What is an MDI?

An MDI is defined as a federally insured depository institution of which 51% or more of the voting stock is owned by minority individuals, or an institution where the majority of the board of directors is minority and the community that the institution serves is predominantly minority.

Source: Federal Reserve Bank of Dallas

It can be a vicious circle: Minority depository institutions (MDIs) need capital to lend to their communities, but those communities sometimes can’t make the deposits necessary to build up the bank’s capital and then expand its capacity. 

“Eighty percent of our branches are in low- and moderate-income neighborhoods,” says Carlos P. Naudon, president and CEO of Ponce Bank in the Bronx, N.Y. “Those communities cannot fund enough deposits to make the branches profitable and give us funds to lend out. We have to have alternative sources of funding.”

Ponce Bank, founded 63 years ago by Puerto Rican immigrants, is a Community Development Financial Institution (CDFI). Naudon is proud of the role the $2.8 billion-asset bank, its branches and five loan production offices play in its communities but is keenly aware of how capital constraints sometimes impede the bank’s vision. 

This is not a new problem for MDIs and may also reflect systemic factors. “There’s been a real historical issue of the inability of MDIs to gain access to Tier 1 capital,” says John Lewis, CEO and president of $372 million-asset The Harbor Bank in Baltimore.

Carlos Naudon
Carlos P. Naudon

In recent years, both the federal government and private sectors have focused on increasing MDIs’ access to capital. In 2021, the U.S. Treasury provided $9 billion directly to MDIs and CDFIs through the Emergency Capital Investment Program (ECIP) to support loans, grants and forbearances in these banks’ communities. 

“ECIP’s been a game changer for our institution,” says James Sills, president and CEO of $426 million-asset M&F Bank in Durham, N.C. M&F, the second-oldest African American-owned bank in the U.S., received $80 million from ECIP in June 2022. 

“Our legal lending limit increased because we have more capital,” Sills says. “When we provide that capital, it allows businesses to grow, hire more people, hire other vendors and purchase services. Most minority firms are located in minority communities. It’s a great way to improve the ecosystem in a lot of minority communities across the country.”

Naudon agrees, noting that ECIP funds made it possible for Ponce Bank to fund a large affordable housing project in the Bronx—an immediate, meaningful community improvement. 

“It’s literally around the corner from our bank headquarters,” he says. “It was too big for us, and we would have exceeded the amount we could loan to one borrower. We closed on the loan a few days after we got the funds from the U.S. Treasury.”

“We’re a community bank and we are proud to say that we go and meet our customers where they are.”
–James Sills, M&F Bank

Housing: a key focus for MDIs

James Sills
James Sills, president and CEO of M&F Bank, says ECIP has been a game-changer for the community bank.

MDIs routinely prioritize affordable housing projects because of the role homeownership plays in generational wealth creation. “Homeownership has always been one of the best ways for a family to build some wealth,” says Josh Pape, COO of $430 million-asset Chickasaw Community Bank (CCB) in Oklahoma City, Okla. “When you help people into homeownership, not only are immediate living conditions drastically improved, but it builds intergenerational wealth.”

When Southern Bancorp in Arkadelphia, Ark., received $250 million in ECIP funding, it focused on affordable housing. 

“We are embarking on a significant expansion of our affordable home mortgage division to really attack the homeownership gap,” reports Darrin Williams, CEO of Southern Bancorp Inc., the holding company that wholly owns $2.5 billion-asset Southern Bancorp Bank. “We have expanded our mortgage loan originators and hired a new president of the home mortgage division. We were always planning to do this. The ECIP funding has allowed us to increase the speed and pace of our expansion.”

As welcome as federal funds have been, MDI and CDFI bankers are also encouraged by the private sector’s increased efforts to invest in and partner with mission-driven financial institutions. “The private sector has really stepped up in the aftermath of the unrest following the 2020 death of George Floyd,” Williams says. “A number of private sector companies have made huge commitments to support MDIs and CDFIs.”

Many major banks have taken the lead in partnering with MDIs. A combination of ECIP funding and private sector support empowered Detroit-based First Independence Bank to open two branches in the Minneapolis-St. Paul area. Several major banks supported the initiative, making investments in First Independence-preferred stock and assisting it in purchasing some loans. 

“It allowed us to open branches and not have to worry immediately about how to keep the lights on,” says Kenneth Kelly, CEO of the $600 million-asset community bank. “It’s the first time we’ve seen institutions, some of them representing 80% of the market, invite another banking institution into that market. That’s the spirit of hope. Even competitors can work together to solve local community issues.”

MDIs’ outsized role in vulnerable communities’ success

MDI Infographics

Source: Federal Reserve Bank of Dallas, February 2022

Community bank support

Larger fellow community banks are partnering with MDIs and CDFIs in much the same way—by making investments and sharing in loan participations. Williams is inspired by larger fellow community banks, such as Relyance Bank and Encore Bank, that have purchased stock in Southern Bancorp. “These are community banks helping community banks,” he says.

For larger community banks, these meaningful relationships are about more than transactional funding. In fact, they find value in helping uncover where MDIs and CDFIs need further support for building capacity, as well as sharing expertise in various facets of the banking industry, such as risk, compliance and technology. 

Williams believes these investments reflect an awareness that this is a constructive way to support minority and underserved communities. “[Large banks] are not equipped to serve these communities well,” Williams says. “JPMorgan Chase is not going to locate a branch in Helena, Ark. That’s not its business model.” 

As well as purchasing equity or making deposits, larger banks are partnering with CDFIs and MDIs to fund loans. Bank of America organized the widely publicized three-year $78 million loan facility to the National Football League (NFL) that a consortium of MDIs and CDFIs made. Such high-profile loans provide interest income as well as a significant boost for these banks’ public profile.

“When MDIs aggregate their resources to lend to those larger sports leagues [and other asset classes], it’s a great way for us to showcase our economic power,” says Sills; M&F Bank participated in the funding. “That helps other corporations say, ‘Maybe [we] should do the same thing. If they have a large project, they can partner with a group of MDIs.’ It’s a great win‑win for all.”

Kelly adds that the high-profile NFL deal has generated other opportunities. “It has cascaded into discussions with individual teams of the NFL,” he says. “That’s less likely to have happened had the NFL not taken on the leadership and engagement with MDIs.” 

Williams agrees that corporate support of CDFIs and MDIs is surging. “[One large bank] told us that their customers are asking them to work with us,” he says. “We’ve done at least a dozen loan participations with large money center banks. There’s a growing awareness among large corporations and small businesses about mission-focused banks. People want to ... use lenders and deposits aligned with their mission. They’re requiring larger banks to partner with us.”

CFG Bank Arena

The Harbor Bank revitalizes a downtown hub

In between funding the smaller projects that are its bread and butter, The Harbor Bank of Maryland in Baltimore recently participated in a high-profile civic project: syndicated loan facilities of $130 million, led by Truist, that renovated the Baltimore Arena, now renamed the CFG Bank Arena.

“It’s a historical arena that you can see from our headquarters,” notes John Lewis, president and CEO of The Harbor Bank of Maryland. “We were excited to be a part of that.”

The arena is an economic hub for downtown Baltimore. “We at Harbor Bank are huge believers in the city of Baltimore, and we love having an arena that serves as a magnet to bring people into the city and experience the city firsthand,” Lewis says. “That’s a great catalyst to this city’s continued growth.”

The project exemplifies how community banks are joining larger national interests with local community concerns. Lewis is especially gratified that several of The Harbor Bank’s small business clients benefit from the increased economic energy.

“We’ve been working for years with developers on the periphery of the arena,” Lewis reports. “This supports the work they’ve been doing. Attracting people to attend events creates the vibrancy in residential and small businesses.”

The value of an MDI

If cash-rich private entities supply the means, MDIs bring their own assets: firsthand knowledge of their communities and deep relationships. These vital resources guide the best use of dollars. “We’re experts in loaning to our communities,” says Pape. “If large organizations or larger banks want to help make an impact, they should put liquidity in a minority-owned bank that is already loaning money to those minority communities.”

Lewis agrees. “When you really dig into it, most of us are the community bank of a specific community,” he says. “There are only two commercial banks headquartered in the city of Baltimore. We are an MDI, and we are very much of the community. We can bank the community in an intentional way.”

According to Lewis, larger banks and corporations should do their homework on the ways MDIs can contribute. “Private sources need to get to know and understand the MDIs that are in their markets to effectively partner with them,” he says. “We believe we bring great value to the partners in our relationships and knowledge of the community.” 

“Generally speaking, minority populations are still very unsure about approaching large-scale banks,” says Sills. “They still have a bit of fear about not getting treated well or being looked down upon. We’re a community bank, and we are proud to say that we go and meet our customers where they are.”

Darrin Williams
Southern Bancorp enjoys the financial support of larger community banks, says CEO Darrin Williams.

Tailored banking services

Lewis says that the infusion of capital hasn’t changed the vision of The Harbor Bank of Maryland: It has continued operating as a community bank, funding small, local enterprises. “Providing capital to an MDI doesn’t mean that we’re going to do large, up-market deals,” Lewis explains. “We will do more of the deals of the type we’ve historically done. We do the deals that we see in our market that are smaller than the larger banks would take an interest in.”

Naudon agrees, as Ponce Bank often makes microloans under $25,000 for small businesses. He says MDIs with deep community roots can responsibly use alternative underwriting methodology to provide funding.

“It’s important to develop safe underwriting processes that don’t rely on data that’s biased,” he says. “Certain parts of the population don’t have good credit scores because they don’t use credit. There have to be alternative ways to show the ability to repay through cash flows.”

MDIs face continued challenges, and the overall environment for banks is bracing. Industry professionals hope that new awareness and partnerships that are developing will endure and reinforce mission-focused banks.

“We are very hopeful that what we’re seeing in terms of collaboration and partnership is not episodic,” Kelly concludes. “I hope that what we are seeing in terms of collaboration and partnership becomes systemic.”

Mission Driven Bank Fund targets MDIs and CDFIs

Private funding for MDIs and CDFIs got a boost in 2022 with the creation of the Mission Driven Bank Fund. The fund will tailor capital to a bank’s needs, investing via seven different products: common equity, preferred equity, subdeck, deposits, purchase of a bank’s available for sale securities, lines of credit and participation in loan syndication.

By providing subsidized technological services to portfolio companies, the fund hopes to drive organizational capacity and greater access to technology services. “Our average bank is [below] $500 million in assets. There are all types of operational and technical services they can’t access because they’re not big enough,” says Paul Welch, portfolio manager of Mission Driven Bank Fund and head of private equity for Elizabeth Park Capital Management.