Medallion Financial Corp. — Form 10-Q, Second Quarter 2018
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2018. Medallion is transitioning away from taxi-medallion lending toward consumer finance, principally RV, boat, trailer, and home-improvement loans originated by Medallion Bank.
A major comparability caveat: shareholders approved withdrawal of the Company’s BDC election, effective April 2, 2018. Beginning in Q2, Medallion consolidated Medallion Bank and other subsidiaries and reported under bank-holding-company accounting; earlier periods remain under investment-company accounting and were not restated. Consequently, reported year-over-year and balance-sheet comparisons are not like-for-like.
Financial results and key metrics
- Q2 revenue and earnings: Interest income was $32.6 million and net interest income before loan-loss provision was $24.7 million. The provision for loan losses was $30.6 million; other income was $4.9 million and other expenses were $16.9 million. The Company reported a $17.9 million pretax loss and a $14.6 million net loss attributable to Medallion, or $0.60 per diluted share.
- Margins: The filing gives differing Q2 net-interest-margin figures: 7.93% in one MD&A passage and 8.57% in its average-balance table. Verify the applicable calculation. Average yield on interest-earning assets was 11.23%; average borrowing cost was 2.65%.
- Six-month results: Net loss attributable to Medallion was $29.5 million, or $1.22 per diluted share. This combined figure includes Q1 investment-company accounting and Q2 consolidated bank-holding-company accounting, limiting comparison with prior periods.
- Balance sheet at June 30: Total assets were $1.535 billion; net loans were $1.129 billion, against a $21.4 million allowance. Total liabilities were $1.250 billion and total equity, including noncontrolling interests, was $284.9 million. Book value per share was $10.54; the prior-year-end figure of $11.80 is on a different accounting basis.
- Loan mix: Gross loans totaled $1.150 billion: recreation $597.3 million, home improvement $195.9 million, medallion $276.8 million, and commercial $80.1 million. Management said consumer loans represented 70% of the loan portfolio.
- Credit quality: Q2 provision included $24.8 million for medallion lending and a $6.7 million unallocated medallion reserve. Net charge-offs were $9.2 million. Loans more than 90 days past due were $15.2 million (1.32% of the portfolio), down from $60.5 million (18.9%) at December 31, 2017, though accounting and portfolio composition changed. Nonperforming loans were reported at $49.6 million in the portfolio table.
- Cash flow and liquidity: For six months, operating cash flow was $24.6 million, investing cash outflow $74.8 million, and financing cash inflow $43.3 million. Cash and federal funds sold ended at $35.6 million. Medallion Bank had $45 million available under federal-funds lines; the Company also reported $5.5 million of unused SBA commitments.
- Debt: Total borrowings were $1.226 billion, including $896.4 million in deposits; weighted-average contractual cost was 2.59%. The DZ loan balance was $96.9 million and matures in December 2018. The filing reports $509.98 million of obligations due in less than one year, including deposits and the DZ loan.
Material changes and management commentary
- Medallion Bank’s consumer lending is the strategic growth focus; management reported a 17% compound annual growth rate in its consumer portfolio since 2004. Medallion Bank was not originating new taxi-medallion loans.
- Consolidation materially changed presentation: Q2 includes the Bank’s consumer lending, deposits, and operating results, unlike the earlier periods shown. Total assets under management were $1.561 billion at June 30, versus $1.593 billion at year-end 2017 and $1.606 billion at June 2017.
- Management attributed the large Q2 loss chiefly to loan-loss provisioning, including losses across the portfolio and reserves for medallion exposure. Medallion lending generated a $21.7 million segment net loss; recreation, home-improvement, commercial, and RPAC reported segment net income of $7.6 million, $1.0 million, $0.3 million, and $0.4 million, respectively.
- No formal earnings or growth guidance is provided. The Company said it was exploring financing alternatives, including asset sales or spin-offs and securitization, and cautioned that additional liquidity might not be available on favorable terms or at all. Management warned that it could reduce lower-yielding originations or sell assets if funding is constrained.
Risks, contingencies, and unusual items
- DZ covenant: The Company was not in compliance with a financial covenant in the DZ loan agreement at June 30 and was seeking an amendment. DZ had given a preliminary indication it expected to approve, but the filing cautions there is no assurance.
- Bank capital and deposits: Medallion Bank’s Tier 1 leverage ratio was 14.95%, just below the FDIC-imposed 15% requirement. The filing warns that capital restrictions could constrain dividends and access to brokered deposits. The Bank’s other reported regulatory capital ratios exceeded stated minimums.
- Medallion and taxi exposure: Management cited ridesharing competition and falling medallion values. New York medallion value was estimated at $181,000 net of liquidation costs; the estimated weighted-average medallion-loan-to-value ratio was 211%. The Company held 159 foreclosed Chicago medallions, carried at $5.5 million net realizable value.
- Trust III: The taxi-loan trust had a $26.6 million deficit, exceeding Medallion Funding’s $6.1 million maximum exposure by $20.5 million. The Company said it was exploring recovery options; no recovery is assured.
- Other contingencies: Five subsidiaries had not repaid $8.8 million of overdue notes secured by Chicago medallions; the lender sued and other lenders had waived related defaults. A shareholder derivative action filed in 2017 was awaiting a ruling on a motion to dismiss. The Company also disclosed ordinary-course legal matters.
- Accounting and outlook risks: Management expects the future CECL credit-loss standard to significantly affect loan-loss accounting. The Company must continue to qualify for an Investment Company Act exception after withdrawing its BDC election. Consumer credit deterioration, funding renewals, interest-rate sensitivity, and illiquid assets are prominent disclosed risks.
- The Company declared no common distributions during the reported periods. Management said results for the quarter may not indicate future performance.
Important facts for investors to verify
- How Q2 net interest margin is calculated and why the filing reports both 7.93% and 8.57%.
- The basis and assumptions behind the $30.6 million loan-loss provision, medallion collateral valuations, and the decline in past-due balances.
- Whether DZ covenant relief was finalized, and the status of the overdue Chicago-medallion notes and related litigation or waivers.
- Medallion Bank’s capital position relative to its 15% leverage requirement, and implications for brokered deposits and dividend capacity.
- Available refinancing and liquidity for near-term maturities, including the DZ facility and other credit arrangements.
- Progress and recoverability of Trust III’s deficit, and the impact of continued taxi-medallion market weakness.
- The effects of consolidated reporting and purchase accounting on future earnings, equity, and period-to-period comparisons.