Credit Union Medallion Troubles — 12/31/16 Update Soon

Credit Union Taxi Medallion Troubles

Credit unions that manage taxicab medallion loan portfolios and participation loans continue to feel the pain wrought by fierce competitive pressures from the ride-sharing services in New York City, Philadelphia, Boston and Chicago.

What’s worse, however, is that no one knows when these medallion loan losses will bottom out and whether more credit unions may be forced into conservatorship. However, CEOs managing large taxi medallion loan portfolios say they see the competitive market between traditional taxicabs and app-based ridesharing companies, Uber and Lyft, stabilizing and are optimistic their credit unions will be able to survive.

In the meantime, the latest financial performance reports don’t look good.

The release of the third quarter call reports last month revealed that the $243 million LOMTO Federal Credit Union is undercapitalized.

LOMTO posted a net worth of 8.4% at the end of the third quarter compared to its net worth of 16.36% at the end of the third quarter of 2015. However, because LOMTO is considered to be a complex cooperative by the NCUA, its risk-based net worth requirement was 10.04%, which classified the Woodside, N.Y.-based credit union as undercapitalized, according to its call report.

The undercapitalization placed LOMTO into prompt corrective action requiring it to submit a net worth restoration plan to the NCUA.

Keith Leggett, retired SVP and senior economist for the American Bankers Association, said LOMTO might be the next Montauk Credit Union in New York City, which was forced into conservatorship in September 2015 because of its troubled taxi medallion loan portfolio. Six months later in March 2016, Montauk was merged into the $6.8 billion Bethpage Federal Credit Union in Bethpage, N.Y.

“They’re [LOMTO] really pigeon holed,” Leggett said. “They are a mono-line credit union.”

LOMTO manages more than 600 medallion loans totaling about $138 million, which accounts for almost half of its 1,133 total loans and more than half of its total assets of $243 million.

LOMTO posted total net income loss of $11.7 million at the end of the third quarter. The credit union’s total delinquent loans to net worth ratio soared from 8.46% in September 2015 to 148.38% in September 2016, while its ROAA deteriorated from -0.68% in September 2015 to -6.18% in September 2016.

Michael Cahalin, president/CEO of LOMTO, did not respond to CU Times’ phone and email messages seeking comment. The credit union announced in October that Cahalin replaced Richard Kay who retired after 27 years of service. LOMTO is the second credit union that serves the taxi medallion industry to become undercapitalized.

 

The $1.9 billion Melrose Credit Union became undercapitalized after posting a net income loss of $57 million at the end of the second quarter. Though it shaved its net income loss by $1.2 million, Melrose recorded a total net income loss of $55.8 million at the end of the third quarter and remains undercapitalized, according to its September 2016 call report.

Melrose posted a net worth of 7.52% at the end of the third quarter compared to its net worth of 17.30% at the end of the third quarter of 2015. Because Melrose is considered to be a complex cooperative by the NCUA, its risk-based net worth requirement was 9.14%, which classified the Briarwood, N.Y.-based credit union as undercapitalized, according to its call report.

The credit union’s total delinquent loans to net worth ratio also soared from 34% in September 2015 to 290% in September 2016, while its ROAA deteriorated from -1.36% in September 2015 to -3.85% in September 2016.

In addition to its financial issues, Melrose also remains under a consent order issued in July by the New York State Department of Financial Services. The regulator determined the credit union violated laws and regulations and had significant supervisory concerns.

Nonetheless, Melrose Interim President/CEO Steven Krauser said the credit union is on an upward path and is well positioned with its new staff focused on growth into 2017 and beyond.

“The marketplace is improving, and a strong rebound on earnings growth should improve the economy for our members and beyond,” Krauser said. “A pro-growth agenda in 2017 should stimulate the economy, which should in-turn stimulate lending. It would be premature to speculate on our level of growth at this point, but we retain a positive outlook.”

Although Melrose manages more than 3,000 taxi medallion loans totaling approximately $1.5 billion, the credit union announced last summer that it would be diversifying into other loan products and services.

Other credit unions with large medallion loan portfolios, such as the $589 million Progressive Credit Union in New York City, posted a total net income loss of $52.3 million at the end of the third quarter.

The credit union’s total delinquent loans to net worth ratio substantially increased from 2.33% in September 2015 to 35.29% in September 2016. In the same year, Progressive’s ROAA went from 1.08% to -11.31%.

Despite heavy losses, however, the credit union’s net worth is 33.95% at the end of the third quarter, which is down from its net worth of 41.03%. Progressive holds more than $252 million in undivided earnings and regular reserves.

“A lot of what you see that looks like losses is money that is really being put in reserves against devaluations,” Progressive President/CEO Robert Familant said. “Now those could become losses if those devaluations never rebound, but for now they’re not losses. The members are still working with their medallions. The members are still making payments on their loans, and we’re hopeful that the marketplace will stabilize and turn around for these folks.”

 

New York medallions have fallen in value from $1 million or more in 2014 to about $600,000 today, according to Familant.

However, Gene Freidman, who owns numerous companies that operate more than 1,100 New York cabs, said in an affidavit that the medallion values are perhaps as low as $250,000, but no more than $500,000 based on some recent auctions. Freidman, commonly known as New York’s Taxi King, filed the affidavit on Nov. 14 in U.S. bankruptcy court in Manhattan. His companies are seeking Chapter 11 protection.

“Why pay $1,000,000 for something, i.e., a license, to pick up passengers in Manhattan that comes with all sorts of restrictions, when you can do it freely for nothing?” Freidman asked in his affidavit statement, making an obvious reference to Uber and Lyft that are not required to comply with regulations that traditional taxicabs do.

In other markets such as Philadelphia, Boston and Chicago, which Progressive serves, medallion values have reportedly dropped to about $60,000 from $400,000 a couple of years ago. But Familant contends the medallion values are approximately $100,000.

On good days, Familant said, he is cautiously optimistic that the medallion values will rebound when the marketplace stabilizes.

“There is a difference between medallion values and income stream,” Familant explained. “The values are down because the municipalities are not supporting medallion owners and there is a lack of confidence. Medallion owners and medallion drivers are making money every day. The income streams have changed but they are there.”

Though Progressive expects to remain in the medallion marketplace, it is aggressively expanding its commercial loan offerings through direct loans and participation loans.

There are more than 120 credit unions that hold participation loans collateralized by taxi medallions.

The $928 million Quorum Federal Credit Union in Purchase, N.Y., had about $76.2 million in loans collateralized by taxi medallions in Philadelphia, New York, Boston and Chicago, according to the credit union’s 2015 annual report. Of its total loans collateralized by taxi medallions, $6 million were listed as nonperforming at the end of last year.

At the end of the third quarter, Quorum posted a total net loss of $6.8 million though it’s unknown to what extent its collateralized medallion loan portfolio contributed to that total net loss so far this year.

Quorum’s net worth was 7.03% at the end of September, down from 7.77% at the end of September last year. The credit union’s total delinquent loans to net worth shot up from 18.64% in September 2015 to 49.53% in September 2016. Quorum’s ROAA was 0.55% in September 2015 and declined to -0.98 at the end of September 2016.

“Currently, our portfolio is about $74 million, which is 8% of our total assets,” Quorum President/CEO Bruno Sementilli said. “Moving forward, we do expect additional stress to this loan type, but we are prepared and have adequately reserved for potential losses. Because Quorum is dedicated to controlling this risk, we have increased our allowance for loan losses and, consequently, there was a decrease in our earnings as reported in our second quarter call report.”

Although Quorum never originated medallion loans, Sementilli pointed out that the credit union benefited from taxi medallion participation loans for 13 years with zero losses. Nevertheless, he said the credit union stopped participating in taxi loans in 2013.

Quorum also sees the taxi marketplace eventually stabilizing. “We will continue to work closely with all stakeholders on this asset class including examiners, industry experts, originating credit unions and borrowers,” he said. “We remain a healthy credit union providing the best service to our members and, until the taxi marketplace stabilizes, we are prepared to handle the stresses on this small part of our assets.”

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