Board of Governors of the Federal Reserve System

Preserving and Promoting Minority Depository Institutions Annual Report 2023

Preface

The Federal Reserve Board (Board) submits this report pursuant to section 367 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 367 of the Dodd-Frank Act requires the Board to submit an annual report to 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 (appendix A). In addition to the annual reporting requirement, FIRREA section 308 requires the Federal Reserve System (System) to devote efforts toward preserving and promoting minority ownership of minority depository institutions (MDIs). This report looks at the System's supervision responsibility relative to MDIs, the System's Partnership for Progress (PFP) initiatives, the Board's research efforts, and other System efforts and initiatives in 2023.

The Board is responsible for implementing numerous provisions of the Dodd-Frank Act, including mandates to preserve and promote MDIs.

The Regulatory Reform page on the Board's website provides information on the Board's efforts implementing the Dodd-Frank Act as well as initiatives the Board expects to address in the future.¹

Abbreviations

CDFI

Community Development Financial Institution

CRA

Community Reinvestment Act

ECIP

Emergency Capital Investment Program

FIRREA

Financial Institutions Reform, Recovery, and Enforcement Act of 1989

FRB

Federal Reserve Bank

LICU

Low-income credit union

MDI

Minority depository institution

NBA

National Bankers Association

PFP

Partnership for Progress

WDI

Women's depository institution

Executive Summary

In today's financial landscape, access to credit and banking services plays a pivotal role in fostering economic growth and promoting a vibrant economy. The Federal Reserve understands that MDIs are uniquely positioned to play an important role in providing much-needed banking services to their communities. In accordance with the Board's statutory mandate, this report details the actions taken in 2023, including through the Partnership for Progress (PFP) program, in support of preserving and promoting these institutions.

This report looks at the four main areas of the Board's efforts in preserving and promoting MDIs:

1. State Member MDIs looks at the System's supervisory responsibility for the 16 state member MDIs.
2. Partnership for Progress Programming looks at how the System supports MDIs through its PFP program, which is a national outreach effort to help MDIs confront unique business-model challenges, cultivate safe banking practices, and compete more effectively in the marketplace.
3. Research on MDIs and Low- and Moderate-Income Communities looks at research conducted, and the articles and surveys published, by the Federal Reserve to better understand the opportunities and challenges MDIs face in their local market areas.
4. Efforts and Initiatives looks at ways the Federal Reserve continued to dedicate resources for proactive outreach and technical assistance activities.

State Member MDIs

The Board had primary supervisory responsibility for 16 state member MDIs in 2023,² an increase of two institutions from 2022. The majority of these MDIs are community banks with total assets of $10 billion or less (table 1).³ Accordingly, the System's community banking organizations program, which is responsible for the risk-focused supervision of state member banks with less than $10 billion in total assets, maintains supervisory responsibility for most of the Board's portfolio of MDIs.

There were two changes to the portfolio in 2023:

1. Sovereign Bank (formerly known as First National Bank and Trust Company), Shawnee, Oklahoma, a $913 million Native American institution, changed their primary regulator from the Office of the Comptroller of the Currency (OCC) to the Federal Reserve and became a state member institution as of May 23, 2023. During this process, the institution also changed its name.
2. Nave Bank, San Juan, Puerto Rico, a $100 million de novo state member institution supervised by the Federal Reserve, was established on September 18, 2023. The majority of the institution's board are Hispanic American and the bank serves predominately minority communities.

Table 1. Asset distribution of state member MDIs as of December 31, 2023

Geographic Dispersion

In 2023, state member MDIs were located in six of the 12 Federal Reserve Bank Districts, with assets concentrated in the New York and San Francisco Districts (table 2).⁴ State member MDIs in these two Districts accounted for 97 percent of the total state member bank assets in the System's MDI portfolio. Though smaller in asset size, there is also a concentration of state member MDIs in the Kansas City District. All five of the MDIs in this District are located in Oklahoma and are Native American MDIs.

Table 2. State member MDI distribution by Federal Reserve District as of December 31, 2023

Minority Ownership Type

The Board's MDI portfolio includes banks rep- resenting all minority ownership categories as defined by FIRREA (appendix A). As of year-end 2023, five state member MDIs were classified under Asian American minority status, six were classified under Native American minority status, four were classified under Hispanic American minority status, and one was classified under Black/African American minority status (figure 1).

Women's Depository Institutions

The Federal Reserve defines women's depository institutions (WDIs) separately from MDIs. In March 2021, the Board issued a Supervision and Regulation letter—"Highlighting the Federal Reserve System's Partnership for Progress Program for Minority Depository Institutions and Women's Depository Institutions"—to clarify the distinction between WDIs and MDIs and to include WDIs in the PFP program.⁵ The System's definition of WDI is consistent with the definition of this term in the Community Reinvestment Act (CRA) and includes any depository institution where a majority of ownership or a majority of revenue is held by at least one woman and a significant percentage of senior management positions are held by women.⁶ As of year-end 2023, there were three banks classified as state member WDIs.⁷

Partnership for Progress Programming

The Board and the Federal Reserve Banks (FRBs) support MDIs primarily through the PFP program. The PFP is the System's national MDI outreach program created to support the System's federal mandate to preserve and promote MDIs. The PFP includes a national outreach effort to help MDIs address unique business-model challenges, cultivate safe banking practices, and compete more effectively in the marketplace.

The PFP program is jointly managed by the Community Banking Organizations section of the Federal Reserve's Division of Supervision and Regulation (S&R) and the Community Development section of the Division of Consumer and Community Affairs (DCCA). This multidivisional arrangement leverages the community development expertise and external network of the community development program in DCCA with the institutional focus and regulatory expertise of community and regional banking in S&R. The two divisions share the staffing of the PFP program, and both divisions have appointed senior officers to co-chair the program's Executive Oversight Committee. In addition, there is a program manager at the Federal Reserve Bank of Philadelphia, and each FRB has designated a PFP District coordinator who communicates regularly with the MDIs in their District (where applicable) and assists with accomplishing the mission of the PFP program.

Overview of the outreach provided by PFP:

• Technical assistance: Providing direct consultative support to MDIs on a variety of regulatory topics as requested or through outreach events.
• Research: Publishing research on topics impacting MDIs and the customers they serve.

• Conferences and convenings: Leveraging the System's resources as the central bank of the United States to support MDIs by

  • attending and presenting at MDI-related convenings;
  • holding MDI-focused conferences and convenings to foster information exchange, promote the importance of MDIs, and strengthen partnerships to support the MDI sector; and
  • strengthening communication between MDIs, with System and interagency supervisors, and other key regulatory stakeholders.

• Outreach: Providing MDIs information, guidance, and support regarding

  • current and emerging regulatory updates and issues,
  • applications,
  • de novo bank formation and MDI designation, and
  • key information on the PFP's website.

As noted above, the congressional mandate in section 308 of FIRREA to preserve and promote MDIs is carried out through supervisory actions as well as other activities. In addition to providing technical assistance and outreach to the System's regulated MDIs, the Board actively works with colleagues at the other federal regulatory agencies with section 308 responsibilities to ensure a coordinated approach to supporting all MDIs.

The PFP seeks to achieve the program's goals outlined above through

• holding periodic meetings with the Board's PFP Executive Oversight Committee, program manager, and District coordinators to collaborate on MDI outreach efforts around the Federal Reserve System;
• offering outreach and technical training sessions to MDIs and Federal Reserve examiners;
• providing targeted information regarding the System's supervisory and application processes and making research available through the PFP website; and
• producing research, convening stakeholders, and promoting MDIs through speeches and other publications.

Conferences and Convenings

Throughout 2023, the Federal Reserve conducted a number of programs specific to MDIs, including the following:

Minorities in Banking Forum, September 27–28, 2023

The System hosted the eighth annual "Minorities in Banking Forum" at the Federal Reserve Bank of Dallas. This in-person forum had 105 attendees from 23 states, representing 70 organizations. The forum, which is designed for mid-level and senior leaders in the financial services industry, featured over 10 hours of programming focused on leadership, professional development, banking/economic updates, and networking opportunities. Panelists included senior-level management from small and large banking institutions, and other industry experts on workplace topics. Governor Lisa D. Cook gave (recorded) closing remarks for the forum.⁸

2023 Interagency Minority Depository Institution and CDFI Bank Conference November 15–16, 2023

The Federal Reserve, along with the Federal Deposit Insurance Corporation (FDIC) and OCC, hosted the in-person biennial interagency conference for MDIs and Community Development Financial Institution (CDFI) banks in November 2023, at the Federal Reserve Bank of Dallas. The conference theme was, "MDI and CDFI Bank Partnership Exchange," and focused on collaboration, partnerships, and promoting the mission of MDIs and CDFIs among leaders at these institutions. Governor Michelle W. Bowman gave (recorded) opening remarks.

The first day of the conference focused on providing information and resources for the MDI and CDFI participants. Panels covered topics ranging from regulatory changes and CRA updates to federal programs and initiatives that support MDIs and CDFIs. Bankers were also able to meet directly with regulatory subject matter experts, connect with exhibitors, and network with their mission-driven bank colleagues.

Day two of the conference centered on the newest addition to the conference format, networking roundtables. The aim of the roundtables was to foster collaboration between the MDI and CDFI bank participants and representatives from large and regional banks. MDI and CDFI bankers met one-on-one with a wide range of large and regional banks seeking to expand on CRA and community impact initiatives. This event created the opportunity for MDIs and CDFI banks to discuss ways they can forge new connections and build partnerships.

The conference attracted over 250 attendees from 38 states and territories, representing 108 MDIs and CDFIs and 73 large and regional banks. The conference was also attended by representatives of government agencies and private entities that have programs supporting MDIs and CDFIs.

Collaboration with Trade Groups and Other Partners

Throughout 2023, the PFP consulted closely with the National Bankers Association (NBA). 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 Federal Reserve also collaborates regularly with other federal banking agencies, such as the OCC and the FDIC. The agencies discuss various collaboration opportunities to identify ways they can work together to support MDIs consistent with the statutory mandate.

Other outreach engagements in 2023 included the following:

• In February, Board staff represented PFP at the American Bankers Association and the NBA MDI Partnerships Summit in Orlando, Florida. The meeting was focused on MDIs and attended by representatives from the FDIC, OCC, and Federal Reserve. The summit stressed the importance of partnerships between regional banks and MDIs.
• In March, the PFP, along with the FDIC and OCC, hosted an Emergency Capital Investment Program (ECIP) Interagency Webinar to provide MDIs technical assistance on supervisory expectations of companies that received ECIP funds.⁹
• In October, the PFP organized a call with representatives from the Alliance for Innovative Regulation (AIR). AIR aims to help MDIs modernize their technology and scale up digital solutions. The group met with regulators during the year to highlight challenges CDFIs and MDIs face relating to technology, compliance, and access to capital. Discussions included ways to make the financial system more inclusive, fair, and resilient through responsible use of new technology.
• In October, Board and Reserve Bank staff represented PFP at the NBA Conference in Washington, D.C. The conference focused on building partnerships, technology, capital, and deposits. PFP representatives participated in panel discussions that included questions on CRA, Basel III implementation, and the interest rate environment.
• In October, the PFP, along with the FDIC and OCC, met with the MDI Keepers Fund to determine the treatment of capital investments from the MDI Keepers Fund as it pertains to an institution's MDI designation.

Speeches and Remarks

In 2023, Federal Reserve Board members gave the following public remarks on topics relevant to the MDI and WDI industry:

• In February, Vice Chair for Supervision Michael S. Barr gave remarks at the "Banking on Financial Inclusion" Conference in Jackson, Mississippi. The remarks are available here: https://www.federalreserve.gov/newsevents/speech/barr20230207a.htm.
• In March, Governor Michelle W. Bowman gave a speech on "The Innovation Imperative: Modernizing Traditional Banking" in Honolulu, Hawaii. The speech is available here: https://www.federalreserve.gov/newsevents/speech/bowman20230314a.htm.
• In September, Governor Michelle W. Bowman was on a panel at the 2023 Symposium on Indigenous Inclusion, in Auckland, New Zealand. The panel remarks are available here: https://www.federalreserve.gov/newsevents/speech/bowman20230927a.htm.
• In September, Governor Lisa D. Cook gave closing remarks at the Minorities in Banking Forum in Dallas, Texas. The remarks are available here: https://www.federalreserve.gov/newsevents/speech/cook20230928a.htm.
• In November, Vice Chair for Supervision Michael S. Barr gave a speech on "Serving Indian Country with the Modernized Community Reinvestment Act" in Minneapolis, Minnesota. The speech is available here: https://www.federalreserve.gov/newsevents/speech/barr20231128a.htm.
• In December, Governor Michelle W. Bowman gave a speech on "Building a More Inclusive Financial System through Collaboration and Action" in Washington, D.C. The speech is available here: https://www.federalreserve.gov/newsevents/speech/bowman20231205a.htm.

Research on MDIs and Low- and Moderate-Income Communities

Throughout 2023, the System produced several pieces of research that were relevant to MDIs and CDFIs.¹⁰ These articles and data tools provide helpful information to the industry as they relate to the MDI business model and reflect the impact of MDIs and CDFIs on the communities they serve.

The following list highlights data tools and research published during 2023:

• Native Community Data Profiles: For more information on this data tool, see https://www.minneapolisfed.org/indiancountry/resources/native-community-data-profiles.

• Native American Funding and Finance Atlas: For more information on this data tool, see https://www.minneapolisfed.org/indiancountry/resources/native-american-funding-and-finance-atlas.

• Banking Deserts Dashboard: For more information on this data tool, see https://fedcommunities.org/data/banking-deserts-dashboard/.

• Minority Owned Banks and Banking Access in Minority Communities: For more information on this virtual event, see https://www.chicagofed.org/events/2023/minority-owned-banks.

• Preserving Minority Depository Institutions: Understanding Their Challenges and What Is Being Done to Support Them: For more information on this paper, see https://www.chicagofed.org/research/content-areas/mobility/policy-brief-preserving-minority-depository-institutions.

• Sizing the CDFI Market: Understanding Industry Growth : For more information on this report, see https://www.newyorkfed.org/medialibrary/media/newsevents/news/regional_outreach/2023/sizing-the-cdfi-market-understanding-industry-growth.

• Stakeholders' Aversion to Inequality and Bank Lending to Minorities: For more information on this report, see https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1079.pdf.

• Which Types of Unbanked Households Are More (or Less) Likely to Open a Bank Account?: For more information on this working paper, see https://www.kansascityfed.org/Research%20Working%20Papers/documents/9595/rwp23-08hayashirouthtoh.pdf.

Efforts and Initiatives

Preserving the Character and Number of MDIs

To preserve the character and prevalence of state member MDIs, in accordance with the Board's statutory mandate, whenever Federal Reserve staff receive a proposal involving an MDI, every effort is made to ensure that the institution's MDI status is preserved and that its future prospects are enhanced. 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, in the rare instance where an MDI is in troubled condition, 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.

Promoting MDIs

In accordance with the Board's statutory mandate, the Federal Reserve strives to promote new MDIs by providing guidance via public websites about regulatory procedures for minority bank ownership, informing MDIs of 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, coordinators from each FRB periodically discuss emerging issues, attend conferences, serve on local examination teams, and collect feedback from MDIs on observations and how the PFP can provide additional assistance.

In September 2023, the Board and Federal Reserve Bank of New York recognized a new MDI, Nave Bank in San Juan, Puerto Rico. During 2023, PFP staff engaged with several groups seeking guidance from the regulatory agencies on navigating the de novo process for establishing new MDIs and WDIs. Staff of the PFP and relevant FRBs answered questions, provided resources, and offered assistance on navigating the de novo applications process.

Training, Technical Assistance, and Educational Programs

Coordinators from each FRB meet as needed 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 2023 included capital rules, CRA, and HMDA. As an example, a state member MDI reached out to a District coordinator for technical assistance related to HMDA filings. The PFP coordinated a subject matter expert to help the MDI understand the reporting and submission requirements of the HMDA regulation.

During 2023, the PFP provided MDIs with several training and educational programs, including an "Ask the Fed" session on the Bank Term Funding Program and an internal training on supervisory expectations for ECIP recipients.

Partnership for Progress Website

The PFP website is currently undergoing a substantial update with the goals of modernizing the website, sharing timely information, increasing stakeholder engagement, and improving the accessibility of information.¹¹ The website is in the final production stage with an anticipated launch date of late 2025.

The website will continue to serve as one of the primary vehicles for distributing educational materials relevant to MDIs and WDIs and will provide industry specific information about new regulations and their impact on community banking organizations. The website will also post regulatory and agency events relevant to MDIs and share information focused on market conditions and economic data related to areas typically served by MDIs.

Publications and Webinars

The Federal Reserve continues to support enhanced communications with community banks, including MDIs. To this end, the staff disseminates important information about regulatory matters through the publications and programs listed below, most of which are accessible through links on the PFP website.

The System's Community Banking Connections publication serves to¹²

• 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.

The System's Consumer Compliance Outlookpublication focuses on compliance with federal consumer protection laws and regulations for financial services and serves to¹³

• clarify key supervisory guidance,
• explain new and existing regulatory compliance requirements,
• provide perspectives from bank examiners and System staff,
• address challenges and concerns facing community banks and provide resources to assist them, and
• discuss emerging compliance issues.

"Outlook Live" is a webinar series dedicated to consumer compliance.¹⁴ The webinars involve a variety of presenters from both the System and the other federal financial regulatory agencies, focusing on key emerging issues in the industry.

"Ask the Fed" is the Federal Reserve's premier program for communicating important and timely supervisory, regulatory, banking policy, and economic information. "Ask the Fed" is a webinar program open to supervised financial institutions, state bank regulators, state/national banking associations, and other relevant groups.¹⁵ "Ask the Fed" consists of periodic webinars that feature presentations by Federal Reserve experts and guest speakers on current critical banking questions with time at the end for questions and comments.

Community Reinvestment Act

The Community Reinvestment Act, or CRA, was signed into law in 1977 and is a seminal piece of legislation to address inequities in access to credit for low- and moderate-income individuals and communities. Under the statute and CRA regulations, banks can receive CRA credit for capital investment, loan participation, and other ventures undertaken in cooperation with MDIs, WDIs, and low-income credit unions (LICUs), in certain circumstances.¹⁶ These activities must help meet the credit needs of local communities in which the MDIs, WDIs, or LICUs are chartered. In addition, certain bank activities with CDFIs can qualify as community development under the CRA regulations and guidance.¹⁷

Appendix A: 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.

Appendix B: MDI Figures and Tables

Table B.1. State member MDIs as of December 31, 2023

Table B.2. State member WDIs as of December 31, 2023

Table B.3. List of MDIs as of December 31, 2023

Footnotes