Business context and reporting period
Medallion Financial Corp. filed this unaudited Form 10-Q for the three months ended March 31, 2021, with comparisons to the first quarter of 2020. It is a finance company whose growth strategy centers on Medallion Bank’s consumer lending, principally recreation and home-improvement loans. At quarter-end, consumer loans were 92% of the loan portfolio; commercial loans were 5% and legacy taxi-medallion loans 3%. Results for the quarter may not indicate future performance.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Interest income | $37.1 million | $35.5 million |
| Net interest income | $28.7 million | $26.5 million |
| Net interest margin | 9.18% | 8.80% |
| Provision for loan losses | $3.0 million | $16.5 million |
| Net income attributable to Medallion | $8.4 million; $0.34 per diluted share | Net loss of $13.6 million; loss of $0.56 per diluted share |
| Operating cash flow | $21.1 million | $16.8 million |
| Net increase in cash, cash equivalents and restricted cash | $28.2 million | Decrease of $12.3 million |
At March 31, 2021, total assets were $1.689 billion, net loans were $1.201 billion, and total equity was $312.0 million, including non-controlling interests. Book value per share was $9.58, versus $9.30 at December 31, 2020. Cash and cash equivalents plus federal funds sold totaled $140.3 million.
Total outstanding debt was reported as approximately $1.347 billion, with a weighted-average contractual rate of 2.43%. Deposits were approximately $1.084 billion on the balance sheet (the debt schedule reports $1.087 billion, including strategic-partner reserve deposits). Average borrowing cost for the quarter fell to 2.61% from 3.11%. The Bank’s Tier 1 leverage ratio was 18.03%, above its 15% FDIC-imposed minimum.
Gross loans grew 3% from year-end to $1.259 billion. The allowance for loan losses was $57.8 million, or 4.59% of gross loans. Loans 90 days or more past due were $4.1 million (0.33% of the portfolio), down from $6.9 million (0.57%) at year-end. Nonperforming loans were $57.3 million, or 4.55% of gross loans.
Material changes versus the prior comparable period
- The Company moved from a prior-year loss to a profit. The improvement reflected a substantially lower loan-loss provision, lower operating expenses, a $1.8 million gain on debt extinguishment, and a smaller collateral write-down; Q1 2020 included a $3.5 million loss on an equity investment.
- Interest income increased with consumer-loan growth. Recreation and home-improvement gross loans rose year over year to $822.9 million and $342.1 million, respectively. Net loans overall increased 3% from December 31, 2020.
- Net charge-offs declined to $2.8 million from $8.6 million; the consolidated charge-off ratio fell to 0.95% from 3.08%. The lower provision also reflects that the prior-year quarter included COVID-related reserve increases.
- Operating expenses fell to $14.6 million from $19.3 million, including lower salaries and professional fees. The Company cited reduced bonuses and lower legal costs, among other factors.
- Medallion gross loans declined year over year to $35.3 million from $124.4 million, as the Company exited new medallion lending and moved troubled loans to collateral-in-foreclosure status. All medallion loans were on nonaccrual.
- Debt increased from year-end, partly reflecting new privately placed notes. The Company issued $25 million of 7.25% senior notes in February 2021 and $3.25 million more in March; additional offerings occurred after quarter-end. It also issued additional 7.50% notes. The $33.625 million of 9.00% retail notes was repaid at maturity on April 15, 2021.
Outlook, commentary, risks and unusual items
No specific earnings or loan-growth guidance was provided. Management described early signs of economic recovery but emphasized that the duration and effects of COVID-19 remain uncertain, particularly for consumer and small-business borrowers and discretionary spending. Consumer payment deferrals had largely ended by March 31, 2021; no medallion loans remained on deferral.
- Medallion exposure: All medallion loans were placed on nonaccrual and written down to collateral value. The weighted-average loan-to-value ratio was estimated at 362% at March 31, 2021. New York City medallions represented most of the portfolio and remain exposed to weak taxi demand; management warned further write-downs or charge-offs could be material.
- Credit and estimates: The allowance depends on estimates of borrower performance, economic conditions and collateral values. Management said the future impact of COVID-19 is difficult to predict. The Company expects adoption of the CECL credit-loss standard, deferred for it until fiscal years beginning after December 15, 2022, to materially affect its credit-loss accounting.
- Funding and liquidity: Approximately $722 million of borrowing relationships mature within two years, including nearly $643 million of brokered CDs. The Company has $25 million of undrawn SBA commitments and Bank access to up to $45 million of Fed Funds lines, but warned additional liquidity may not be available on favorable terms or at all. It may need to limit lending or sell assets below book value to meet obligations.
- Interest-rate sensitivity: The one-year cumulative interest-rate gap was negative $327.3 million, or 23% of interest-sensitive assets. Management noted that sharply rising rates could increase funding costs and hurt net interest income. Its rate-shock estimates are hypothetical and may differ from actual results.
- Debt and unusual items: Q1 included a $1.767 million debt-extinguishment gain. Management expected a further $2.316 million gain in Q2 from repayment of bank notes. In April 2021, follow-on private placements raised additional proceeds, and certain bank notes were repaid at a discount.
- Other matters: The Company had no commitments to extend credit or make investments outstanding at quarter-end. Management said pending or threatened litigation was not expected to have a material adverse effect. The Company had not paid common dividends since 2016 and did not then anticipate paying them.
Important facts for investors to verify
- Whether consumer-loan growth and credit performance remain durable as pandemic-related support and payment deferrals recede, and how future charge-offs affect the allowance.
- How taxi-medallion collateral values, collections and liquidation proceeds compare with the carrying values, especially given the reported 362% weighted-average loan-to-value ratio.
- The maturity and renewal profile of deposits and other borrowings, and the Company’s ability to refinance near-term obligations without costly funding or asset sales.
- How much reported earnings depended on the debt-extinguishment gain, lower provisioning and reduced professional fees, versus recurring lending performance.
- The terms and uses of proceeds of debt issued after quarter-end, the repayment of notes, and the expected Q2 extinguishment gain.
- The eventual effect of CECL adoption, COVID-19 developments and any changes in collateral or credit-loss assumptions.