DETERMINANTS OF PROFITABILITY IN MINORITY-OWNED COMMERCIAL BANKS, 1976 - 1978

Introduction and Purpose. Minority-owned commercial banks are those banks owned primarily by Blacks, Hispanic-Americans, Oriental-Americans, American Indians, and women. These banks have rapidly increased in number in the United States since the Civil Rights Movement in the mid-1960's. Most previous research on their performance has focused upon comparisons of these banks to similar non-minority banks. Without exception, the average profitability of minority banks has fallen short of average levels attained by comparable non-minority institutions. However, this body of research has almost entirely ignored large variations in profitability that have existed within the population of minority-owned banks. The purpose of this dissertation is to identify and to determine the relative importance of selected financial and demographic variables in explaining profitability differences among the most and least profitable minority-owned banks from 1976-1978.;Methodology. Reports of Income and Reports of Condition for each minority-owned commercial bank were obtained from the Division of Research and Statistics of the Board of Governors of the Federal Reserve System for 1976, 1977, and 1978. Selected regional banking and demographic data for the same period were obtained from Census Bureau records and from the Federal Deposit Insurance Corporation.;Following data collection, the most profitable and least profitable minority-owned banks were selected for each of the three years of the study. Stepwise regression analysis was then used to relate profitability ratios from the sample banks to a set of candidate independent variables chosen from previous banking literature. Independent variables tested included demographic data, as well as financial ratios. Dependent variables included three profitability ratios each year: Return on Investment, Return on Equity, and Net Profit Margin. A total of eighteen "best" regression models were examined.;Results. Results of the regression analyses revealed that relatively few independent variables accounted for large proportions of the variation in profitability among the sample banks over the 3-year period. Specifically, Provision for Loan Losses/Total Operating Expenses; State, Municipal and Other Non-Federal Securities/Total Assets; Fixed and Other Assets/Total Assets; and Total Assets/Equity were the candidate variables appearing most often. Provision for Loan Losses/Total Operating Expenses appeared in all eighteen final models. All but State, Municipal, and Other Non-Federal Securities/Total Assets were negatively related to profitability ratios. Other independent variables appeared only once or twice among the final eighteen models of minority bank profitability. These results suggested that, while a few variables were important in two or even in three years of the period studied, most determinants of minority bank profitability were evolving from 1976 to 1978.;A final portion of the empirical work involved a survey of minority bank managers in 1979. Although responses were obtained from 62.8% of all minority banks surveyed (fifty-nine out of ninety-four), only the results from 1978 sample banks were reported. Based on a descriptive analysis of sixty-one respondents from the sample banks it was noted that the educational attainments of managers in more profitable banks were higher and that these managers had more years work experience at their current institutions. However, loan officers at more profitable banks tended to have fewer years experience in loan analysis before assuming their present responsibilities than did loan officers at less profitable banks. This result was unexpected since the quality of loan portfolios was higher at more profitable banks throughout the years studied through regression analysis. However, managers at more profitable banks tended to have greater experience in analyzing state, municipal, and county securities.