Medallion Financial Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
Medallion Financial is a finance company whose growth strategy centers on Medallion Bank’s consumer lending, principally recreational vehicle, boat and home-improvement loans, along with services for fintech partners. At June 30, 2021, consumer loans were 94% of the loan portfolio; commercial loans were 5% and legacy medallion loans 1%. Assets under management, including assets serviced for third parties, were $1.8 billion.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total interest income | $37.4 | $35.6 | $74.5 | $71.1 |
| Net interest income | $29.5 | $26.8 | $58.2 | $53.3 |
| Provision for loan losses | Benefit $0.7 | Expense $16.9 | Expense $2.3 | Expense $33.5 |
| Net income (loss) attributable to Medallion Financial | $10.3 | $(4.0) | $18.7 | $(17.6) |
| Diluted earnings (loss) per share | $0.41 | $(0.16) | $0.75 | $(0.72) |
| Net interest margin | 8.84% | 8.23% | 9.01% | 8.48% |
Q2 net income also included $2.9 million of gains on debt extinguishment and $3.2 million of gains on equity investments. Net interest income after loan-loss provision was $30.2 million in Q2, versus $9.8 million a year earlier. The effective improvement in earnings therefore reflects both stronger consumer lending and substantially lower credit-loss provision, as well as unusual gains.
For the six months, cash from operations was $39.8 million, investing activities used $131.8 million, financing activities provided $71.5 million, and cash, cash equivalents and restricted cash declined $20.5 million to $91.6 million. Loan originations were $359.0 million. Net charge-offs were $10.2 million in Q2 and $12.9 million year to date.
At June 30, total assets were $1.740 billion, net loans $1.294 billion, allowance for loan losses $46.9 million, and total equity $322.8 million, including $72.1 million of non-controlling interest. Book value per share was $10.00. Gross loans increased 9% from year-end 2020 to $1.341 billion. Recreation loans were $886.2 million and home-improvement loans $368.3 million.
Funding included $1.154 billion of deposits and $121.0 million of retail and privately placed notes. Total outstanding debt was reported as $1.382 billion, with a weighted-average contractual rate of 2.04%; average borrowing cost was 2.36% in Q2. Cash, cash equivalents and federal funds sold totaled $91.6 million. The Bank reported a Tier 1 leverage ratio of 18.1%, above the 15% FDIC-imposed minimum.
Material changes versus comparable periods
- Profitability turned positive: attributable net income was $10.3 million in Q2 and $18.7 million year to date, compared with losses in both 2020 periods.
- Net interest income rose as consumer loan balances grew and funding costs fell. Consumer growth more than offset reduced medallion lending; the home-improvement portfolio grew faster but carries a lower yield than recreation loans.
- Loan-loss provision fell sharply from the prior-year periods, which included COVID-related reserve increases. The allowance declined from $57.5 million at year-end to $46.9 million, partly reflecting charge-offs and recoveries.
- Medallion gross loans fell to $16.5 million from $37.8 million at year-end 2020. All medallion loans remain nonaccrual; the portfolio is being run down and collateral liquidated.
- Debt refinancing and new private placements increased retail and privately placed notes to $121.0 million. The company repaid $33.6 million of 9% retail notes at maturity in April and retired bank notes at a discount, recording $4.6 million of debt-extinguishment gains for the first half.
Outlook, risks and unusual items
- No formal earnings guidance is provided. Management says recovery is developing but remains uncertain, particularly given COVID-19 and the Delta variant. The company states that future effects on borrowers, collateral values, loan demand and consumer spending cannot be predicted.
- Medallion loans were placed on nonaccrual and written down to collateral value after payment deferrals ended. Medallion collateral in process of foreclosure was $48.2 million at quarter-end; management warns further write-downs or losses could be material. Taxi-market exposure is concentrated in New York City.
- The SEC is investigating matters from 2015–2017, including third-party financial website activity and prior financial reporting and disclosures. The company is cooperating and discussing a potential settlement; a civil fine may be material, its amount is not estimable, and litigation could follow if no settlement is reached. The company does not expect to change previously reported financial results.
- Liquidity and refinancing require attention: approximately $666 million of borrowing relationships mature within two years, including nearly $653 million of brokered CDs. The company says it is seeking additional funding and warns it may have to sell assets below book value or reduce loan originations if funding is unavailable on acceptable terms.
- Interest-rate exposure is material. The one-year cumulative rate gap was negative $343.4 million; management’s modeled rate scenarios show potentially different effects over different horizons. Rising rates could increase funding costs and pressure net interest income.
- The company expects CECL adoption in fiscal 2023 to materially affect accounting for estimated credit losses. It paid no common dividend in the period and does not currently anticipate paying one.
- Other notable items include a $3.2 million gain from selling Upgrade shares, forgiveness of RPAC’s $0.7 million PPP loan recorded as other income, and a $1.8 million valuation allowance charge related to certain tax assets.
Key facts for investors to verify
- Progress and realized recoveries on the remaining medallion loans and foreclosure collateral, including New York City collateral values and any further charge-offs.
- Consumer loan growth, delinquency and charge-off trends, reserve adequacy, and the effect of the economic recovery and pandemic developments.
- Deposit retention and renewal costs, near-term maturities, access to funding, and compliance with debt covenants and Bank regulatory capital requirements.
- Outcome, timing and potential financial impact of the SEC investigation and any settlement or litigation.
- How much of reported earnings is repeatable operating performance versus investment-sale and debt-extinguishment gains, and the eventual impact of CECL adoption.