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| TAXI > SEC Filings for TAXI > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
GENERAL
We are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 9%, and our commercial loan portfolio at a compound annual growth rate of 7% (both 12% on a managed basis when combined with Medallion Bank). Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17%. Total assets under our management, which includes assets serviced for third party investors and managed by Medallion Bank, were $1,069,153,000 as of March 31, 2009 and $1,075,509,000 and $1,024,219,000 as of December 31, and March 31, 2008, and have grown at a compound annual growth rate of 14% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid dividends in excess of $134,900,000 or $8.72 per share.
We conduct our business through various wholly-owned investment company subsidiaries including:
• Medallion Funding, an SBIC and a RIC, our primary taxicab lending company;
• Medallion Capital, an SBIC and a RIC, which conducts a mezzanine financing business; and
• Freshstart, an SBIC and a RIC, which originates and services taxicab medallion and commercial loans.
We also conduct business through our asset-based lending division, Medallion Business Credit, an originator of loans to small businesses for the purpose of financing inventory and receivables, which prior to December 31, 2007, was a wholly-owned investment company subsidiary. On December 31, 2007, Medallion Business Credit was merged into us and ceased to exist as a separate legal entity.
In addition, we conduct business through a wholly-owned portfolio company, Medallion Bank, a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans, which are serviced by us. We earn referral and servicing fees for these activities.
Realized gains or losses on investments are recognized when the investments are sold or written off. The realized gains or losses represent the difference between the proceeds received from the disposition of portfolio assets, if any, and the cost of such portfolio assets. In addition, changes in unrealized appreciation or depreciation on investments are recorded and represent the net change in the estimated fair values of the portfolio assets at the end of the period as compared with their estimated fair values at the beginning of the period. Generally, realized gains (losses) on investments and changes in unrealized appreciation (depreciation) on investments are inversely related. When an appreciated asset is sold to realize a gain, a decrease in the previously recorded unrealized appreciation occurs. Conversely, when a loss previously recorded as unrealized depreciation is realized by the sale or other disposition of a depreciated portfolio asset, the reclassification of the loss from unrealized to realized causes a decrease in net unrealized depreciation and an increase in realized loss.
The credit markets are undergoing a crisis which has disrupted a wide range of traditional financing sources. The crisis has made it increasingly difficult and significantly more expensive through higher credit spreads for finance companies to obtain and renew financing. Continued turmoil in the credit markets could limit our access to funds and restrict us from continuing our current operating strategy or implementing new operating strategies. If funds are available to us, we anticipate that our cost of funds will increase as we obtain new financing.
The credit crisis has also caused many financial institutions to record significant write-downs, mostly on their residential mortgage related assets and structured investment vehicles and due to unsound lending practices. We are not involved in these types of transactions and always understand the importance of proper underwriting. Nonetheless, the judgments used by management in applying the critical accounting policies discussed herein may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. Subsequent evaluations of our loan portfolio and other investments, in light of the factors then prevailing, may result in changes to the fair value of the investments, including a decrease in the fair value. In addition, the fair value of investments in our portfolio may be negatively impacted by illiquidity or dislocation in marketplaces resulting in depressed market prices.
Trends in Investment Portfolio
Our investment income is driven by the principal amount of and yields on our
investment portfolio. To identify trends in the balances and yields, the
following table illustrates our investments at fair value, grouped by medallion
loans, commercial loans, equity investments, and investment securities, and also
presents the portfolio information for Medallion Bank, at the dates indicated.
March 31, 2009 December 31, 2008 March 31, 2008
Interest Investment Interest Investment Interest Investment
(Dollars in thousands) Rate (1) Balances Rate (1) Balances Rate (1) Balances
Medallion loans
New York 5.98 % $ 301,228 6.04 % $ 304,306 6.48 % $ 380,870
Boston 7.51 30,380 7.54 31,283 8.38 32,348
Chicago 7.10 29,279 7.15 28,172 7.30 27,459
Newark 8.12 27,582 8.17 27,809 8.39 24,367
Cambridge 7.57 4,371 7.59 4,387 8.49 4,695
Other 7.39 6,391 7.40 6,584 7.65 5,405
Total medallion loans 6.37 399,231 6.42 402,541 6.79 475,144
Deferred loan acquisition costs 373 423 737
Unrealized depreciation on loans - - (72 )
Net medallion loans $ 399,604 $ 402,964 $ 475,809
Commercial loans
Secured mezzanine 14.38 % $ 67,810 14.23 % $ 65,475 14.09 % $ 59,187
Asset based 5.00 13,794 5.29 13,552 6.92 22,344
Other secured commercial 8.09 14,666 8.34 15,870 8.29 17,970
Total commercial loans 12.08 96,270 11.97 94,897 11.43 99,501
Deferred loan acquisition income (233 ) (171 ) (55 )
Unrealized depreciation on loans (5,366 ) (5,115 ) (6,752 )
Net commercial loans $ 90,671 $ 89,611 $ 92,694
Investment in Medallion Bank and other
controlled subsidiaries, net 7.40 % $ 76,010 8.22 % $ 74,750 9.46 % $ 65,842
Equity investments 5.49 % $ 3,075 4.33 % $ 2,835 5.69 % $ 2,484
Unrealized appreciation (depreciation)
on equities (282 ) 437 2,619
Net equity investments $ 2,793 $ 3,272 $ 5,103
Investments securities - % $ - - % $ - - % $ -
Unrealized appreciation (depreciation)
on investment securities - - -
Net investments securities $ - $ - $ -
Investments at cost (2) 7.46 % $ 574,586 7.56 % $ 575,023 7.77 % $ 642,971
Deferred loan acquisition costs 140 252 682
Unrealized appreciation (depreciation)
on equities (282 ) 437 2,619
Unrealized depreciation on loans (5,366 ) (5,115 ) (6,824 )
Net investments $ 569,078 $ 570,597 $ 639,448
Medallion Bank investments
Consumer loans 18.14 % $ 192,769 18.26 % $ 189,886 18.52 % $ 149,808
Medallion loans 6.38 121,338 6.46 122,581 6.35 85,362
Commercial loans 5.71 84,510 5.64 87,800 7.43 87,687
Investment securities 4.62 16,343 4.87 20,056 4.43 18,097
Medallion Bank investments at cost (2) 11.63 414,960 11.54 420,323 11.87 340,954
Deferred loan acquisition costs 5,858 5,994 4,588
Unrealized appreciation (depreciation)
on investment securities 86 (64 ) 177
Premiums paid on purchased securities 84 96 149
Unrealized depreciation on loans (11,712 ) (10,936 ) (7,705 )
Medallion Bank net investments $ 409,276 $ 415,413 $ 338,163
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(1) Represents the weighted average interest or dividend rate of the respective portfolio as of the date indicated.
(2) The weighted average interest rate for the entire managed loan portfolio (medallion, commercial, and consumer loans) was 9.46%, 9.44%, and 9.28% at March 31, 2009, December 31, 2008, and March 31, 2008.
Investment Activity
The following table sets forth the components of investment activity in the
investment portfolio for the periods indicated:
Three Months Ended March 31,
(Dollars in thousands) 2009 2008
Net investments at beginning of period $ 570,597 $ 653,046
Investments originated 53,118 81,190
Repayments of investments (52,749 ) (94,308 )
Net realized gains (losses) on investments (1) (364 ) (100 )
Net increase in unrealized appreciation (depreciation) (2) (1,493 ) (883 )
Transfers from other assets - 641
Amortization of origination costs (31 ) (138 )
Net increase (decrease) in investments (1,519 ) (13,598 )
Net investments at end of period $ 569,078 $ 639,448
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(1) Excludes net realized gains of $0 and $1,247 for the quarters ended March 31, 2009 and 2008, related to foreclosed properties, which are carried in other assets on the consolidated balance sheet.
(2) Excludes net unrealized appreciation of $1,837 and $260 for the quarters ended March 31, 2009 and 2008, related to foreclosed properties, which are carried in other assets on the consolidated balance sheet.
PORTFOLIO SUMMARY
Total Portfolio Yield
The weighted average yield of the total portfolio at March 31, 2009 was 7.46% (7.48% for the loan portfolio), a decrease of 10 basis points from 7.56% at December 31, 2008, and a decrease of 52 basis points from 7.98% at March 31, 2008. The weighted average yield of the total managed portfolio at March 31, 2009 was 9.25%, (9.46% for the loan portfolio), an increase of 3 basis points from 9.22% at December 31, 2008, and an increase of 17 basis points from 9.08% at March 31, 2008. The decreases from 2008 reflected the general market condition of falling interest rates, and the increases in the managed yields reflect changes in the portfolio mix.
Medallion Loan Portfolio
Our medallion loans comprised 70% of the net portfolio of $569,078,000 at March 31, 2009 compared to 70% of the net portfolio of $570,597,000 at December 31, 2008, and 74% of $639,448,000 at March 31, 2008. Our managed medallion loans of $520,711,000 comprised 57% of the net managed portfolio of $912,732,000 at March 31, 2009, compared to 57% of the net managed portfolio of $922,007,000 at December 31, 2008, and 61% of $921,940,000 at March 31, 2008. The medallion loan portfolio decreased by $3,360,000 or 1% in 2009 ($4,661,000 or 1% on a managed basis), primarily reflecting loan payoffs, and the sale of participation interests to third parties. Total medallion loans serviced for third parties were $64,018,000, $66,041,000, and $25,142,000 at March 31, 2009, December 31, 2008, and March 31, 2008.
The weighted average yield of the medallion loan portfolio at March 31, 2009 was 6.37%, a decrease of 5 basis points from 6.42% at December 31, 2008, and a decrease of 42 basis points from 6.79% at March 31, 2008. The weighted average yield of the managed medallion loan portfolio at March 31, 2009 was 6.37%, a decrease of 6 basis points from 6.43% at December 31, 2008, and a decrease of 35 basis points from 6.72% at March 31, 2008. The decrease in yield primarily reflected the impact of falling interest rates in the economy and the effects of borrower refinancings. At March 31, 2009, 25% of the medallion loan portfolio represented loans outside New York, compared to 24% at December 31, 2008 and 20% at March 31, 2008. At March 31, 2009, 26% of the managed medallion loan portfolio represented loans outside New York, compared to 26% at December 31, 2008 and 17% at March 31, 2008. We continue to focus our efforts on originating higher yielding medallion loans outside the New York market.
Commercial Loan Portfolio
Our commercial loans represented 16%, 16%, and 15% of the net investment portfolio as of March 31, 2009, December 31, 2008, and March 31, 2008 and were 19% on a managed basis for all three periods. Commercial loans increased by $1,061,000 or 1% during the quarter ended March 31, 2009 (decreased $2,165,000 or 1% on a managed basis), reflecting growth in the mezzanine loan portfolio, offset by reductions in asset-based and other secured commercial loans. Net commercial loans serviced by third parties were $8,765,000 at March 31, 2009, $8,646,000 at December 31, 2008, and $13,544,000 at March 31, 2008.
The weighted average yield of the commercial loan portfolio at March 31, 2009, was 12.08%, an increase of 11 basis points from 11.97% at December 31, 2008, and 65 basis points from 11.43% at March 31, 2008. The increases reflect the higher proportion of higher-yielding mezzanine loans in the portfolio. The weighted average yield of the managed commercial loan portfolio at March 31, 2009 was 9.10%, an increase of 17 basis points from 8.93% at December 31, 2008, and a decrease of 46 basis points from 9.56% at March 31, 2008. The decrease reflects the decline of rates on the floating pool of loans, partially offset by higher levels of higher rate mezzanine loans. We continue to originate adjustable-rate and floating-rate loans tied to the prime rate to help mitigate our interest rate risk in a rising interest rate environment. At March 31, 2009, variable-rate loans represented approximately 21% of the commercial portfolio, compared to 22% and 30% at December 31, 2008 and March 31, 2008, and were 57%, 59%, and 59% on a managed basis. Although this strategy initially produces a lower yield, we believe that this strategy mitigates interest rate risk by better matching our earning assets to their adjustable-rate funding sources.
Consumer Loan Portfolio
Our managed consumer loans, all of which are held in the portfolio managed by Medallion Bank, represented 21%, 20% and 16% of the managed net investment portfolio as of March 31, 2009, December 31, 2008, and March 31, 2008. Medallion Bank originates adjustable rate consumer loans secured by recreational vehicles, boats, motorcycles, and trailers located in all 50 states. The portfolio is serviced by a third party subsidiary of a major commercial bank.
The weighted average gross yield of the managed consumer loan portfolio was 18.14% at March 31, 2009, compared to 18.26%, and 18.52% at December 31 and March 31, 2008. Amortization of the portfolio purchase premium reduced the yield by an average of 0.21%, 0.25%, and 0.35%, for the respective quarters. Adjustable rate loans represented 88% of the managed consumer portfolio at March 31, 2009, compared to 89% and 91% at December 31 and March 31, 2008.
Delinquency and Loan Loss Experience
We generally follow a practice of discontinuing the accrual of interest income on our loans that are in arrears as to interest payments for a period of 90 days or more. We deliver a default notice and begin foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the most appropriate course of action under the circumstances. A loan is considered to be delinquent if the borrower fails to make a payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment terms of the loan with a borrower that cannot make payments in accordance with the original loan agreement. For loan modifications, the loan will only be returned to accrual status if all past due interest payments are brought fully current. For credit that is collateral based, we evaluate the anticipated net residual value we would receive upon foreclosure of such loans, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequate in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install a new operator to run the business and reduce the debt.
For the consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged off to realized losses. If the collateral is repossessed, a realized loss is recorded to write the collateral down to 75% of its net realizable value, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off as a realized loss, and any excess proceeds are recorded as a realized gain. Proceeds collected on charged off accounts are recorded as realized gains. All collection, repossession, and recovery efforts are handled on behalf of Medallion Bank by the servicer.
The following table shows the trend in loans 90 days or more past due:
March 31, 2009 December 31, 2008 March 31, 2008
(Dollars in thousands) Amount %(1) Amount %(1) Amount %(1)
Medallion loans $ 1,004 0.2 % $ 765 0.2 % $ 1,953 0.4 %
Commercial loans
Secured mezzanine 14,428 2.9 6,415 1.3 200 -
Asset-based receivable - 0.0 - 0.0 - 0.0
Other secured commercial 358 0.1 190 0.0 492 0.1
Total commercial loans 14,786 3.0 6,605 1.3 692 0.1
Total loans 90 days or more past due $ 15,790 3.2 % $ 7,370 1.5 % $ 2,645 0.5 %
Total Medallion Bank loans $ 3,478 0.9 % $ 4,345 1.1 % $ 670 0.2 %
Total managed loans 90 days or more past due $ 19,268 2.2 % $ 11,715 1.3 % $ 3,315 0.4 %
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(1) Percentages are calculated against the total or managed loan portfolio, as appropriate.
In general, collection efforts since the establishment of our collection department have contributed to the reduction in overall delinquencies of medallion and other secured commercial loans. However, due to current market conditions, Medallion loan delinquencies have increased slightly from year end, and remain lower than a year ago. The economic recession has caused delinquencies in secured mezzanine financings to increase over 2008 due to lowered demand and consumer and industrial spending, which has impacted certain industrial and travel related customers. Higher unemployment rates, which impacted Medallion Bank's customers, contributed to its higher delinquency in the consumer recreational portfolio compared to March 2008, and seasonal factors impacted its decline from year end. We are actively working with each delinquent borrower to bring them current, and believe that any potential loss exposure is reflected in our mark-to-market estimates on each loan. Although there can be no assurances as to changes in the trend rate and further negative changes in the economy, management believes that any loss exposures are properly reflected in reported asset values.
We monitor delinquent loans for possible exposure to loss by analyzing various factors, including the value of the collateral securing the loan and the borrower's prior payment history. Under the 1940 Act, our loan portfolio must be recorded at fair value or "marked-to-market." Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio is adjusted quarterly to reflect our estimate of the current realizable value of our loan portfolio. Since no ready market exists for this portfolio, fair value is subject to the good faith determination of management and the approval of our Board of Directors. Because of the subjectivity of these estimates, there can be no assurance that in the event of a foreclosure or the sale of portfolio loans we would be able to recover the amounts reflected on our balance sheet.
In determining the value of our portfolio, management and the Board of Directors may take into consideration various factors such as the financial condition of the borrower and the adequacy of the collateral. For example, in a period of sustained increases in market interest rates, management and the Board of Directors could decrease its valuation of the portfolio if the portfolio consists primarily of long-term, fixed-rate loans. Our valuation procedures are designed to generate values that approximate that which would have been established by market forces, and are therefore subject to uncertainties and variations from reported results. Based upon these factors, net unrealized appreciation or depreciation on investments is determined, or the amount by which our estimate of the current realizable value of our portfolio is above or below our cost basis.
The following tables set forth the changes in our unrealized appreciation (depreciation) on investments, other than investments in controlled subsidiaries, for the quarters ended March 31, 2009 and 2008.
Equity Foreclosed
(Dollars in thousands) Loans Investments Properties Total
Balance December 31, 2008 $ (5,115 ) $ 437 $ 15,614 $ 10,936
Net change in unrealized
Appreciation on investments - (656 ) 1,837 1,181
Depreciation on investments (621 ) (63 ) - (684 )
Reversal of unrealized appreciation
(depreciation) related to realized
Gains on investments - - - -
Losses on investments 370 - - 370
Balance March 31, 2009 $ (5,366 ) $ (282 ) $ 17,451 $ 11,803
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Equity Foreclosed
(Dollars in thousands) Loans Investments Properties Total
Balance December 31, 2007 $ (6,469 ) $ 2,742 $ 8,341 $ 4,614
Net change in unrealized
Appreciation on investments - - 1,670 1,670
Depreciation on investments (500 ) (123 ) (150 ) (773 )
Reversal of unrealized appreciation
(depreciation) related to realized
Gains on investments - - (1,260 ) (1,260 )
Losses on investments 145 - - 145
Balance March 31, 2008 $ (6,824 ) $ 2,619 $ 8,601 $ 4,396
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The following table presents credit-related information for the investment portfolios as of the dates shown.
(Dollars in thousands) March 31, 2009 December 31, 2008 March 31, 2008 . . . |
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