Business context and reporting period
Medallion Financial Corp. filed this Form 10-K for the fiscal year ended December 31, 2019. It is a specialty finance company whose primary operating subsidiary, FDIC-insured Medallion Bank, originates consumer loans for recreational vehicles, boats, trailers and home improvements. The company has shifted its focus away from taxi-medallion lending; at year-end, consumer loans were 84% of net loans, medallion loans 10% and commercial loans 6%.
Comparability is limited: the company withdrew its BDC election effective April 2, 2018 and began consolidating Medallion Bank and other subsidiaries. The cited 2018 comparison is generally a nine-month period under bank-holding-company accounting, with the first quarter reported under investment-company accounting; it is not directly comparable to full-year 2019.
Financial results and position
| Metric | 2019 | Prior-period context |
|---|---|---|
| Total interest income | $132.6 million | $100.8 million for the nine months ended December 31, 2018, under the combined presentation |
| Net interest income | $97.5 million | $72.5 million for the nine-month 2018 combined period |
| Provision for loan losses | $47.4 million | $59.0 million for the nine-month 2018 comparison |
| Net income (loss) attributable to Medallion Financial | $(1.8) million; $(0.07) per diluted share | $(25.0) million; $(1.03) per diluted share, for the nine-month 2018 combined period |
| Net interest margin | 8.64% | 8.19% for the nine-month 2018 comparison |
| Net charge-offs | $37.7 million; 3.60% of average loans | $22.6 million; 2.73% for the nine-month 2018 comparison |
| Net cash from operating activities | $64.9 million | $66.6 million for 2018 |
| Cash and federal funds sold, year-end | $67.8 million | $57.7 million at December 31, 2018 |
At December 31, 2019, total assets were $1.542 billion, net loans $1.115 billion, total liabilities $1.207 billion and total equity $334.5 million. Total borrowings were $1.170 billion, with a reported weighted-average contractual rate of 2.89%; deposits accounted for $954.2 million of debt funding. The company generated $64.9 million in operating cash, used $206.5 million in investing activities and received $151.7 million from financing activities, increasing cash and cash equivalents by $10.1 million.
Gross loans were $1.161 billion, up 14% from year-end 2018. Recreation loans were $713.3 million, home-improvement loans $247.3 million, commercial loans $69.8 million and medallion loans $130.4 million. The allowance for loan losses was $46.1 million, or 3.97% of loans. Loans 90 or more days past due totaled $8.7 million; broader reported nonperforming loans were $62.5 million, including troubled debt restructurings.
Material changes versus the prior period
- Consumer lending expanded: recreation and home-improvement gross loans rose to $960.7 million combined, while medallion loans declined from $183.6 million to $130.4 million.
- Net interest income and margin increased, reflecting consumer portfolio growth and a higher yield on interest-earning assets. Funding costs also rose: average cost of interest-bearing liabilities was 3.08%, compared with 2.79% in the nine-month 2018 period.
- Net charge-offs increased to $37.7 million and the charge-off ratio rose to 3.60%, driven principally by recreation lending. The provision was lower than the nine-month 2018 amount, but periods differ in length.
- 2019 included a $4.1 million gain from extinguishing debt at a discount. The prior-year period included a $25.3 million gain from deconsolidating Taxi Medallion Loan Trust III, making headline earnings comparisons especially difficult.
Outlook, risks, contingencies and unusual items
No quantified earnings or loan-growth guidance is provided. Management said it was developing a strategic partnership program with fintech and other non-bank partners, with an initial partnership expected during 2020; no partnership had been finalized by the filing date.
The filing identifies COVID-19 as a significant subsequent-event risk. Management said the outbreak had adversely affected the business and could materially affect borrower repayment, collateral values, loan demand and consumer spending; the duration and financial impact could not then be reasonably estimated. The company reported remote-work measures and discussions with borrowers and lenders on payment terms.
Other key risks include dependence on brokered deposits, refinancing and covenant compliance; substantial leverage and near-term funding maturities; rising funding costs and fixed-rate asset/variable-rate liability exposure; consumer credit and economic-cycle risk; and ongoing deterioration in taxi economics and medallion collateral values. The Bank’s Tier 1 leverage ratio was 19.4% at year-end, above the 15% level required by its FDIC capital-maintenance agreement. The company disclosed a lender waiver expiring April 1, 2020 and stated that it had extended facilities as they matured, but could not guarantee future extensions or replacement funding.
Medallion collateral remains a material concern: management estimated a 190% weighted-average loan-to-value ratio at year-end and a New York City medallion value of $167,000 net of liquidation costs. Medallion loans produced a $23.5 million after-tax segment loss in 2019. The filing also reports ordinary-course legal proceedings, but management and counsel did not expect an adverse decision to have a material effect. The company had not paid common dividends since 2016 and did not anticipate resuming them.
Most important facts for investors to verify
- Review the audited statements and notes for the accounting transition and ensure comparisons account for the shorter, differently accounted-for 2018 period.
- Track COVID-19 effects on borrower payment performance, loan modifications, delinquencies, charge-offs, provisions and collateral values in subsequent filings.
- Assess the sufficiency of the $46.1 million loan-loss allowance, especially for recreation credit and medallion exposure, and monitor foreclosed collateral and medallion valuations.
- Confirm extensions, repayment or refinancing of debt maturities and waivers, continued access to brokered deposits, and compliance with lender covenants and Bank capital requirements.
- Monitor whether the planned strategic partnership launches, its economics and regulatory treatment, and whether it changes the Bank’s credit, compliance or funding risks.