Can the Industry Preserve MDIs?

The NCUA’s annual report to Congress on the condition of the industry’s minority depository institutions had some good news and some bad news.

The good news was that the financial performance metrics for the industry’s MDIs showed strong growth in 2019 with ample gains in assets, loans, members, shares and deposits. What’s more, the overall net worth ratio for this group of credit unions was 11.77%, higher than the industry’s overall net worth ratio of 11.37%, and 95% of MDIs posted a net worth ratio of 7% at the end of last year. These key performance metrics were impressive when you consider that 87% of MDIs are small institutions managing assets of $100 million or less.

The bad news was that the years-long trend of the declining number of MDIs continues unabated.

At the end of last year, there were 514 MDIs, down from the 626 that were primarily serving minorities in 2015. While that drop was largely blamed on consolidation, NCUA Chairman Rodney Hood said in an exclusive CU Times interview that ­preserving MDIs is critically ­important because of the agency’s and the industry’s multifaceted commitments to address racial inequalities, which include expanding access to financial products and services for minorities. Leaders who serve MDIs agreed with Hood, but added that in order to preserve them, a coordinated industry-wide initiative is needed to provide greater resources and support for MDIs that will enable them to remain viable and avoid consolidation.

“As much as we talk about access to more and better services, many members of these [merged MDIs] feel disfranchised and don’t feel like they’re part of the new entity, and oftentimes the branches end up being shut down,” said Pablo DeFilippi, SVP of membership and network engagement for Inclusiv in New York, N.Y., which works with ­community ­development credit unions in delivering products, services and programs to benefit their low- to moderate-income members.

“I think that mergers should not yet be driven by the [NCUA] insurance fund,” he added. “I’m sorry to say that, especially now that we have Chairman Hood who is saying so clearly and so strongly how important it is to focus on diversity and inclusion. They need to have a better process to manage these mergers, and to make sure that communities are not left behind without a say.”

Michelle Outlaw, vice president of programs for the African American Credit Union Coalition in Duluth, Ga., said consolidation is not necessarily the best option and that regulators should allow MDIs greater flexibility to pursue potential growth opportunities.

“When [MDIs] are taken over by larger institutions, there’s a transfer of wealth, a transfer of power to them,” Outlaw said. “We are losing what took years to build. It almost feels like another knee to the neck with us [MDIs] oftentimes being taken over instead of a solution being found.” Aside from the complexities and other challenges that come with most mergers, Outlaw suggested that when a consolidation becomes the only option, MDIs should have a say in the option of merging with “like-minded” financial institutions that share the same values in serving minority communities.

As the first African American to ever chair a banking regulatory agency, Hood said he has made preserving minority depositories the crux of his chairmanship.

“The COVID-19 pandemic has really uncovered a lot of economic inequality that’s taking place notably in communities of color. I think the George Floyd tragedy also illustrated the economic and also the lack of justice equitably pursued in all of our communities, especially those of communities of color,” Hood said. “So the issues of COVID-19 and George Floyd really just made a lot of us recognize that if we’re ever going to be able to address a lot of these intractable issues, it’s going to be from my point, providing access to affordable financial services.”

On a scale of one to 10, Hood said he rates the NCUA a nine based on its various initiatives to preserve MDIs over the last five years. In 2019 alone, the federal agency’s Office of Credit Union Resources and Expansion provided 58 low-income designated MDI credit unions with more than $738,000 in technical assistance grants that supported various needs such as developing digital tools, improving the financial well-being of members and staff development. The NCUA also approved nearly $75,000 in grants for three small MDI credit unions under the agency’s new mentoring program that provides them with technical and other assistance from larger institutions.

Additionally, the federal agency chartered one MDI last year, the $2.9 million Otoe-Missouria Federal Credit Union in Red Rock, Okla., and approved 24 field-of-membership expansions for MDIs allowing them to add 578 groups or geographic areas to their membership.

One could safely assume that without these NCUA initiatives, the loss of MDIs would be much greater. But still, over the last five years, the industry has lost 112 MDIs or about 22 each year on average. Of the 20 MDIs that consolidated in 2019, six of them were the continuing credit union. Three merged because of their poor financial condition, while one was unable to attract new leadership and one was consolidated because of declining membership. Fifteen MDIs merged for “expanded services.”

If the industry continues to lose 22 MDIs annually over the next five years, their numbers will shrink to 402 by 2025 and 290 by 2030.

Though Hood said he agrees the NCUA can always do more to stem the loss of MDIs, he pointed out that the consolidation is a general trend affecting all small credit unions and community banks because it is getting increasingly harder for them to compete.

Nevertheless, Hood said he is committed to doing more by revealing that he is working with his peers at the Office of the Comptroller of the Currency and FDIC to connect fintechs with credit union and community bank MDIs.

“I mentioned that there are about 514 MDIs at [the] NCUA and about 230 or 240 that are with the FDIC and OCC,” Hood said. “There’s definitely an area of common ground for us to come together to preserve these institutions.”

Hood said he is hoping that fintechs will enable MDIs to provide affordable digital banking services to their members that could help MDIs remain independent, obviating consolidation.

DeFilippi of Inclusiv, however, suggested a much broader approach in helping preserve MDIs is needed. He mentioned even though many MDIs are small, some have managed to avoid a merger because they serve niche markets.

“What they need is the tools and the know-how to capitalize on those niche markets and others,” he said. “For sure it’s about knowing your market, and that’s something that MDIs know so well and that’s why if we lose them, we lose a huge touchpoint with these communities. To your question, how do we address this then? It has to be an industry-wide response. We can’t just say that we are committed to diversity, equity, inclusion and then stand on the sidelines as we see these institutions go under.”

DeFilippi recommended the NCUA collaborate with organizations that work with minority depository institutions to develop more initiatives to preserve MDIs.

While he said he likes the idea of large-asset credit unions taking MDIs under their wing to help them address their specific challenges to growth, DeFilippi said there first is a need to establish ground rules that would include the larger institution agreeing not to pursue a merger with the MDI.

“To the extent that we respond effectively to these issues, we’re going to be more credible and we’re going to be more relevant in the future,” DeFilippi said. “If you look at trends in this country, some years from now, it’s going to be a minority-majority country. If we as an industry don’t reflect this country, we’re not going to be around. Maybe the big institutions will, but as an industry, we need to reflect the communities we serve. That’s how you develop trust.”