Medallion Financial Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless otherwise noted. The filing is unaudited.
Business context and comparability
Medallion Financial is shifting from taxi-medallion lending toward consumer finance through Medallion Bank, which makes recreational-vehicle, boat, trailer, and home-improvement loans. Consumer loans were 80% of net loans at quarter-end; medallion loans were 14% and commercial loans 6%. Assets under management and servicing were $1.565 billion.
Results are not directly comparable with Q1 2018: after withdrawing its BDC election effective April 2, 2018, the company began consolidating Medallion Bank and other subsidiaries and adopted bank-holding-company accounting prospectively. Q1 2018 was reported under investment-company accounting and showed a $14.874 million net decrease in assets from operations, or a $0.62 loss per share.
Key financial metrics
| Metric | Q1 2019 / March 31, 2019 |
|---|---|
| Interest income | $30.043 million |
| Interest expense | $7.722 million |
| Net interest income | $22.321 million; net interest margin 8.56% |
| Provision for loan losses | $13.343 million |
| Net income | $1.395 million after tax, including $0.167 million attributable to non-controlling interests; $1.228 million attributable to Medallion Financial, or $0.05 diluted EPS |
| Cash flow | $16.087 million provided by operating activities; $27.888 million used in investing; $40.209 million provided by financing. Cash, cash equivalents, and federal funds sold ended at $86.121 million, including $2.475 million restricted cash. |
| Assets and equity | Total assets $1.429 billion; total equity $291.841 million; book value $10.76 per share |
| Loans and allowance | Gross loans $1.024 billion; net loans $987.338 million; allowance $36.862 million, or 3.60% of gross loans |
| Debt and deposits | Funds borrowed $1.099 billion, including $864.131 million of deposits. The filing’s selected-data measure of total borrowings is $1.112 billion because it includes operating lease liabilities. |
| Liquidity and capital | Medallion Bank reported a 16.56% Tier 1 leverage ratio, above its 15% FDIC-imposed minimum. The Bank also had $45 million available under Fed Funds lines; the company reported $3 million of undisbursed SBA commitments. |
Material changes and unusual items
- Gross loans rose $6.3 million from year-end 2018. Recreation loans increased to $610.0 million and home-improvement loans to $193.3 million; medallion loans declined to $165.7 million.
- Loans more than 90 days past due fell to $8.1 million, or 0.81% of the portfolio, from $20.2 million, or 2.03%, at year-end. Nonperforming loans declined to $21.5 million from $34.9 million; management noted charge-offs and transfers to foreclosure collateral contributed to the decrease.
- Net charge-offs were $12.876 million. The allowance included a $6.173 million general reserve for performing medallion loans. Medallion loans accounted for 69% of the allowance.
- Q1 income included a $4.145 million gain from repaying bank debt at a discount and $3.179 million of sponsorship and race winnings. These items were partly offset by a $2.119 million decline in collateral values on loans in foreclosure.
- In March, the company issued $30 million of unsecured 8.25% senior notes due 2024 and used proceeds partly to repay borrowings. Total debt at quarter-end was $1.099 billion, with a weighted average contractual rate of 2.89%.
- New York medallion values declined during the quarter; management reported a net realizable value of $169,500. Medallion loans had a weighted-average loan-to-value ratio of approximately 213%. Loan collateral in process of foreclosure was $49.8 million.
Outlook, risks, and contingencies
The company gave no numerical earnings or loan-growth guidance. Management described ongoing consumer-lending growth and continued transition away from medallion lending. It stated that funding availability and terms are uncertain, and that it is exploring financing alternatives, including asset sales or spin-offs and securitization. Many borrowing relationships mature between 2019 and 2021; management said it was discussing extensions with lenders. The DZ Bank facility had a September 2019 termination date in the filing, and the company disclosed a subsequent extension of a demand note to December 2020.
Interest-rate exposure is material: the one-year cumulative rate gap was negative $213.7 million, or 19% of interest-sensitive assets; adjusting for an assumed medallion-loan prepayment rate, it was negative $160.4 million, or 14%. Management cautioned that modeled rate impacts may differ from actual results. The loan portfolio’s illiquidity, credit losses, collateral values, deposit funding costs, refinancing needs, and regulatory restrictions are key risks. The company said the upcoming CECL expected-credit-loss standard is expected to significantly affect its loan-loss accounting.
Management reported no pending or threatened legal proceeding expected to have a material adverse effect, and no material change in the risk factors from the 2018 Form 10-K. The company had not paid dividends since 2016 and did not anticipate paying them at the time of filing. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Assess the sustainability of reported earnings excluding the $4.145 million debt-extinguishment gain, and distinguish consolidated net income from income attributable to shareholders.
- Review medallion collateral valuations, charge-offs, the $49.8 million foreclosure-collateral balance, and the adequacy of reserves, especially given the 213% medallion loan-to-value ratio.
- Verify refinancing and lender-extension progress for near-term maturities, deposit funding costs, and available liquidity; note that cash includes restricted funds.
- Track consumer-loan growth, delinquency and charge-off trends, and the impact of CECL adoption on reserves and earnings.
- Use caution comparing Q1 2019 with Q1 2018 because accounting and consolidation changed materially; the filing does not provide a fully restated comparable prior-period consolidated result.