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CREDIT UNION TIMES

1990 2015

Trusted News for Credit Union Leaders

September 16, 2015 | Vol. 26 | No. 33 | cutimes.com

Must Reads
FocusReport:
expenses

LENDING
Arkansas FCU Battles Bankers
Credit unions have become used
to criticism from bankers linger-
ing in the background as they go
about their business.
However, a recent incident in-
volving a community develop-
ment project in Little Rock, Ark.,
brought home the true cost of
banker hostility.
The project is the Little Rock
Tech Park in central Little Rock,
which the state’s legislature and
sponsoring universities have
said will include “new and ren-
ovated buildings developed to
form an integrated environment
for start-up and mature technol-
ogy companies,” according to the
Little Rock Tech Park Authority’s
website.
The Arkansas legislature
passed a law authorizing the
park in 2007.
A governing authority includ-
ing the University of Arkansas at
Little Rock, the University of Ar-
kansas for Medical Sciences and
CEOs
Regulation & Accept
League
Compliance Dues Hikes
In this Focus Report, learn why PETER STROZNIAK
pstrozniak@cutimes.com
bankers are bashing the NCUA’s
proposed MBL reform. Plus,
payments industry experts weigh redit unions in North
in on the impacts of the Durbin Carolina, South Car-
Amendment and overdraft olina, California and
regulation. y8 Nevada will see their
league membership dues increase
in 2016 – and CEOs in those states
interviewed by CU Times said they
support the change.
Next year, the
Carolinas Credit
Union League is
moving to a square
root formula to cal-
culate dues, which
shifts a greater
portion of the total
Radebaugh dues to members
LENDING with large assets

Taxi Industry CUs Take a Bumpy Ride

the City of Little Rock came to-
gether under a memorandum of
understanding in 2010, accord-
ing to the Tech Park Authority.
When the Tech Park Authority
requested loan proposals for the
project earlier this year, AFCU
sent one of its community de-
velopment staff members to a
meeting for financial institutions
interested in helping fund the
project.
According to AFCU President/
CEO  Rodney Showmar, AFCU
was generally welcomed there.
“We never had an in- y14
DAVID MORRISON  Delinquency has risen sharply for four
dmorrison@cutimes.com
ith app-based
ridesharing ser-
vices such as
Uber and Lyft
becoming more popular by the
day, the taxicab industry has tak-
en a real hit – and so have some
credit unions that serve it. Specifi-
cally, four New York-based credit
unions have seen their income
decrease and provisions for loan
The Rundown
credit unions in New York serving the taxi
industry.
 Two of the four credit unions have seen
negative income in 2015.
 The taxi industry’s woes are unlikely to
subside.
losses increase in 2015 as the
transportation industry they serve
has struggled to survive economic
and technological changes.
Those four cooperatives are
the $179 million, 2,900-mem-
ber Montauk Credit Union  of
New York City; the $271 million,
3,000-member  LOMTO Federal
Credit Union  in Woodside; the
$2.1 billion, 24,000-member Mel-
rose Credit Union  in Briarwood
and the $692 million, 3,800-mem-
ber  Progressive Credit Union  in
New York City.
The credit unions have histories
of lending to the New York City
taxi industry, financing the pur-
chase or leasing of taxi industry
medallions (licenses to operate
yellow taxis in New York City), or
financing other loans with y16
and lowers dues for credit unions
with small assets, according to
John Radebaugh, president/CEO
of the Carolinas Credit Union
League.
About 25 of the league-affiliat-
ed credit unions in North Caroli-
na and South Carolina with assets
of $180 million and above will see
their dues increase in proportion
to the amount of dues they man-
age. Some are expected to see an
increase as low as 1%, but others
will see their membership dues
increase by as much as 20% or
30%, Radebaugh said.
However, a few of the y17

Up Close With Caucus

Matz ­Opportunities
The NCUA NAFCU urges
­Chairman talks credit unions to fight
gender and ­overregulation.  y12
­leadership.  y6

CUT_9-16-15.indd 1 9/10/15 2:00 PM

 Taxi
cont. from Page 1 ratio of provision for loan losses to
the medallions as collateral.
As of June 30, 2015, each of the
four credit unions reported capi-
tal positions with net worth ra-
tios ranging from 10.37% on the
low end to 39.94% on the high
end. Nevertheless, they also saw
delinquencies and provisions for
loan losses climb dramatically as
the taxi industries they supported
struggled due to the disruption
brought on by new competitors.
“To put it bluntly, the imminent
risk of cascading medallion fore-
closures, followed by the collapse
of the medallion market, and by
extension the entire taxicab in-
dustry, is no longer a threatened
harm – it is a reality that is already
unfolding,” Todd Higgins, a lawyer
with the New York
City firm Crosby
& Higgins and the
counsel to Melrose
CU, wrote in an
Aug. 28, 2015 letter.
Higgins ad-
dressed his letter,
Higgins which was leaked
to a local media
outlet, to New York City Corpora-
tion Counsel Zachary Carter in
support of a suit the four credit
unions brought against New York
City Mayor William de Blasio’s
administration.
The suit sought to force the ad-
ministration to place app-based
requests to Uber and Lyft on equal
ground with hailing cabs on a
street corner. Current statute only
allows taxis with medallions to
pick up passengers from the street,
so by giving app-based requests
the same classification as street
hails, rideshare businesses could
be considered illegal and shut
down, according to legal experts.
cutimes.com | Credit Union Times | September 16, 2015 | 16
CUT_9-16-15.indd 16
Montauk CU had the lowest
net worth ratio of the four credit
unions at 10.34%, and the highest
total assets at 4.24%, well above
the peer ratio of 0.24%.
This represented a complete re-
versal from June 2014, when Mon-
tauk reported it removed $182,951
from its allowance for loan and
lease losses.
By June 2015, the cooperative
had set aside $3.67 million for the
allowance.
The increased allowance
helped drop the credit union’s
income from $1.6 million in June
2014 to slightly less than negative
$2 million in June 2015.
In addition, the cooperative saw
its ratio of delinquent loans to as-
sets climb from 0.98% in June 2014
to 2.77% in June 2015, more than
four times the peer group’s average
delinquency ratio of 0.57%.
LOMTO FCU had the next high-
est net worth ratio, 16.75%, in June
2015, with a provision for loan
losses that climbed from 0.13% in
June 2014 to 1.57% in June 2015,
also more than four times the peer
average of 0.24%.
Like Montauk CU, its increased
provision for loan losses from
$178,000 in June 2014 to $2.13 mil-
lion in June 2015 helped force the
cooperative into negative income
of slightly less than $204,000 for
the year that closed that month.
Melrose CU saw the next high-
est next worth ratio of the four at
18.04% in June 2015, and removed
roughly $360,000 from its provi-
sion for loan losses in June 2014,
according to its most recent 5300
call report.
However, by June 2015, the co-
operative added $14.9 million to
its loan loss provision and saw its
loan loss to asset ratio increase
from negative 0.04% in June 2014
to 1.43% in June 2015. This rep-
resented more than four times
the cooperative’s peer average of
0.25%. The added loan loss pro-
vision reduced the cooperative’s
income from slightly more than
$14 million as of June 2014 to just
more than $371,000 for June 2015.
Finally, Progressive CU re-
ported 39.94% net worth in June
of 2015 but also saw its loan loss
provision climb from 0.18% in
June 2014 to 1.22% in June 2015.
However, while Progressive CU’s
ratio of delinquent loans to as-
sets hit 3.50% in September 2014,
it dropped to 1.94% at the end
of 2014 and hit a low of 0.53% in
March 2015, before climbing to
0.94% in June. The cooperative
also posted income of $4.4 mil-
lion in June 2015 – a 50% hit from
the slightly more than $9 million it
posted in June 2014.
Melrose CU President/CEO
Alan Kaufman acknowledged that
the legal and commercial fights
taking place between the taxi in-
dustry and ridesharing services
are significant; however, he down-
played the risk that downgraded
medallion values could endanger
the credit union.
“From our perspective, we are
seeing an impact from what we
view as an illegal business model,”
Kaufman said. “But by no means
is that the only thing we do. Be-
sides, we have one of the highest
equities in the entire credit union
industry.”
With $2.1 billion in assets, Mel-
rose CU’s 18.04% net worth ratio
equals roughly $378 million in
capital, substantiating Kaufman’s
observation that the coopera-
tive remains sufficiently capital-
ized to withstand a dip in the taxi
industry.
However, taxi industry observ-
ers have been wondering whether
other credit unions that are not as
well capitalized might face diffi-
culties if the taxi industry does not
stabilize quickly.
With $179 million in assets and
a 10.34% net worth ratio, Montauk
CU, for example, has a little more
than $18 million in capital and
$3.6 million in its provisions for
loan losses, which equals a signifi-
cantly smaller cushion than Mel-
rose CU has.
The underlying problem is that
the New York City taxi industry
has remained extraordinarily sen-
sitive to small drops in revenue
from lost rides, according to HVM
Capital, a Boston-based research
and investment company that
has argued taxi medallion val-
ues and prices have been largely
overstated.
In a recent white paper, HVM
observed that taxi medallions have
been among the safest investments
in the U.S. for more than 70 years,
as they have been largely shielded
from wide economic swings be-
cause municipalities have main-
tained their taxi industries as
monopolies. Local governments
capped the number of medallions
allowed and thus prohibited com-
petition even as the cities’ popula-
tions rose, the firm contended.
This resulted in steadily rising
prices for the medallions and re-
turns of roughly 3% in cities such
as New York, Chicago and Boston,
where returns are 3.2%, 2.8% and
2.9%, respectively, according to
the firm.
However, competition from
ridesharing services has shaken
this monopoly-based model and
effectively undermined medallion
values, HVM contended.
“Medallion investors eventually
realized taxis were no longer the
only game in town,” HVM wrote
in a June 2015 paper. “Prospec-
tive medallion buyers became un-
willing to accept only a 3% return
on investment given the unprec-
edented risk introduced to this
market. At the same time inves-
tors are demanding higher cash
returns, Transportation Network
Companies are eroding medallion
cash flows by grabbing significant
and rising market share – the for-
mula for a downward medallion
price spiral.”
Based on their current risk,
HVM suggested New York City
taxi medallions should be valued
at roughly $360,000, not $1.3 mil-
lion as one source claimed as their
peak price in 2014.
The wild card in the changing
economic picture is the court case
brought by the four credit unions.
If a court rules Uber and other
ridesharing companies have been
operating under an illegal busi-
ness model, the situation could
shift rather quickly.
However, Christian Samito, a
lawyer with his own practice in
Boston and a pro-
fessor at Boston
University’s School
of Law, observed
that a winning
court case may be
unlikely, even if the
taxi industry were
Samito to prevail in state
court.
Samito pointed to an 1830s suit,
Charles River Bridge v. Warren
Bridge, in which a company that
had a charter to build, maintain
and earn toll income from a bridge
project attempted to prevent an-
other company from building a
bridge a few hundred yards away;
the company lost the suit.
“The case went all the way to
the Supreme Court, which ruled
that what was really at stake was
competition,” Samito explained.
“If the government, the court rea-
soned, could restrict the abilities
of newcomers to offer similar re-
sources and services to meet le-
gitimate needs, there would be no
progress.”
Samito said ridesharing ser-
vices may face additional local
regulations, such as insurance re-
quirements, and expects some of
the more arcane regulations over
taxi operations to go away. But the
taxi industry must face the real-
ity that its competitors are here to
stay, he said.
“I don’t think taxis are going to
go away,” Samito said. “There will
always be some people who can’t
or don’t want to use a smartphone
or wait for a rideshare car to come.
But the industry’s days as the only
option are probably over.”  n
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9/10/15 2:00 PM
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