ABA Says PenFed Merger a Threat to Small Credit Unions

The American Bankers Association threw shade on the NCUA’s decision to approve an emergency merger that allowed Pentagon Federal Credit Union on Tuesday to acquire Progressive Credit Union, which had heavy losses from taxi medallion loans.

In a statement released Wednesday, the ABA portrayed the merger as an attempt by a large credit union to trample on smaller ones by expanding beyond its original field of membership.

In the statement, the ABA said PenFed gained a valuable asset by acquiring Progressive’s state charter that allows any person to join. “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.

“Small credit unions and community banks should be concerned about the competitive threat posed by this large and aggressive $24 billion credit union — one that has already publicly stated its plans to triple in size over a short period of time — that now will be able to do so with no membership restrictions at all,” Ken Clayton, the ABA’s EVP for legislative affairs and chief counsel, said Thursday.

Clayton said no decision had been made on what action, if any, the ABA would take.  “We’re still exploring the basis of the merger, and whether or not it violates anything,” Clayton said.

PenFed President/CEO James Schenck said even though Progressive’s national charter transfers to PenFed, this merger will not change its focus on service personnel. The credit union ($24.1 billion in assets, 1.7 million members as of Sept. 30), historically served employees and family members of the Department of Defense and 22 sub-agencies within the Department of Homeland Security through its multiple-common-bond charter.

“We will continue to be laser-focused on delivering world-class financial value to our military members, those across the entire national defense community, and all who support them,” Schenck said. “If we try to be all things to all people, we’d be nothing to no one. PenFed stands for our nation’s defenders and all Americans who support the brave men and women who fight and win our nation’s wars — today, tomorrow and into the future.”

CUNA President/CEO Jim Nussle defended the NCUA and PenFed, saying the merger helped protect the National Credit Union Share Insurance Fund.

“If [the] NCUA had conserved and liquidated Progressive Credit Union, all credit unions — and by extension credit union members — would have borne the cost,” Nussle said. “By agreeing to be part of the emergency merger, PenFed is taking on the liabilities, diversifying their holdings and ensuring that these members receive high quality credit union services.”

Progressive ($382.8 million in assets, 2,897 members as of Sept. 30, 2018) lost $69.5 million in the 12 months ending Sept. 30, worsening from a $65.5 million loss for the preceding 12 months.

More than half that loss – $35.3 million – came in the three months ending Sept. 30, 2018, deepening from a $20.7 million loss in 2017’s third quarter. Loan loss provisions rose 35.8% to $26.6 million.

Progressive’s net worth ratio fell from 25.8% in September 2017 to 11.6% in September 2018 — a sharp decline but still well above the NCUA’s 7% threshold for being “well capitalized.”

PenFed chose to keep all of Progressive’s loans including about $290 million in loans backed by taxi medallion loans, which have plummeted in value with the rise of Uber and other ride-sharing services.

The move was unlike the fate of Melrose Credit Union and LOMTO Federal Credit Union. The NCUA conserved the two New York-area credit unions and liquidated them last August and September. The NCUA kept $960.7 million in taxi medallion loans, while Teachers Federal Credit Union on Long Island, N.Y., acquired the remaining members and assets.

The NCUA released a statement Thursday saying its board approved the emergency merger for Progressive in November. The NCUA said emergency mergers are allowed under federal law when a credit union is insolvent or in danger of insolvency. Also, there must be an emergency requiring quick action with no other alternatives reasonably available, and the public interest must be best-served by approval.

“After careful analysis, the NCUA board was satisfied the conditions listed in Section 1785(h) of the Federal Credit Union Act were fulfilled and that this was the least-cost option to the National Credit Union Share Insurance Fund,” the NCUA said.