By Ray Birch
NEW YORK—Even what was once a 44% capital ratio was not enough for a taxi medallion lender in this city to withstand the impact of ride sharing services—a fact Robert Familant, CEO of Progressive CU, now knows.
The $385-million Progressive merged into PenFed last week. NCUA approved the emergency merger, which became effective Jan. 1, raising an immediate complaint from the banking industry, as CUToday.info reported here.
The CEO of the last New York City taxi-medallion credit union left standing—after Montauk CU, Melrose CU and LOMTO FCU all failed due to the impact on their portfolios from Uber and Lyft—talked with CUToday.info about the decision to merge into the second-largest federal credit union in the nation.
PenFed President and CEO James Schenck, also spoke with CUToday.info about the acquisition.
In a number of earlier interviews with CUToday.info, including here, Familant had said he believed the credit union could weather the plunge in taxi medallion values, expressing his expectation medallion prices in this city would stabilize before capital at Progressive eroded to levels that would concern the CU and NCUA.
But that didn’t happen, acknowledged Familant.
“I guess it is sad, it’s melancholy, and it’s hard. But it’s the right thing to do,” he said. “Sometimes you have to step back, swallow hard and think about who is really at risk here. And when we did that we knew it was time to find a stronger partner to help us through. As strong as our capital was, it was not going to be enough, especially when you factor in all of the GAP requirements and the preparations for CECL we were making before CECL was postponed.”
Shrinking (And Shrinking) Values
At their height, New York City taxi medallions had a market cap of about $15 billion, said Familant.
“That cap is now $3 billion,” he noted. “When that kind of market cap evaporates, there are casualties and unintended consequences. And the credit unions that serviced these hard-working immigrants unfortunately became collateral damage.”
Of all the New York taxi medallion credit unions, Familant contends Progressive was the highest capitalized and best managed.
“That’s why we were able to last as long as we did,” he said. “But at the end of the day we had to focus on how will our members be best served going forward, and that would not be by us working alone.”
Progressive had the highest capital ratio among all the New York taxi medallion CUs when problems began. At its height, capital stood at a whopping 44%. Familant said Progressive kept capital exceptionally high partially due to concentration risk, but also because the credit union was just making a lot of money.
“We made so much money and we didn’t outgrow our capital and we had a really low expense ratio,” he explained. “The participation program we had was making a lot of money for us. So, if you don’t grow too fast and you make money, your capital just naturally grows.”
The Numbers Slip
Capital at Progressive CU, while still strong through Sept. 30, 2018, slipped to 11.63% from 38.83% in 2014. During that same period, ROA fell from 1.48% to -16.64%. Progressive lost $57.3 million in 2016, $97.1 million in 2017, and $53.2 million through September of 2018, according to call report data.
A key to deciding to merge with PenFed, said Familant, is the huge, Virginia-based CU provides the necessary liquidity to give Progressive members the time they need to sort out their problems with their businesses.
“Progressive had been struggling with liquidity. Now, under PenFed, our members will have more time to address their issues and solve their problems, as the medallion market stabilizes,” said Familant. “This merger will allow many more Progressive members to succeed in what is clearly a difficult market. Just pulling out the rug from under our members only makes their problems worse.”
Others Interested in Merging
Familant said Progressive had a number of credit unions interested in a merger, primarily due to the CU’s unique “open” charter, which was one of the issues the American Bankers Association raised in criticizing the deal.
“There were those, too, who recognized the value of our membership and entrepreneurial flavor of our members,” said Familant. “PenFed currently serves hard-working people, our nation’s military, so our membership is a good fit with their membership.”
More so, what Familant liked about PenFed, is the $24-billion CU’s strength and willingness to work with Progressive’s medallion owners to solve their problems.
“I am glad were able to partner with PenFed. They are hiring all our employees. They are going to actively work with our members to modify their loans. Our members will get better rates and more products. It could not be better circumstance for the Progressive member,” said Familant, who is staying on with PenFed “for a while” in a senior advisor capacity.
The View From PenFed
PenFed’s Schenck said the decision to acquire Progressive will benefit PenFed with a new, attractive market, help struggling Progressive members, and help the movement possibly avoid NCUSIF assessments. NCUA had reported in 2018 that it had reserved approximately $750 million to cover potential losses, nearly all of that from taxi medallion credit unions.
“Progressive assets represent about 1.5% of PenFed’s,” said Schenck. “So PenFed being a multi-common bond credit union having a multi-billion-dollar diversified loan portfolio, we felt this was the right thing to do for the movement so that credit unions would not be impacted by any NCUSIF assessment if NCUA had to place this fourth medallion credit union into conservatorship.”
Schenck said with signs medallion values are starting to stabilize, PenFed’s ability to work with the former Progressive members will prevent many from defaulting.
“This weighed heavily into our decision to acquire Progressive,” Schenck said. “Whenever there is a downturn or things need time to stabilize, providing time and liquidity is the best formula for success in the long run. Not only from the institution’s perspective in maximizing the value of the portfolio, but in keeping these members as long-term viable members. You take care of someone during a tough time and they will be with you for life.”
Schenck said PenFed had little concerns about the acquisition after first carefully evaluating Progressive.
“We did very thorough due-diligence. We had lot of internal and external experts go through Progressive with a fine-tooth comb. We know exactly what we are getting,” said Schenck, who added that NCUA is not providing any assistance with Progressive’s loan portfolio. “We think with our diversified portfolio, our products and services, and our ability to provide capital and liquidity, it will be the best solution for all the employees of Progressive—who are guaranteed their jobs—all the members whose loans won’t be foreclosed on, and for PenFed as we continue to grow in the greater New York metro area. For the first time in our 83-year history, we will have a retail location in walking distance to Madison Square Garden, the center of the universe. And we are pretty excited about that.”
As CUToday.info reported, the American Bankers Association is objecting to the merger, alleging the merger is about more than just coming to the rescue of a struggling credit union.
“In acquiring the century-old credit union in an ‘emergency merger,’ PenFed also acquired Progressive’s unusual open charter — a relic of the days before the Federal Credit Union Act,” the ABA said in a statement.
ABA EVP Ken Clayton added, “This merger is just the latest example of large credit unions far exceeding their original mission to serve targeted communities of modest means. This not only hurts small credit unions playing by the rules, but also taxpayers who are unknowingly subsidizing this national expansion.”
Unconcerned With Bankers’ Opinions
Schenck said PenFed is not concerned about the ABA’s opinions.
“Any day a bank wants to allow their board not to be paid and become volunteer board members; any time their shareholders want to give up their interests in the organization and be aligned with the organization as members–they should convert to being a credit union,” said Schenck. “While we are excited about this opportunity in New York, we won’t change our stripes. PenFed will remain focused on the men and women who volunteer to serve our national defense and support our freedom.”
Schenk acknowledged what happened to Progressive is an unfortunate result of a changing marketplace.
“This is an example of a very well-run, fine institution that unfortunately got involved with concentration risk,” he said. “They had been serving Main Street America, taxi drivers, the little guys and women who have been providing transportation needs to New Yorkers for over a century. But, unfortunately, with the advent of Uber and Lyft and not a lot of diversification in their loan portfolio whose value fell 80%, they were squeezed.”
100 Years, 172 Days
As for Familant, he looks fondly upon the 31-plus years he led Progressive.
“It’s always sad when a credit union closes its doors,” said Familant. “It was 100 years and 172 days for this credit union—that’s how long we were open.”