Introduction

MDIs: The Epitome of Community Banking

MDIs: The Epitome of Community Banking

The FDIC’s Policy regarding minority depository institutions (MDIs) states:

“Minority depository institutions often promote the economic viability of minority and under-served communities. The FDIC has long recognized the importance of minority depository institutions and has historically taken steps to preserve and encourage minority ownership of insured financial institutions.”

MDIs are institutions where 51% or more of the voting stock is owned by minority individuals, specifically Asian American, Black American, Hispanic American or Native American. Congress has established the following goals:
– Preserve the number of MDIs;
– Preserve the minority character in the case of merger;
– Provide assistance to prevent insolvency of MDIs;
– Encourage creation of new MDIs; and
– Provide training and technical assistance to MDIs.

In the event of a failure, the FDIC tries to maintain the minority character, which is not always an easy task. According to the FDIC Report to Congress for 2016, only 38% of the MDIs that failed between 2002 and 2016 were acquired by other MDIs. But, they were the big ones, accounting for 86% of total assets at failed MDIs.

Of course, consolidation has hit this sector just like the rest of the banking industry. Looking at voluntary mergers during that same time frame, 54% merged with other MDIs accounting for 76% of the assets for the group.

But this year… one MDI has been closed and the process was far from simple. We first wrote about  zero-star Seaway Bank & Trust, Chicago, IL in January (JRN 34:05) as it was one of just two banks in the nation that had received a regulatory classification of “critically undercapitalized” with both September 30th and December 31, 2016 financial data. The first had already failed and we surmised that Seaway’s days were numbered. We were right; it failed the same Friday our article came out.

Seaway B&T was a Black/African-American MDI until it was closed on January 27th (JRN 34:15). Regulators have little choice when a bank becomes critically undercapitalized, there is a short window for it to improve, find an acquirer or be shut down. When the first two options didn’t pan out, the state of Illinois swept in, closed the bank and named the FDIC as receiver.

When shopping for an acquirer, the FDIC is also tied to strict rules as it must accept the bid that is least costly to the deposit insurance fund. In the case of Seaway, that turned out to be *****State Bank of Texas, Dallas. While also a MDI, State Bank of Texas serves mostly Asian Americans, not Black Americans. According to the FDIC press release, State Bank of Texas was going to assume all of Seaway’s deposits and purchase $309 million of its assets. The ten branches of Seaway were to reopen the following business day as branches of State Bank of Texas.

However, just over a month later, we learned that State Bank of Texas was selling nine of those branches to ***Self-Help Credit Union, Durham, NC and that they will continue to operate under the Seaway name.

According to its website, “Self-Help’s history and mission are deeply intertwined with the history of African-American credit unions”. Were State Bank of Texas and Self-Help in discussions from the outset? It doesn’t really matter, the point is that Self-Help CU is in a position to help Seaway continue to provide banking services and counter any discriminatory lending practices in the diverse neighborhoods that it has serviced for 50 years. We applaud the move.

There are some who argue that the MDI distinction no longer has value. We disagree. We actually consider MDIs to be the epitome of community banking: committed to helping their neighbors be successful. A list of all U.S. MDIs as of December 31, 2016 along with financial highlights is on page 7 and the insert.