervisory guidance, discuss challenges, and respond to management concerns. Trending topics discussed throughout 2018 included IT/cybersecurity, concentrations in commercial real estate, interest-rate risk, capital planning and rules, BSA and anti-money-laundering compliance, third-party vendor management, and the CRA. The goal of these conversations is to help MDIs and provide the PFP with valuable insight and feedback on challenges facing MDIs. Additionally, several of the sessions of the MDI Leaders Forum in April 2018 involved technical assistance training, including one on the BSA and new accounting standards related to CECL.

Partnership for Progress Website

Consistent with past years, one of the primary vehicles for distributing educational materials relevant to MDIs continues to be the System's PFP website.¹⁵ This website promotes the creation of MDIs by

• providing information about new regulations and their impact on community banking organizations;
• advertising regulatory and agency events relevant to MDIs; and
• sharing information focused on market conditions and economic data related to areas typically served by MDIs.

To ensure continued relevance of posted material, PFP staff regularly update the website.

Publications

The System continues to support enhanced communications with community banks, including MDIs. To this end, the System disseminates important information about regulatory matters through a variety of publications, most of which are accessible through links on the PFP website.

The System's Community Banking Connections® publication¹⁶ serves to

• clarify key supervisory guidance;
• highlight new regulations;
• provide perspectives from bank examiners and System staff; and
• address challenges and concerns facing community banks and provide resources to assist them.

During 2018, Community Banking Connections offered articles on a range of timely topics, including understanding how culture drives a bank's mission, CECL, and the Federal Reserve's revision to risk-management guidance.

The System's FedLinks™ publication¹⁷ is another resource that offers information and guidance to MDIs. This publication serves to

• discuss supervisory topics that are important to community banks;
• highlight the purpose of related supervisory policy and guidance, if applicable;
• provide examples and illustrations to demonstrate the practical application of covered topics; and
• provide integrated summaries that describe how examiners typically will address the covered topic.

During 2018, FedLinks published an article applicable to MDIs, namely, "Sound Risk Management of CRE Credit Concentrations." In the past, topics have included agricultural credit risk management, intercompany transactions, and BSA.

Appendix A: MDI Tables and Figures

Table A.1. State-member MDIs

Table A.2. List of MDIs as of December 31, 2018

Appendix B: Section 308 of FIRREA

Section 308 of FIRREA, as amended by the Dodd-Frank Act, requires

1. CONSULTATION ON METHODS.—The Secretary of the Treasury shall consult with the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Chairman of the National Credit Union Administration, and the Chairperson of the Board of Directors of the Federal Deposit Insurance Corporation on methods for best achieving the following:

   1. Preserving the present number of minority depository institutions.

   2. Preserving their minority character in cases involving mergers or acquisition of a minority depository institution by using general preference guidelines in the following order:

      1. Same type of minority depository institution in the same city.
      2. Same type of minority depository institution in the same State.
      3. Same type of minority depository institution nationwide.
      4. Any type of minority depository institution in the same city.
      5. Any type of minority depository institution in the same State.
      6. Any type of minority depository institution nationwide.
      7. Any other bidders.
   3. Providing technical assistance to prevent insolvency of institutions not now insolvent.
   4. Promoting and encouraging creation of new minority depository institutions.
   5. Providing for training, technical assistance, and educational programs.

2. DEFINITIONS.—For purposes of this section—

   1. MINORITY FINANCIAL INSTITUTION.—The term "minority depository institution" means any depository institution that—

      1. if a privately owned institution, 51 percent is owned by one or more socially- and economically-disadvantaged individuals;
      2. if publicly owned, 51 percent of the stock is owned by one or more socially- and economically-disadvantaged individuals; and
      3. in the case of a mutual institution, the majority of the board of directors, account holders, and the community which it services is predominantly minority.
   2. MINORITY.—The term "minority" means any Black American, Native American, Hispanic American, or Asian American.¹⁸

In addition, section 367 of the Dodd-Frank Act amended FIRREA to require the supervisory agencies to submit an annual report to the Congress containing a description of actions taken to carry out FIRREA section 308.

Footnotes