Medallion Financial Corp. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018; filed November 13, 2018. Amounts are in U.S. dollars. The company withdrew its BDC election effective April 2, 2018 and began consolidating Medallion Bank and other subsidiaries. Consequently, current-period bank-holding-company accounting and prior-period investment-company accounting are not directly comparable; the filing does not restate prior periods.
Business context
Medallion is shifting from taxi-medallion lending toward consumer finance through Medallion Bank, which originates recreational vehicle, boat, trailer, and home-improvement loans. At quarter-end, management described consumer loans as 70% of the loan portfolio, medallion loans as 22%, and commercial loans as 8%. Assets under management were $1.598 billion, versus $1.593 billion at December 31, 2017 and $1.646 billion a year earlier.
Financial results and condition
| Metric | Q3 2018 / September 30, 2018 | YTD / comparison |
|---|---|---|
| Interest income | $33.2 million | $69.8 million for the nine months, a mixed-accounting period |
| Net interest income | $24.3 million; net interest margin 7.94% | $49.5 million for the nine months |
| Provision for loan losses | $18.2 million | $48.8 million for the six months under bank-holding-company accounting |
| Net result attributable to Medallion | Loss of $4.7 million, or $0.19 per diluted share | Loss of $34.2 million, or $1.41 per diluted share, for the nine months under the combined presentation |
| Operating cash flow | Not separately provided for the quarter | $41.5 million for the nine months; investing cash flow was negative $21.8 million and financing cash flow positive $81.4 million |
| Cash and federal funds sold | $143.6 million | Includes federal funds sold; prior-period balance is not directly comparable |
| Total assets / total equity | $1.571 billion / $280.4 million | Book value per share was $10.35, versus $11.80 at December 31, 2017; accounting bases differ |
| Loans | $1.090 billion gross; $1.060 billion net of $29.5 million allowance | Allowance was 2.71% of gross loans |
| Deposits / total borrowings | $947.0 million / $1.265 billion | Weighted-average contractual borrowing rate was 2.64% |
Q3 operating results included $9.4 million of other income, including sponsorship and race winnings and gains on consumer-loan sales. The filing reports a $5.488 million gain on sale of loans in the financial statements, while MD&A describes a $5.172 million gain; investors should reconcile this difference. Operating expenses were $19.5 million, with management citing higher legal and collection costs. No distributions were declared for the quarter.
Changes, outlook, and key risks
- Credit and medallion exposure: Medallion loans were $261.5 million, 24% of gross loans. The allowance included a $15.6 million general reserve for performing medallion loans. Nonperforming loans were $48.7 million; loans more than 90 days past due were $14.1 million, or 1.29% of the portfolio. Management said medallion values had leveled off and transfer activity had increased, but medallion lending remained loss-making and interest income was pressured by delinquency and nonaccrual status.
- Losses and charge-offs: Q3 net charge-offs were $10.1 million. The medallion segment recorded a $13.3 million provision for loan losses and a $14.5 million after-tax loss. Separately, recreation and home-improvement loan sales totaled approximately $100.9 million during the quarter.
- Funding, liquidity, and covenant: The company relied heavily on brokered deposits, which comprised $947.0 million of funding. It reported $45 million available under Medallion Bank federal-funds lines and $3 million of undisbursed SBA commitments. The company was not in compliance with a financial covenant under the DZ loan and was seeking an amendment; approval was not assured. The DZ facility had $96.1 million outstanding and was due to mature in December 2018. Subsequent to quarter-end, the company reported extending a separate facility to March 2019.
- Bank capital: Medallion Bank’s Tier 1 leverage ratio was 15.08%, against an FDIC-imposed minimum of 15%, leaving limited headroom. The bank’s ability to maintain capital and access brokered deposits is important to liquidity.
- Trust III restructuring: At September 30, Trust III had $63.5 million of assets and $98.5 million of liabilities, including a $96.1 million DZ loan. On November 8, MFC’s $6.0 million limited guaranty was terminated in exchange for a $1.4 million note payable over five years; Trust III was then deconsolidated, and future Trust III losses will no longer be included.
- Other risks and outlook: Management provided no numerical earnings guidance. Principal risks include consumer-credit losses, nonprime exposure, competition from ride-hailing services and falling taxi-medallion collateral values, refinancing and deposit access, rising funding costs, and compliance with the company’s Section 3(c)(6) Investment Company Act exception. Management stated that controls and procedures were effective as of September 30, 2018. The company expects CECL adoption to significantly affect its credit-loss accounting.
Most important facts for investors to verify
- Reconcile the $5.488 million loan-sale gain in the statements with the $5.172 million amount in MD&A, and determine the net effect of loan sales on recurring earnings.
- Track the DZ covenant amendment, facility maturity and refinancing, and the company’s post-quarter liquidity and debt maturities.
- Assess medallion collateral values, charge-offs, nonaccrual balances, foreclosure collateral, and whether the $29.5 million allowance is adequate.
- Monitor Medallion Bank’s capital cushion relative to the 15% leverage requirement and its continued access and cost of brokered deposits.
- Confirm the accounting and economic effects of the Trust III deconsolidation and the $1.4 million replacement note.
- Use caution comparing reported results with 2017: the company changed accounting and consolidation scope during 2018, and the filing does not provide fully comparable restated periods.