Statement Of
Sandra L. Thompson, Director,
Division Of Supervision
And
Consumer Protection,
Federal Deposit Insurance Corporation
On
Preserving and Expanding Minority Banks
before the
Subcommittee on Oversight and Investigations
of the
Financial Services Committee;
U.S. House Of Representatives;
2128 Rayburn House Office Building
October 30, 2007
Chairman Watt, Ranking Member Miller, and members of the Committee, I appreciate
the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC)
regarding the FDIC's role in preserving and expanding opportunities for minority
depository institutions (MDIs). Historically, MDIs play a vital role in their communities.
They serve as a key source of credit and other banking services essential to economic
growth and business development in areas that are often underserved by traditional
depository institutions.
My testimony will discuss the current financial condition of MDIs and the FDIC's efforts
to implement the statutory mandate under section 308 of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to preserve and encourage
minority ownership of depository institutions. My testimony also will detail the FDIC's
actions to respond to the recommendations in the October 2006 report by the
Government Accountability Office (GAO) on MDIs.
The Condition of Minority Depository Institutions
As of June 30, 2007, there were 205 MDIs in the banking system, including 129
supervised by the FDIC. These MDIs ranged in size from $2 million to $25 billion in
assets. However, over 63 percent of MDIs have $250 million in assets or less. The
capital levels of MDIs are roughly comparable to that of the industry. More than 99
percent of MDIs meet or exceed the highest regulatory capital standards. In addition,
minority-owned institutions are more likely to be headquartered in urban areas than
other banks and thrifts, with almost 90 percent headquartered in metropolitan areas,
compared to slightly more than 50 percent of all insured institutions.
A larger proportion of MDIs are new compared to the industry average. Almost 17
percent of minority-owned institutions are less than five years old compared to 8.5
percent of the overall industry. In fact, almost 12 percent of minority-owned institutions
are less than two years old, compared to an industry average of 4.4 percent.
Sandra L. Thompson, Director,
Division Of Supervision
And
Consumer Protection,
Federal Deposit Insurance Corporation
On
Preserving and Expanding Minority Banks
before the
Subcommittee on Oversight and Investigations
of the
Financial Services Committee;
U.S. House Of Representatives;
2128 Rayburn House Office Building
October 30, 2007
Chairman Watt, Ranking Member Miller, and members of the Committee, I appreciate
the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC)
regarding the FDIC's role in preserving and expanding opportunities for minority
depository institutions (MDIs). Historically, MDIs play a vital role in their communities.
They serve as a key source of credit and other banking services essential to economic
growth and business development in areas that are often underserved by traditional
depository institutions.
My testimony will discuss the current financial condition of MDIs and the FDIC's efforts
to implement the statutory mandate under section 308 of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to preserve and encourage
minority ownership of depository institutions. My testimony also will detail the FDIC's
actions to respond to the recommendations in the October 2006 report by the
Government Accountability Office (GAO) on MDIs.
The Condition of Minority Depository Institutions
As of June 30, 2007, there were 205 MDIs in the banking system, including 129
supervised by the FDIC. These MDIs ranged in size from $2 million to $25 billion in
assets. However, over 63 percent of MDIs have $250 million in assets or less. The
capital levels of MDIs are roughly comparable to that of the industry. More than 99
percent of MDIs meet or exceed the highest regulatory capital standards. In addition,
minority-owned institutions are more likely to be headquartered in urban areas than
other banks and thrifts, with almost 90 percent headquartered in metropolitan areas,
compared to slightly more than 50 percent of all insured institutions.
A larger proportion of MDIs are new compared to the industry average. Almost 17
percent of minority-owned institutions are less than five years old compared to 8.5
percent of the overall industry. In fact, almost 12 percent of minority-owned institutions
are less than two years old, compared to an industry average of 4.4 percent.
While most MDIs are profitable, the financial performance of MDIs, as a group, lags
behind that of non-minority institutions. The average return on assets (ROA) for
minority-owned institutions in the first half of 2007 was 0.69 percent, compared to an
industry average of 1.21 percent. Less than one in three minority-owned institutions
(30.5 percent) had an ROA of 1 percent or higher, while 47.3 percent of all insured
institutions had ROAs of 1 percent or better. In addition, almost a quarter of minority-
owned institutions (23.2 percent) were unprofitable for the first six months of this year,
compared to 9.4 percent of all insured institutions.
MDIs also have much lower levels of noninterest income and higher levels of loan-loss
provisions than the rest of the industry. Noninterest income represents only 19.5
percent of net operating revenue (net interest income plus total noninterest income) at
minority institutions, compared to an industry average of 42.7 percent. Loan loss
provisions represent 15.3 percent of net operating revenue for MDIs, versus an industry
average of 6.7 percent.
In addition, asset-quality indicators are less favorable at MDIs than for the industry as a
whole. For the first six months of 2007, the net charge-off rate for minority-owned
institutions was 0.56 percent, compared to an industry average of 0.47 percent. For the
same period, 2.03 percent of all loans at minority-owned institutions were noncurrent
(90 days or more past due or in nonaccrual status), compared to 0.90 percent for all
insured institutions.
The difference in profitability can result from many factors. MDIs, like most community
banks, often must compete with larger financial institutions for both business and a
talented work force. They also may find it difficult to diversify their geographical and
credit risk exposures due to their commitment to serve local communities and ethnic
populations. In addition, some minority institutions are challenged with operating in an
economically depressed market area. The disparities in profitability and other key
measures between MDIs and other financial institutions demonstrate the continuing
importance of the FIRREA goals to encourage and preserve MDIs.
Statutory Requirements
FIRREA requires the Secretary of the Treasury to consult with the Director of the Office
of Thrift Supervision and the Chairperson of the FDIC Board of Directors to determine
the best methods for preserving and encouraging minority1 ownership of depository
institutions. Specifically, Section 308 of FIRREA sets the following goals:
Preserve the number of minority depository institutions;
Preserve the minority character in cases of merger or acquisition;
Provide technical assistance to prevent insolvency of institutions not now
insolvent;
Promote and encourage the creation of new depository institutions; and
Provide for training, technical assistance, and education programs.
behind that of non-minority institutions. The average return on assets (ROA) for
minority-owned institutions in the first half of 2007 was 0.69 percent, compared to an
industry average of 1.21 percent. Less than one in three minority-owned institutions
(30.5 percent) had an ROA of 1 percent or higher, while 47.3 percent of all insured
institutions had ROAs of 1 percent or better. In addition, almost a quarter of minority-
owned institutions (23.2 percent) were unprofitable for the first six months of this year,
compared to 9.4 percent of all insured institutions.
MDIs also have much lower levels of noninterest income and higher levels of loan-loss
provisions than the rest of the industry. Noninterest income represents only 19.5
percent of net operating revenue (net interest income plus total noninterest income) at
minority institutions, compared to an industry average of 42.7 percent. Loan loss
provisions represent 15.3 percent of net operating revenue for MDIs, versus an industry
average of 6.7 percent.
In addition, asset-quality indicators are less favorable at MDIs than for the industry as a
whole. For the first six months of 2007, the net charge-off rate for minority-owned
institutions was 0.56 percent, compared to an industry average of 0.47 percent. For the
same period, 2.03 percent of all loans at minority-owned institutions were noncurrent
(90 days or more past due or in nonaccrual status), compared to 0.90 percent for all
insured institutions.
The difference in profitability can result from many factors. MDIs, like most community
banks, often must compete with larger financial institutions for both business and a
talented work force. They also may find it difficult to diversify their geographical and
credit risk exposures due to their commitment to serve local communities and ethnic
populations. In addition, some minority institutions are challenged with operating in an
economically depressed market area. The disparities in profitability and other key
measures between MDIs and other financial institutions demonstrate the continuing
importance of the FIRREA goals to encourage and preserve MDIs.
Statutory Requirements
FIRREA requires the Secretary of the Treasury to consult with the Director of the Office
of Thrift Supervision and the Chairperson of the FDIC Board of Directors to determine
the best methods for preserving and encouraging minority1 ownership of depository
institutions. Specifically, Section 308 of FIRREA sets the following goals:
Preserve the number of minority depository institutions;
Preserve the minority character in cases of merger or acquisition;
Provide technical assistance to prevent insolvency of institutions not now
insolvent;
Promote and encourage the creation of new depository institutions; and
Provide for training, technical assistance, and education programs.