An Insider's Take: Buying Melrose Credit Union

Teachers Federal Credit Union President/CEO Robert Allen likes to tell all of his employees what the last line of his job description is: “Keep everyone from getting bored.”

That’s why Allen decided, in part, to compete for and won NCUA’s bid to purchase the $1.1 billion Melrose Credit Union and its estimated $412 million consumer, residential and commercial loan portfolio, which he negotiated without acquiring its massive and troubled taxi medallion portfolio that led to Melrose’s demise. Along with the Melrose acquisition and adding nearly 20,000 of its members to Teachers’ membership of 300,541, the $6 billion Hauppauge, N.Y. cooperative will be opening three new branches and relocating another on the mostly affluent suburb of Long Island over the next five months.

That should be enough to keep the boredom at bay for 700 employees of New York’s second largest credit union.

Allen was contacted in early March by the NCUA to make a bid for Melrose, a project that was time-consuming and costly, though he described the process as somewhat different and interesting.

“The first thing they have you do is sign a non-disclosure agreement. It’s an interesting process because your hands are tied in a lot of ways in what you can do and say and what you can deal with,” Allen said, who learned Teachers FCU won the bid by the end of May.

Teachers FCU hired third-party companies to evaluate Melrose’s assets and review the qualifications of the credit union’s 70 employees. Twenty-seven employees were hired and another half dozen staff members were contracted to assist with the IT and operational conversion process.

Although the NCUA asked credit unions, invited to bid for Melrose, to consider acquiring the taxi medallion portfolio, Allen negotiated his way out of that for a variety of reasons based on his past management experiences.

When he was appointed CEO 30 years ago, the credit union’s capital position was very low, below four percent, so he made it a No. 1 priority to build up capital to more than 12%. That enabled Teachers FCU to survive the Great Recession and the tragedy of 9/11, which deepened the 2001 economic downturn and hit the New York metropolitan region very hard. Allen is particularly proud of the fact that he didn’t have to lay off any staff during difficult economic times, and he has never given pink slips to employees during his long tenure.

“So, we’re at 10% and change capital ratio now, which allows me to take on this growth and have it drop and still be way above the statutory (capital ratio) limit,” he explained. “And my goal would be to build the capital up even higher, but if we had put the other stuff (Melrose taxi medallion portfolio) into the mix, it wouldn’t have worked.”

Teachers agreed to manage all of Melrose’s consumer and commercial (non-medallion) loans, and lines of credit or loans secured by real estate which amount to more than $412 million, according to Melrose’s June 2018 Call Report. Teachers also is managing Melrose’s $22.3 million in uninsured deposits, which includes $4.4 million in IRA and KOEGH plans and its $1.2 billion in total insured shares and deposits.

The NCUA liquidated Melrose Credit Union on Aug. 31 after the largest taxi medallion cooperative lost more than $744 million over the past three years, according to NCUA’s financial performance reports.

Because of massive competition from mobile app ridesharing services like Uber and Lyft, the value of taxi medallions — licenses that allow cabbies to transport passengers throughout New York City — have plunged substantially over the last few years forcing many medallion owners to default on their loans.

For example, in 2013, some medallions were worth $1 million. In August 2018, of the 61 medallions that were sold, about 25 were each priced from a low of $150,000 to $195,000, according to the New York City Tax and Limousine Commission reports. An additional 30 medallions sold within the price range of $200,000 to $350,000 each.

Moreover, no one really knows whether the value of taxi medallion loans have bottomed out. New York media outlets, however, have reported recently that investors linked to hedge funds are buying up medallions at dirt-cheap prices, betting their values will eventually increase.

Nevertheless, from Allen’s perspective, betting on whether the value of tax medallions would go up was not just a question of being far too much of a risk for Teachers FCU to take on Melrose’s taxi medallion portfolio.

“The underlying thought process here for me was that I wasn’t going to put my institution in jeopardy,” he said.

According to Melrose’s June 2018 Call Report, its estimated taxi medallion loan portfolio totaled $823 million. Of that amount, $348 million, or 42.3% of the portfolio, was delinquent, and medallion loan net charge offs were estimated at $141 million, according to a CU Times analysis of Melrose’s Call Report.

Managing that massive taxi medallion loan portfolio would have been fairly complex and costly, Allen noted.

Because Teachers did not acquire the taxi loans, it will leave the NCUA Share Insurance Fund on the hook for any losses from those troubled loans.

Nevertheless, CUNA’s recently updated analysis of taxi medallion lending concluded that although taxi medallion lending could result in future insurance fund losses, the magnitude of those losses – even in an extreme stress scenario – would have a negligible effect on the health of the NCUSIF.

Because of massive competition from mobile app ridesharing services like Uber and Lyft, the value of taxi medallions — licenses that allow cabbies to transport passengers throughout New York City — have plunged substantially over the last few years forcing many medallion owners to default on their loans.

Allen said the NCUA has contracted the management of Melrose’s taxi medallion loan portfolio to another company. Employees from that company and NCUA employees will be working at the former Melrose 30,000-square-foot building in Queens to continue managing the medallion loans. Teachers FCU agreed to buy the three-story building that comes with underground parking.  Based on Melrose’s IRS 990 report from 2016, the total estimated value of its land, building and equipment totaled more than $27 million.

“What they (the NCUA) has done by letting this (Melrose acquisition) get approved is they are taking serious steps in continuing to work on the medallion loans and in collecting them,” Allen said. He noted that for many Melrose members who have medallion loans, they will still be able to walk into the building they are familiar with to make payments or whenever they need service assistance for their loans.

One of the other positive elements of the Teachers FCU acquisition deal is that the former Melrose’s members will not see any disruption in their financial products or services, and they will be kept within the credit union membership fold.

“We are honoring all of (Melrose’s) current rates on their CDs and on all of their loans, which will be another benefit for members,” Allen said. “And we took full deposits — not just up to the insured limits — we took full deposit balances, so there’s no disruption for members that way as well.”

What’s more, the Melrose acquisition came with its open field of membership state charter, allowing anyone in the nation to join Teachers FCU.

“It enables us to basically select what looks like the best options for logical growth,” Allen said. “For now, it put us into the New York City boundary because the office is in Queens. In practice, we have commercial loans in all of the five boroughs of New York City. The Queens office will make it better for us from a servicing standpoint and from a visibility standpoint.”