By Ray Birch
NEW YORK—The effects from the sinking value of taxi medallions in this city—which has led to the conservatorship of two credit unions—will be felt by CUs across the country, indicate sources who also predict NCUSIF assessments will be part of the pain.
Credit unions that have bought participations from Big Apple medallion lenders—which one analyst said reach across the nation and amount to approximately $3 billion—will face issues with rising delinquencies and defaults in their portfolios. Sources told CUToday.info they believe the under-performing participations won’t sink any credit unions, but will likely force some already operating on the edge of profitability to merge.
Even credit unions that have not originated or bought participations will feel some effects, as sources predict NCUA will charge an NCUSIF premium this year to bolster the fund against upcoming losses from the taxi loans.
NCUA, however, said the overall amount of dollars represented by taxi medallion loans is small when compared to the total credit union loan portfolio.
In New York City the value of taxi medallions, which are required in order to legally drive a cab, have plummeted to approximately half of their peak values, and that has led many members to default on their medallion loans. Such defaults led to the recent conservatorship of the $1.8-billion Melrose Credit Union and, prior to that in September of 2015, the conservatorship of another taxi medallion lender, Montauk CU. It was later merged into Bethpage FCU.
$200 To $400 Million Price Tag
Examining the situation today, Keith Leggett, the former senior vice president and senior economist at the ABA, sees the eventual cost to the share insurance fund from the medallion issue ranging from $200 million to $400 million, largely from Melrose and what Leggett expects will come from $236-million LOMTO, based in Woodside, N.Y. As CUToday.info has reported, year-end 2016 Call Report data shows that medallion lender LOMTO FCU’s capital has slipped to 5.87%.
“I think the key issues all credit unions face from the problems stemming largely from New York City is that they can expect an assessment this year,” Leggett told CUToday.info. “NCUA will need to buttress the insurance fund.”
But NCUA said the performance of the taxi medallion loans is only one factor that will need to be considered related to any premium to shore up the National Credit Union Share Insurance Fund (NCUSIF).
Larry Fazio, NCUA
“Many factors, primarily the growth in insured shares and the returns on investments, come to bear on the Share Insurance Fund’s equity ratio and on any decision whether or not to charge a premium,” said NCUA Director of Examination and Insurance Larry Fazio. “That decision rests with the board.”
Reports in the last six months indicate that medallion values in New York City have dropped by at least 50%. Leggett noted that medallion values reached $1.1-$1.2 million at their peak, and have dropped to around $400,000 in many cases, he said. Driving down values has been the emergence of ride sharing services such as Uber and Lyft which do not require any sort of medallion to operate.
But Leggett believes $400,000 will not be the bottom. Based on his discussions with medallion market analysts, Leggett said a large number of foreclosed medallions are expected to come onto the market this year, which will further depress values.
“The situation is pretty dire,” said Leggett.
Progressive In Best Shape
Of all the taxi medallion lenders in the city, Leggett feels that Progressive Credit Union is the only shop that may be able to ride out the issues until medallion vales eventually stabilize—which Leggett feels will happen as the taxi industry adapts.
“I think Progressive may survive because it maintained its business model, and kept a very high net worth ratio,” said Leggett.
Progressive’s net worth is 33.55% and has also been working effectively with members to restructure loans and keep medallion borrowers from defaulting (Read CUToday.info’s interview with Progressive CEO Robert Familant in the coming days).
“Melrose (CU) fundamentally changed it business model and its net worth ratio started dropping even before the medallion defaults,” noted Leggett.
In other cities in which there are concentrations of medallion-lending credit unions, Leggett does not see the same degree of risk that faces Big Apple medallion lenders.
“In cities like Boston, Chicago San Francisco, Philadelphia, those credit unions also have some issues,” said Leggett, who is forecasting that NCUA will not conserve any of those cooperatives. “I don’t think any of them have the same level of exposure as the credit unions in New York. In New York City many of these lenders have monoline business models and all they really did was make taxi medallion loans. The credit unions that make medallion loans outside of New York appear to have more diversified business models.”
But with about $3 billion in medallion participation loans across the U.S., according to Leggett’s estimates, there will be struggles. Leggett noted that $902-million Quorum FCU in Purchase, N.Y., for instance, bought $76.3 million in medallion participations, according to the CU’s 2015 annual report. Leggett said Quorum reported a 2016 loss of $6.7 million, driven by an increase in loan loss provisions. Loan loss provisions rose from $7.9 million at the end of 2015 to $24.5 million at the end of 2016, Leggett noted.
Keith Leggett
“The credit union saw its net worth fall from $72.2 million to $65.5 million. The credit union had a net worth ratio of 7.25% at the end of 2016,” said Leggett, adding that Quorum has almost $35 million in delinquent loans.
Leggett said he does not believe any credit union purchased a sufficient amount of participations to force a conservatorship.
“I don’t think anyone bought 20%-30% of their book in participations,” he said. “But I believe you will see these deals leading to some credit unions not having the ability to remain independent. They will see their net worth dinged, and these organizations won’t have the luxury to wait for a recovery in medallion values. They will be forced to merge.”
Another CU executive close to the medallion issue, asking for anonymity, believes that those who purchased participations will need to have a capital cushion.
“They will have to have the capital to maintain themselves if they bought too many participations. There are probably some credit unions like that,” said the executive, who noted that a CU in New Jersey had been selling participation loans with high balances on the Internet. “But participants are limited in the percentage of member business loans they can buy, so for the most part I don’t think any will fail. But there will be participants that suffer greatly. I think there will be some who wind up merging that would have otherwise not merged. This will drag them down and take the wind out of their sails. That will happen.”
NCUA Watching
NCUA emphasized that it is closely monitoring the situation with the taxi medallion credit unions.
“The credit union system’s total exposure to taxi medallion loans, concentrated in a limited number of credit unions, is finite and manageable,” said NCUA spokesperson John Fairbanks. “Taxi medallion loans of approximately $3.2 billion represent about four tenths of 1% of the credit union system’s overall lending of $847.1 billion, based on the latest available data from Sept. 30, 2016. They are a small part of the system’s $63.9 billion in commercial loans.”
Similarly, NAFCU does not believe losses related to medallion loans across the country will force a premium assessment in 2017.
“Taxi medallion lenders continue to experience rising delinquencies, so there could be more struggles ahead for the remaining credit unions in that line of business,” said NAFCU Chief Economist and Director of Research Curt Long. “For now, delinquencies on their loan participations are not nearly as high, although there has been a modest increase there as well. Overall, the Share Insurance Fund is in a solid position. It’s unlikely that losses from taxi medallion lenders alone will be large enough this year to require NCUA to charge a premium to credit unions although it is in their discretion to do so.”