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TAXI > SEC Filings for TAXI > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for MEDALLION FINANCIAL CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MEDALLION FINANCIAL CORP


7-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, and to finance small-scale home improvements. 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 5%, and our commercial loan portfolio at a compound annual growth rate of 2% (10% and 7% 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 15%. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which includes assets serviced for third party investors, were $1,255,849,000 as of June 30, 2013, and $1,219,224,000 and $1,159,971,000 as of December 31, 2012 and June 30, 2012, and have grown at a compound annual growth rate of 11% from $215,000,000 at the end of 1996.

Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as revolving bank facilities, bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities.

We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Medallion Capital's investments are typically in the form of secured debt instruments with fixed interest rates accompanied by warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.

We are a closed-end, management investment company under the 1940 Act. We have elected to be treated as a BDC under the 1940 Act. We have also elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our shareholders as dividends if we meet certain source-of-income and asset diversification requirements. Medallion Bank is not a RIC and must pay corporate-level US federal and state income taxes.

Our wholly-owned portfolio company, Medallion Bank, is 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. However, the FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, or $357,363,000 as of June 30, 2013. We earn referral fees for these activities. All of these servicing activities have been assigned to MSC. As a non-investment company, Medallion Bank is not consolidated with the Company.

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.

Our investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and determine whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank's inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a "commercial firm" (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013. As a result of this valuation process, we used Medallion Bank's actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future.

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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.



                                                      June 30, 2013                     March 31, 2013                  December 31, 2012                   June 30, 2012
                                                Interest        Investment        Interest        Investment        Interest        Investment        Interest        Investment
(Dollars in thousands)                          Rate (1)         Balances         Rate (1)         Balances         Rate (1)         Balances         Rate (1)         Balances
Medallion loans
New York                                             3.58 %    $    204,578            3.68 %    $    199,509            3.96 %    $    208,564            4.43 %    $    201,452
Chicago                                              5.00            39,260            5.26            40,780            5.28            40,405            5.45            35,355
Boston                                               5.26            21,975            5.22            22,140            5.47            19,713            6.14            14,895
Newark                                               5.98            19,109            6.32            17,934            6.70            17,342            7.11            16,625
Cambridge                                            5.40             5,745            5.46             5,458            5.74             5,260            6.51             6,048
Other                                                6.40             3,279            6.72             3,058            6.70             2,899            6.74             3,021

Total medallion loans                                4.12           293,946            4.25           288,879            4.46           294,183            4.89           277,396

Deferred loan acquisition costs                                          83                                (6 )                             205                               360
Unrealized depreciation on loans                                         -                                 -                                 -                                 -

Net medallion loans                                            $    294,029                      $    288,873                      $    294,388                      $    277,756

Commercial loans
Secured mezzanine                                   12.68 %    $     48,200           12.79 %    $     51,939           13.04 %    $     49,456           13.54 %    $     53,649
Asset based                                          5.69             7,207            5.66             7,183            5.79             7,631            5.71             7,123
Other secured commercial                             9.32            11,822            9.31            10,948            8.01             7,754            8.32             8,120

Total commercial loans                              11.34            67,229           11.52            70,070           11.59            64,841           12.11            68,892

Deferred loan acquisition income                                        (40 )                             (80 )                             (78 )                             (52 )
Unrealized depreciation on loans                                     (7,960 )                          (7,894 )                          (7,844 )                         (14,560 )

Net commercial loans                                           $     59,229                      $     62,096                      $     56,919                      $     54,280

Investment in Medallion Bank and other
controlled subsidiaries, net                        11.46 %    $    100,343           11.62 %    $     98,973           10.60 %    $     99,083            8.99 %    $     89,035

Equity investments                                   0.98 %    $      5,914            1.48 %    $      4,576            1.66 %    $      4,576            1.64 %    $      4,575

Unrealized appreciation on equities                                     825                                47                                44                               825

Net equity investments                                         $      6,739                      $      4,623                      $      4,620                      $      5,400

Investment securities                                  -  %    $         -               -  %    $         -               -  %    $         -               -  %    $         -

Investments at cost (2)                              6.69 %    $    467,432            6.90 %    $    462,498            6.75 %    $    462,683            6.81 %    $    439,898

Deferred loan acquisition costs                                          43                               (86 )                             127                               308
Unrealized appreciation on equities                                     825                                47                                44                               825
Unrealized depreciation on loans                                     (7,960 )                          (7,894 )                          (7,844 )                         (14,560 )

Net investments                                                $    460,340                      $    454,565                      $    455,010                      $    426,471

Medallion Bank investments
Medallion loans                                      3.86 %    $    343,825            3.93 %    $    351,227            4.17 %    $    337,108            4.53 %    $    313,164
Consumer loans                                      16.22           311,968           16.56           273,849           16.81           264,691           17.39           232,884
Commercial loans                                     4.95            65,095            4.92            67,371            4.94            70,103            5.05            75,451
Investment securities                                2.45            22,498            1.90            20,439            2.37            20,951            2.72            20,680

Medallion Bank investments at cost (2)               9.10           743,386            8.82           712,886            9.02           692,853            9.20           642,179

Deferred loan acquisition costs                                       8,524                             7,168                             7,019                             6,417
Unrealized appreciation (depreciation) on
investment securities                                                  (137 )                             745                               835                               896
Premiums paid on purchased securities                                   315                               296                               336                               315
Unrealized depreciation on loans                                    (17,290 )                         (14,192 )                         (14,636 )                         (14,766 )

Medallion Bank net investments                                 $    734,798                      $    706,903                      $    686,407                      $    635,041

(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 8.03%, 7.88%, 8.02%, and 8.31% at June 30, 2013, March 31, 2013, December 31, 2012, and June 30, 2012.

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Investment Activity

The following table sets forth the components of investment activity in the
investment portfolio for the periods indicated.



                                           Three Months Ended June 30,            Six Months Ended June 30,
(Dollars in thousands)                      2013                 2012               2013               2012
Net investments at beginning of
period                                  $     454,565        $     440,867      $     455,010        $ 451,835
Investments originated (1)                     72,075               32,409            134,100           67,314
Repayments of investments (1)                 (67,895 )            (48,937 )         (131,287 )        (96,194 )
Net realized gains on investments                   4                  323                 81              265
Net increase in unrealized
appreciation (2)                                1,650                1,822              2,570            3,325
(Amortization) accretion of
origination (costs) fees                          (59 )                (13 )             (134 )            (74 )

Net decrease in investments                     5,775              (14,396 )            5,330          (25,364 )

Net investments at end of period        $     460,340        $     426,471      $     460,340        $ 426,471

(1) Includes refinancings.

(2) Excludes net unrealized appreciation of $2,853 and $5,865 for the quarter and six months ended June 30, 2013, and $1,979 and $4,389 for the comparable 2012 periods, 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 June 30, 2013 was 6.69% (5.46% for the loan portfolio), a decrease of 6 basis points from 6.75% at December 31, 2012, and a decrease of 12 basis points from 6.81% at June 30, 2012. The weighted average yield of the total managed portfolio at June 30, 2013 was 7.84% (8.03% for the loan portfolio), an increase of 1 basis point from 7.83% at December 31, 2012, and a decrease of 29 basis points from 8.13% at June 30, 2012. The slight changes in 2013 reflected changes in the portfolio mix.

Medallion Loan Portfolio

Our medallion loans comprised 64% of the net portfolio of $460,340,000 at June 30, 2013, compared to 65% of the net portfolio of $455,010,000 at December 31, 2012, and 65% of $426,471,000 at June 30, 2012. Our managed medallion loans of $637,054,000 comprised 58% of the net managed portfolio of $1,100,518,000 at June 30, 2013, compared to 60% of the net managed portfolio of $1,048,635,000 at December 31, 2012, and 60% of $976,360,000 at June 30, 2012. The medallion loan portfolio decreased by $359,000 or less than 1% in 2013 (an increase of $6,451,000 or 1% on a managed basis), primarily reflecting loan participations sold and the movement of loans to Medallion Bank. Total medallion loans serviced for third parties were $25,340,000, $57,676,000, and $83,441,000 at June 30, 2013, December 31, 2012, and June 30, 2012.

The weighted average yield of the medallion loan portfolio at June 30, 2013 was 4.12%, a decrease of 34 basis points from 4.46% at December 31, 2012, and a decrease of 77 basis points from 4.89% at June 30, 2012. The weighted average yield of the managed medallion loan portfolio at June 30, 2013 was 3.98%, a decrease of 33 basis points from 4.31% at December 31, 2012, and a decrease of 72 basis points from 4.70% at June 30, 2012. The decrease in yield primarily reflected the impact of falling interest rates in the economy and the effects of borrower refinancings. At June 30, 2013, 30% of the medallion loan portfolio represented loans outside New York, compared to 29% and 27% at December 31, 2012 and June 30, 2012. At June 30, 2013, 24% of the managed medallion loan portfolio represented loans outside New York, compared to 22% at December 31, 2012 and 21% at June 30, 2012. We continue to focus our efforts on originating higher yielding medallion loans outside the New York market.

Commercial Loan Portfolio

Our commercial loans represented 13%, 12%, and 13% of the net investment portfolio as of June 30, 2013, December 31, 2012, and June 30, 2012, and were 11%, 12%, and 13% on a managed basis. Commercial loans increased by $2,310,000 or 4% during 2013 (decreased $5,076,000 or 4% on a managed basis), primarily reflecting increases in the secured mezzanine portfolio. Net commercial loans serviced by third parties were $12,090,000 at June 30, 2013, $12,575,000 at December 31, 2012, and $13,984,000 at June 30, 2012.

The weighted average yield of the commercial loan portfolio at June 30, 2013 was 11.34%, a decrease of 25 basis points from 11.59% at December 31, 2012, and a decrease of 77 basis points from 12.11% at June 30, 2012. The weighted average yield of the managed commercial loan portfolio at June 30, 2013 was 8.20%, an increase of 7 basis points from 8.13% at December 31, 2012, and a decrease of 22 basis points from 8.42% at June 30, 2012. The fluctuations primarily reflect changes in the portfolio mix and changes in the rates earned. We continue to originate adjustable-rate and floating-rate loans tied to the prime rate to help mitigate our interest rate risk in a

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rising interest rate environment. At June 30, 2013, variable-rate loans represented approximately 12% of the commercial portfolio, compared to 13% and 11% at December 31, 2012 and June 30, 2012, and were 53%, 56%, and 55% 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 28%, 25%, and 23% of the managed net investment portfolio as of June 30, 2013, December 31, 2012, and June 30, 2012. Medallion Bank originates adjustable rate consumer loans secured by recreational vehicles, boats, motorcycles, and trailers, and also finances small-scale home improvements 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 16.22% at June 30, 2013, compared to 16.81% and 17.39% at December 31, 2012 and June 30, 2012. Adjustable rate loans represented 72%, 76%, and 80% of the managed consumer portfolio at June 30, 2013, December 31, 2012, and June 30, 2012.

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 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.

                                                  June 30, 2013            March 31, 2013            December 31, 2012            June 30, 2012
(Dollars in thousands)                          Amount      % (1)        Amount       % (1)         Amount         % (1)        Amount      % (1)
Medallion loans                                $     -         0.0 %    $      -         0.0 %    $        -          0.0 %    $    580        0.2 %

Commercial loans
Secured mezzanine                                 2,182        0.6          2,380        0.7            2,380         0.7         8,845        2.5
Asset-based receivable                              205        0.1             -         0.0               -          0.0            -         0.0
Other secured commercial                            492        0.1             -         0.0               -          0.0            -         0.0

Total commercial loans                            2,879        0.8          2,380        0.7            2,380         0.7         8,845        2.5

Total loans 90 days or more past due           $  2,879        0.8 %    $   2,380        0.7 %    $     2,380         0.7 %    $  9,425        2.7 %

Total Medallion Bank loans                     $  1,198        0.2 %    $   1,007        0.2 %    $     1,252         0.2 %    $    887        0.1 %

Total managed loans 90 days or more past due   $  4,077        0.4 %    $   3,387        0.3 %    $     3,632         0.4 %    $ 10,312        1.1 %

(1) Percentages are calculated against the total or managed loan portfolio, as appropriate.

A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. At June 30, 2013, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount is divided between seven separate borrowers operating in a variety of industries. In April 2013, the finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the finance company's liquidation. In May 2013, the bankruptcy court presiding over the finance company's case entered an order converting the involuntary chapter 7 case to a chapter 11 case. Although the bankruptcy proceeding is in its earliest stages, we have performed certain field examinations and due diligence procedures and believe our loan participations are not subject to the misconduct alleged by the bank lenders. We also believe the loan participations are fully secured by the underlying collateral, including personal guarantees from one or more of the principals of each of the underlying seven borrowers. We and Medallion Bank have received no payments on these accounts since March 31, 2013. Because of this and the inherent uncertainty associated with bankruptcy proceedings,

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we and Medallion Bank have placed these loans on nonaccrual, and have reversed interest income of $52,000 and $170,000 in that regard, and in addition, have established valuation allowances against the outstanding balances of 20% or $169,000 and $2,587,000. On May 31, 2013, we commenced an adverse proceeding against the finance company and the bank lenders seeking declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender's security interest in the finance company's assets. The finance company and bank lenders are contesting our position. Although we believe the claims raised by the finance company and the bank lenders are without merit and will vigorously defend against them, we cannot at this time predict the outcome of this litigation or determine our potential exposure.

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. Medallion loan delinquencies remained low. Secured mezzanine delinquencies improved reflecting collection and restructuring efforts. Medallion Bank continued with low levels of delinquency in its consumer loan portfolio. In addition to the delinquencies in the loan portfolio as described above, a receivable from bonuses related to certain investments of $6,468,000 was more than 90 days delinquent at June 30, 2013. We . . .

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