Medallion Financial Corp. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 13, 2019. The company withdrew its BDC election effective April 2, 2018 and began consolidating Medallion Bank and other subsidiaries. Accordingly, 2018 combines first-quarter investment-company accounting with consolidated bank-holding-company accounting for the remaining nine months; prior-year comparisons are not fully comparable.
Business context
Medallion is a specialty finance company shifting away from taxi-medallion lending toward consumer finance. At year-end, consumer loans were 77% of net loans, medallion loans 16%, and commercial loans 7%. Managed assets were approximately $1.522 billion, down from $1.593 billion a year earlier.
Financial and operating highlights
- 2018 reported results: The combined-year statements show a $25.0 million net loss attributable to Medallion Financial, or $1.03 per diluted share, versus net income of $0.3 million in 2017. These figures span different accounting bases and should not be treated as a clean year-over-year comparison.
- Consolidated nine-month period: Interest income was $96.8 million, net interest income $72.0 million, and net interest margin 8.19%. The company recorded a $59.0 million loan-loss provision and a $10.2 million net loss after tax. Recreation lending generated $23.9 million of net income; home improvement $3.6 million; commercial $2.7 million; medallion lending lost $27.6 million.
- Fourth quarter: The company recorded a $25.3 million gain from deconsolidating Taxi Medallion Loan Trust III. Fourth-quarter net income attributable to Medallion was $9.2 million; the trust gain was a major unusual item.
- Loans and credit: Gross loans were $1.018 billion and net loans $981.5 million at year-end. The allowance was $36.4 million. Nine-month net charge-offs were $22.6 million, and 2.03% of loans were more than 90 days past due. Medallion loans had a 220% estimated weighted-average loan-to-value ratio; New York City medallion collateral was estimated at $181,000 net of liquidation costs.
- Cash flow and liquidity: 2018 combined cash flows showed $78.1 million provided by operating activities, $35.3 million used in investing, and $27.7 million used in financing; cash and cash equivalents, including federal funds sold, ended at $57.7 million. Operating cash flow includes substantial noncash and loan-loss adjustments.
- Debt and capital: Total debt was $1.062 billion, with a 2.67% weighted-average contractual rate; total assets were $1.382 billion and total equity $290.2 million, including $27.6 million of non-controlling interest. Brokered deposits were $848.0 million, or 80% of debt. Medallion Bank’s Tier 1 leverage ratio was 15.85%, against a 15% FDIC capital-maintenance requirement.
- Shareholder returns: No dividends were paid or declared in 2018; management did not then anticipate resuming dividends. Book value per share was $10.75 at year-end.
Material changes, outlook and risks
- The move from BDC status changed consolidation and accounting presentation; the company reported as a bank holding company for accounting purposes, but stated it was not one for regulatory purposes.
- Consumer lending is the strategic growth focus, while the medallion portfolio continues to contract. The company sold approximately $100.9 million of consumer loans during 2018, including sales that generated reported gains.
- Management said it had extended maturing lender facilities as they came due and was pursuing other financing options. Nonetheless, substantial funding maturities fell in 2019–2021, and continued access to credit and brokered deposits is important to operations. A February 2019 facility extension is disclosed as a subsequent event.
- Key risks include consumer credit deterioration, dependence on brokered deposits, refinancing and covenant risk, interest-rate mismatch, and the sharp decline in taxi-medallion values amid rideshare competition. Medallion loans were 8.6% 90 days or more past due according to the risk-factor discussion; the reported year-end portfolio tables give different delinquency measures and should be reconciled.
- Other notable items: $5.6 million goodwill/intangible impairment, $49.5 million of loan collateral in process of foreclosure, and a $13.997 million right-of-use asset and lease liability expected to be recorded beginning January 1, 2019. Management and the auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Investor verification priorities
- Reconcile the combined-year $25.0 million attributable loss with the nine-month consolidated loss and the $9.2 million fourth-quarter profit, including accounting-transition and deconsolidation effects.
- Assess the quality and valuation of medallion collateral, delinquency/nonaccrual trends, foreclosures, and adequacy of the $36.4 million allowance.
- Review the 2019–2021 debt and deposit maturities, facility extensions, covenants, and ongoing availability and cost of brokered deposits.
- Evaluate whether consumer-loan growth and credit performance can offset medallion runoff, loan-sale effects, and funding-cost increases.
- Confirm the sustainability of operating cash flow and the implications of no expected near-term dividends.