Medallion Financial Corp. — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited. Amounts below are in U.S. dollars; “million” and “billion” are used for readability.
Business context and reporting period
Medallion is a finance company whose primary operating subsidiary, FDIC-insured Medallion Bank, originates consumer loans for recreational vehicles, boats and trailers, and home improvements. The company has shifted its strategy away from taxi-medallion lending toward consumer finance. At September 30, consumer loans were 84% of net loans; medallion loans were 10% and commercial loans 6%.
Comparisons with 2018 require care: the company withdrew its BDC election effective April 2, 2018 and began consolidating Medallion Bank and other subsidiaries. The 2019 nine-month results are compared in the filing with only six months of 2018 bank-holding-company accounting, while the 2018 third-quarter comparison is on that accounting basis.
Financial performance and position
| Metric | 2019 Q3 | 2019 nine months |
|---|---|---|
| Interest income | $34.6 million | $96.7 million |
| Net interest income | $25.4 million | $70.9 million |
| Net interest margin | 8.71% | 8.57% |
| Provision for loan losses | $8.3 million | $36.9 million |
| Income before taxes | $7.6 million | $0.3 million |
| Net income (loss) attributable to Medallion | $5.0 million; $0.20 per diluted share | $(1.3) million; $(0.05) per diluted share |
| Net cash from operating activities | Not presented separately for the quarter | $57.2 million |
Third-quarter net income improved from a $4.7 million loss in Q3 2018. Net interest income rose from $24.3 million and reported net interest margin from 7.94%. The quarter included $8.9 million of other income, including $7.9 million of sponsorship and race winnings. Management cited growth in higher-yielding consumer loans and lower loan-loss provision; Q3 2018 included a $5.2 million gain on consumer-loan sales.
The nine-month net loss attributable to Medallion improved from a $19.3 million loss in the comparable 2018 six-month bank-accounting period, but the periods are not directly comparable. 2019 included a $4.1 million debt-extinguishment gain, recorded in Q1, and $16.0 million of sponsorship and race winnings.
At September 30, total assets were $1.520 billion, net loans $1.099 billion, and total equity $292.8 million, including $29.3 million of non-controlling interest. Book value was $10.71 per share, versus $10.75 at year-end 2018. Cash and federal funds sold totaled $55.0 million, including $3.0 million of restricted interest reserve. Nine-month investing cash use was $187.4 million and financing cash provided was $127.5 million; cash, cash equivalents and restricted cash declined $2.7 million to $55.0 million.
Deposits were $963.0 million and total borrowings were $1.187 billion at period-end, with a weighted-average contractual rate of 2.91%. Debt includes deposits; the filing’s selected financial data reports $1.201 billion of total borrowings when operating lease liabilities are included. Deposits accounted for 81% of borrowings. Reported debt-to-equity was 4.1x. The Bank’s Tier 1 leverage ratio was 15.91%, compared with its FDIC-imposed minimum of 15%.
Material changes and credit trends
- Gross loans increased to $1.142 billion from $1.018 billion at December 31, 2018, led by recreation loans ($706.4 million) and home-improvement loans ($230.7 million). Nine-month originations totaled $366.3 million.
- Medallion loans declined to $137.0 million from $183.6 million at year-end 2018. The company reported no new medallion originations and continued to work through legacy exposures.
- The allowance for loan losses rose to $43.1 million from $36.4 million; allowance coverage was 3.77% of gross loans. Nine-month net charge-offs were $30.1 million, or 3.92% of average loans.
- Loans 90 days or more past due fell to $8.1 million, or 0.73% of gross loans, from $20.2 million, or 2.03%, at year-end 2018. Nonaccrual loans were $27.1 million. Loan collateral in process of foreclosure was $53.5 million.
- Medallion credit remains a significant risk: the reported weighted-average loan-to-value ratio was approximately 202%; 88% of medallion loans were in New York City. The allowance included $25.0 million for medallion loans, and the company cites cumulative medallion net charge-offs of $242.9 million.
- The company issued $30 million of 8.25% unsecured notes due 2024 in March and a further $6 million in August. A $10.8 million bank facility was repaid at maturity in July; a lender waiver covering certain repayment and other obligations on another term note expires December 1, 2019.
Outlook, risks and unusual items
Management said Medallion Bank was exploring fintech partnerships, with a plan to begin operations in 2020; no partnerships had been finalized. The company was also exploring financing alternatives, including asset sales or spin-offs and securitization. It said additional liquidity may not be available on favorable terms or at all and that it could reduce lending or sell assets below book value to meet obligations.
Key risks include funding and refinancing needs, rising funding costs and interest-rate mismatch, credit losses and collateral values, and the illiquidity of portions of the loan and investment portfolios. The company reported a negative one-year cumulative interest-rate gap of $301.9 million, or 25% of interest-sensitive assets; its modeled result after an assumed medallion prepayment adjustment was negative $266.0 million. The filing’s estimated impact of an immediate 1% rate increase was an annualized $767,000 increase in net income under one stated assumption, but a separate one-year impact figure was negative $1.106 million; management cautioned that actual results could differ.
The Q1 $4.1 million debt-extinguishment gain arose from repayment of bank debt at a discount. Goodwill was $150.8 million; management reported no Bank goodwill impairment at year-end 2018, while a $5.6 million impairment of an RPAC intangible was recorded in Q4 2018. A $7.0 million RPAC sponsorship agreement with Victory Junction, a charity whose board includes RPAC minority shareholder Richard Petty, generated $5.2 million of sponsorship payments earned and received in 2019. The company reported ordinary-course legal proceedings but no matter expected by management and counsel to have a material adverse effect. No common dividends have been paid since 2016, and the company did not anticipate resuming them at the time of the filing.
The company said CECL adoption was deferred for smaller reporting companies to fiscal years beginning after December 15, 2022; it was assessing the impact and expected an effect on its estimated credit-loss accounting. Management stated that disclosure controls were effective as of September 30, 2019 and that no material change in internal controls occurred during the quarter.
Important facts for investors to verify
- Whether the December 1, 2019 lender-waiver deadline was resolved and how upcoming debt maturities were refinanced or repaid.
- Credit performance, reserve adequacy and collateral recoveries in recreation and home-improvement lending, alongside the continuing medallion portfolio workout.
- Funding availability and deposit costs, including the capacity to sustain consumer-loan growth without increasing liquidity or refinancing risk.
- The recurring earnings contribution of sponsorship and race activities, and the terms and related-party governance of the Victory Junction agreement.
- How the accounting-basis change affects comparisons, and the eventual effect of CECL on reserves, earnings and capital.