The National Credit Union Administration has requested a net worth restoration plan from Melrose Credit Union following a three percentage point drop in its net worth ratio tied to declining taxi medallion loans.
Taxi medallion lenders have been under increased pressure since ridesharing applications like Uber, Lyft and Gett landed in the NYC taxi market in 2011, with many seeing significant declines in lending. And for credit unions like Melrose where medallion loans make up a significant portion of the overall lending portfolio, those declines represent a big hit to the institution's overall income.
In its second quarter Call Report (the most recent data available), the Briarwood, N.Y.-based credit union listed a net worth ratio of 7.49%, a decrease of nearly three percentage points from the 10.37% reported for Q1 of this year. That classifies it as undercapitalized, and that figure is nearly 2.5 points lower than the risk-based net worth requirement of 9.89%. The credit union posted a $57 million loss at the end of Q2.
The $1.9 billion-asset institution must provide a restoration plan to NCUA by September 14. According to the regulator, if NCUA does not approve a credit union's net worth restoration plan, the credit union must submit a new plan within 30 days of the agency's denial. If, after the second attempt, a plan is not agreed upon by the regulator, the regional director has the discretion as to what, if any, actions to take.
In the meantime, Melrose has also increased its Allowance for Loan & Lease Losses (ALLL) to $270 million, an increase of nearly 12% from March 2016. The credit union holds just under $1.5 billion in medallion loans and nearly $432 million of those loans (691 loans) are delinquent following a 34% rise in delinquencies between Q1 and Q2 of this year.
"We have increased our ALLL provision, we are continuing to make a pre-provision profit, [this is] very positive for Melrose CU," interim CEO Steven Krauser told the Credit Union Journal. "Our members are still committed to maintaining their ownership; their owner drivers are making more money now than they did before," he added.
In addition to the federal regulator's restoration plan, the New York State Department of Financial Services (NYSDFS) issued a consent order for Melrose in early July. The order is a result of a state and federal safety and soundness exam completed in December 2015 which found "significant supervisory concerns relating to the conduct of the credit union's business, including unsafe and unsound banking practices and apparent violations of laws and regulations," NYSDFS documents said. One stipulation of the order was to retain a CEO with proven ability and experience improving asset quality, which may explain the reason for the
The order also gave the NYSDFS increased supervisory powers, as well as a number of deadlines for various plans such as asset risk reduction and management/executive restructuring. Melrose was also ordered to complete a Concentrations Reduction Plan to "prudently reduce and manage its taxi medallion loan concentrations for New York, Chicago and Philadelphia," the order said.
Metropolitan Medallion Lenders
Although Melrose holds one of the larger shares of medallion loans, other N.Y. credit unions have long participated in the medallion lending market, primarily because they were a commodity that, in the past, only seemed to be increasing in value.
According to NCUA spokesman John Fairbanks, there are only eight total credit unions participating in medallion lending and they "remain protected by the National Credit Union Share Insurance Fund," he said. Fairbanks explained that the system's total exposure to medallion loans "is finite and manageable," representing less than 1% of total loan portfolios for the industry. Fairbanks said the system's overall lending was around $800 billion while medallion loans accounted for only $7.3 billion.
Purchase, N.Y.-based Quorom Federal Credit Union has not originated any taxi medallion loans but continues to hold nearly $75 million in medallion loans through previous participations, under 8% of their $940 million assets.
"Moving forward, we do expect additional stress to this loan type," Quorum's President/CEO Bruno Sementilli said in a statement. "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 in our second quarter Call Report." Quorum recently increased its ALLL to $21 million, a nearly 85% increase from the credit union's first quarter numbers. The credit union also reported a net income loss of $6 million in its Q2 Call Report.
Another medallion lender, Progressive CU, based out of New York City, is dealing with the stressed market in a similar manner. Progressive, which holds more than $400 million in medallion loans, increased its ALLL by one-third in the most recent quarter to $62 million. The CU also reported a net income loss of $19 million.
"We are working with our medallion owners who are experiencing diminished income," Progressive's CEO Robert Familant said in an interview. "More often than not a lot of these loans are becoming TDR structured. It sounds bad, but what really counts is if they are paying."
CUs Seek Legal Action
Along with credit union losses, the market disruption has also led to lawsuits against the NYC Taxi and Limousine Commission (TLC). The suits allege the TLC did not properly regulate the taxi market when the apps hit the streets.
"The lawsuit is not a smoking gun," said Familant, whose credit union has opened a case along with Melrose CU and Woodside-based LOMTO FCU. "It keeps a little pressure on the city. They can always lose a lawsuit — maybe we get some negotiating preference in the future," he suggested.
According to Familant, 80% of Progressive's loan portfolio consists of medallion loans, $44 million of which are currently in various stages of delinquency.
"For the most part we are working closely with our borrowers [and] working very closely with the NCUA and [New York's] Department of Financial Services," Familant said. "Borrowers are paying [but] that isn't to say there isn't a group of borrowers who aren't."
Familant suggested the reasoning behind the lawsuits was to challenge the TLC on the rights awarded to medallion owners originally. "They have allowed unauthorized, improper, unfair competition into the marketplace, in spite of promises they had made when they sold medallions or when they allowed the transfer of medallions to go through," Familant offered.
Melrose's Krauser echoed the sentiments made by Familant. The interim CEO also believes the TLC is not properly regulating the market and enforcing rules. If they did, he said, "Things would be a little bit different for everybody, including the consumer."
Medallion Industry Misery
An additional complaint from lenders and medallion holders is that ridesharing apps have enabled drivers to skirt TLC regulations already in place for yellow-cab operators.
Only after complaints from medallion holders did the TLC increase regulations for rideshare drivers — a TLC license and TLC registered license plate. "The advent of the 'Universal License,' which allows drivers the opportunity to move effortlessly between various segments we regulate to maximize their earnings potential," is just one of the ways the TLC has tried to bring balance to the industry suggested Allan Fromberg, deputy commissioner for public affairs at the TLC.
Rideshare operators are currently restricted from servicing consumers hailing a taxi from the street and can only operate through pickups requested through their mobile applications. However, even though new regulations were implemented, rideshare drivers are not required to purchase a medallion to operate. These medallions were priced as high as $1 million a few years ago but prices have plummeted to the sub-$600,000 mark in recent months, according to TLC medallion sales records. Additionally, medallion cabs are required to pay a tax — 50 cents per ride — to the Metropolitan Transportation Authority (MTA), something rideshare drivers do not have to comply with. However, recent state legislation is attempting to address this issue.
"There is no question that yellow taxi ridership is down by a considerable degree," said Fromberg. He went added there was an early migration into the app market to see if "the grass was greener," which had an effect on the pool of yellow drivers in operation. There have been a number of drivers who have returned from the app side but "many stayed with their chosen apps," said Fromberg.
Although the average trips per day in yellow cabs have decreased by nearly 30,000 per year since 2013, the average fare box per day (total fares collected) has increased by $600,000 to $6 million since 2013. "This is quite possibly due to a movement toward longer rides," said Fromberg, he explained average rides have increased from 11-12 minutes to nearly 17 minutes and new medallions have been released into the market which "added some much-needed capacity to the industry."
E-hail applications, which mirror capabilities of apps like Uber, offer a similar structure as rideshare applications but for the ride-hailing industry. Way2Ride, developed by Verifone Systems, a payment and point-of-sale solutions company, was first released in the NYC market as a "consumer-facing mobile app that makes the taxi experience faster and easier," according to Verifone's website.
The TLC has studied the effects of apps like Way2Ride on the industry. According to their January 2015 study, E-Hail applications have had the greatest effect on areas that are traditionally underserved by yellow cabs. The study showed in an 18-month period that E-Hails apps accounted for 954,379 pickups and the total number of pickups for all other taxis in that time period neared 245 million. E-hails accounted for 0.000392% of total rides for the 18-month period from 2013-14, a sign that a wide adoption seems unlikely.
"Given the low percentage of trips that are e-hailed, the overall financial impact on both [for-hire vehicles] and medallion industries has been small," the study concluded.
