Taxi Industry Credit Unions Take a Bumpy Ride
With app-based ridesharing services such as Uber and Lyft becoming more popular by the day, the taxicab industry has taken a real hit – and so have some credit unions that serve it. Specifically, four New York-based credit unions have seen their income decrease and provisions for loan 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-member 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 Melrose Credit Union in Briarwood and the $692 million, 3,800-member Progressive Credit Union in New York City.
The credit unions have histories of lending to the New York City taxi industry, financing the purchase or leasing of taxi industry medallions (licenses to operate yellow taxis in New York City), or financing other loans with the medallions as collateral.
As of June 30, 2015, each of the four credit unions reported capital positions with net worth ratios 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 foreclosures, followed by the collapse of the medallion market, and by extension the entire taxicab industry, 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 addressed his letter, which was leaked to a local media outlet, to New York City Corporation 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 administration 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.
Montauk CU had the lowest net worth ratio of the four credit unions at 10.34%, and the highest ratio of provision for loan losses to total assets at 4.24%, well above the peer ratio of 0.24%.
This represented a complete reversal from June 2014, when Montauk 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 assets 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 highest 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 million 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 highest next worth ratio of the four at 18.04% in June 2015, and removed roughly $360,000 from its provision for loan losses in June 2014, according to its most recent 5300 call report.
However, by June 2015, the cooperative 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 represented more than four times the cooperative's peer average of 0.25%. The added loan loss provision 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 reported 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 assets 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 million 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 industry and ridesharing services are significant; however, he downplayed 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. Besides, we have one of the highest equities in the entire credit union industry.”
With $2.1 billion in assets, Melrose CU's 18.04% net worth ratio equals roughly $378 million in capital, substantiating Kaufman's observation that the cooperative remains sufficiently capitalized to withstand a dip in the taxi industry.
However, taxi industry observers have been wondering whether other credit unions that are not as well capitalized might face difficulties 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 significantly smaller cushion than Melrose CU has.
The underlying problem is that the New York City taxi industry has remained extraordinarily sensitive to small drops in revenue from lost rides, according to HVM Capital, a Boston-based research and investment company that has argued taxi medallion values 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 because municipalities have maintained their taxi industries as monopolies. Local governments capped the number of medallions allowed and thus prohibited competition even as the cities’ populations rose, the firm contended.
This resulted in steadily rising prices for the medallions and returns 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. “Prospective medallion buyers became unwilling to accept only a 3% return on investment given the unprecedented risk introduced to this market. At the same time investors are demanding higher cash returns, Transportation Network Companies are eroding medallion cash flows by grabbing significant and rising market share – the formula 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 million 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 business model, the situation could shift rather quickly.
However, Christian Samito, a lawyer with his own practice in Boston and a professor at Boston University's School of Law, observed that a winning court case may be unlikely, even if the taxi industry were 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 another 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 reasoned, could restrict the abilities of newcomers to offer similar resources and services to meet legitimate needs, there would be no progress.”
Samito said ridesharing services may face additional local regulations, such as insurance requirements, and expects some of the more arcane regulations over taxi operations to go away. But the taxi industry must face the reality 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.”