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November 4, 2016

Lending on Taxi Medallions Takes a Hit

EXCERPT: Two banks wrote off nonperforming taxi medallion loans in the third quarter. Competition from ride-sharing services like Uber and Lyft has eroded the value of taxi medallions, leaving holders underwater on their loans and making the loans difficult to refinance.

The rise of Uber and Lyft, and the resultant hit to the market share of traditional hail-and-ride taxis has caused erosion in the value of taxi medallions in U.S. cities. Many holders of taxi medallions are underwater on their loans as the value drops. Many are thus having trouble refinancing their debt. As a result, the earnings of several banks that lend for taxi medallions took a hit in the third quarter.

Many taxi medallions are worth less than their outstanding loans.

Falling Taxi Medallion Prices as Ride-Sharing Services Erode Demand

Taxi medallion prices are subject to the laws of supply and demand. Prior to Uber, Lyft, and other ride-sharing platforms, they went for high prices. Why? In large cities such as New York City, where the taxi industry is tightly regulated, the number of medallions is fixed. Limited supply and strong demand fueled high prices. In 2013, for example, a taxi medallion cost as much as $1.2 million.

Ride-sharing services changed all that. Although places such as New York City do not allow Uber and Lyft to pick up from potential passengers hailing them, which limits their business, they have made enough inroads to notably increase competition in the transportation business.

As a result of the rise in competition, a taxi medallion sale in March 2016 sold for just over half 2013 prices: $520,000.

Nonperforming Loans Rise Steeply at Several Banks ...

Several banks that offer taxi medallion loans recently reported loss provisions for the medallion loans that caused unexpectedly lower third quarter earnings. The banks, New York's Signature Bank and Miami Lakes, Florida's BankUnited, are otherwise strong performers.

Signature hiked its set-aside for taxi medallion loan losses dramatically, by 600% over the prior year's third quarter. The third quarter loan loss provision was $80.5 million. Signature also charged off medallion loans in the Chicago area to the tune of $95 million. Only $58 million of such loans in that market remain.

BankUnited's nonperforming taxi medallion loans in the New York market climbed dramatically as well, from $2.6 million at year-end 2015 to $54.4 million. The bank set aside $24.4 million, it reported in quarterly results.

Bank's earnings can be impacted despite overall good performance.

The medallion results affected quarter results overall. At Signature, earnings fell over 20%. An earnings figure of $76.1 million was reported. BankUnited's earnings drop was 6% from year-prior levels, to $50.8 million.

... but Medallion Loans Are a Fraction of Total

Still, both banks remain high-performing institutions. Loans for taxi medallions are an extremely small percentage for both. Signature's portfolio of such loans is just 2%, at $593 million. BankUnited's is only 1%, or $192 million.

Both banks also noted in their earnings report that their overall credit quality remains robust. Both banks also took pains to note that overall credit quality is very strong.

Wells Fargo Securities analyst Jared Shaw noted that taxi medallion loans will have to be restructured as they become due, because refinancing will continue to be tough given market conditions.

Loan Sale Advisors Can Help
The changing market conditions that affect taxi medallion loans are a reminder of the need to constantly monitor loan performance. Our seasoned loan sale advisors can help lending institutions sell any assets on a bank balance sheet that may be performing now but at potential risk for future problems.

At Garnet Capital, we can help support banks and lenders with heavy concentrations of medallion loan portfolios to ensure adequate protective measures are instituted as the industry continues to deal with nonperforming loans.

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