MEDALLION FINANCIAL CORP quarterly report, Q3 FY2021

Medallion Financial Corp. — Q3 2021 Form 10-Q

Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.

Business context

Medallion is a finance company whose primary operating subsidiary, Medallion Bank, originates consumer loans for recreational vehicles, boats and home improvements, and is developing fintech partnerships. The company is winding down legacy taxi-medallion lending. Consumer loans represented 94% of gross loans at quarter-end. Assets under management, including assets serviced for third parties, were $1.8 billion.

Financial results and position

MetricQ3 2021Q3 2020Nine months 2021Nine months 2020
Interest income$41.5$37.4$116.0$108.6
Net interest income$34.1$29.1$92.2$82.4
Provision (benefit) for loan losses$(0.3)$39.7$2.0$73.2
Net income (loss) attributable to Medallion$15.9$(23.6)$34.6$(41.3)
Diluted earnings (loss) per share$0.64$(0.97)$1.39$(1.69)
Net interest margin9.48%8.72%9.19%8.58%

At September 30, total assets were $1.805 billion, net loans $1.372 billion, deposits $1.197 billion, and total equity $338.6 million. Book value was $10.65 per share. The loan-loss allowance was $47.4 million, down from $57.5 million at December 31, 2020. Loans 90 or more days past due were $4.1 million, or 0.29% of loans, versus $6.9 million, or 0.57%, at year-end.

Nine-month operating cash flow was $62.0 million; investing activities used $202.1 million, mainly reflecting loan originations, and financing activities provided $113.5 million. Cash, cash equivalents and federal funds sold ended at $85.4 million, down $26.7 million from the beginning of the year. Total funds borrowed were approximately $1.426 billion, including deposits; the weighted average contractual rate was 1.90%.

Changes and notable items

  • Results turned profitable versus the prior-year periods, substantially reflecting much lower loan-loss provisions after the large 2020 medallion portfolio reserve and charge-offs. Consumer lending growth also lifted interest income and net interest income.
  • Gross loans rose 15% from December 31, 2020 to $1.420 billion. Recreation loans grew to $933.8 million and home-improvement loans to $398.8 million; medallion loans declined to $14.9 million.
  • Nine-month other income included $7.3 million of gains on equity investments and a $4.6 million gain on debt extinguishment. The company also reported $5.4 million of loan-collateral write-downs for the period.
  • Medallion Bank’s Tier 1 leverage ratio was 18.2%, above the 15% level specified by the FDIC. No common dividends were declared; management said it does not currently anticipate paying them.

Outlook, risks and contingencies

  • Management gave no specific earnings or loan-growth guidance. It is considering alternatives for Medallion Bank, potentially including an IPO, sale, or spin-off, but gave no timetable or assurance of a transaction.
  • COVID-19 and the Delta variant remain risks to borrowers, loan demand and collateral values. Management reported minimal consumer loans and no medallion loans remaining on payment deferral at quarter-end, but noted continuing uncertainty about the pandemic’s effects.
  • The legacy medallion portfolio remains highly stressed: all medallion loans were nonperforming, and estimated weighted-average loan-to-value was 287%. Medallion values, recoveries and foreclosure collateral could require further losses.
  • The SEC is investigating matters from 2015–2017 involving third-party online promotion and historical financial reporting and disclosures. The company is discussing a possible settlement; any fine is not estimable and may be material. Litigation may follow if a settlement is not reached. Management said it does not expect to change previously reported results.
  • Funding and rate risks include approximately $669 million of borrowings maturing within two years, primarily brokered certificates of deposit. The company reported a negative one-year cumulative interest-rate gap of $316.2 million and warned that rising funding costs could pressure net interest income. It also expects CECL adoption, scheduled for fiscal years beginning after December 15, 2022, to materially affect credit-loss accounting.

Important facts for investors to verify

  • Whether consumer-loan growth and improved credit performance persist, and how loss rates and the allowance change as economic conditions evolve.
  • Progress in resolving the SEC investigation, including any settlement terms, fine, litigation or related costs.
  • Medallion collateral valuations, foreclosure proceeds and remaining exposure, including assets outside the loan balance.
  • Deposit renewal and refinancing needs, available liquidity, and the impact of changing interest rates on funding costs and margins.
  • Any concrete decision or transaction regarding Medallion Bank, and the consequences for capital, earnings and shareholders.