Business Context and Reporting Period
Company: Medallion Financial Corp. (MFIN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
Business Overview: Medallion Financial is a closed-end, non-diversified management investment company and Business Development Company (BDC). The Company is transitioning its strategy away from traditional taxicab medallion lending toward its growing consumer finance portfolio, primarily through its wholly-owned portfolio company, Medallion Bank. Medallion Bank originates consumer loans for recreational vehicles, boats, motorcycles, and home improvements.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 | Three Months Ended Sep 30, 2016 | Nine Months Ended Sep 30, 2016 |
|---|---|---|---|---|
| Total Investment Income | $5,567,000 | $13,604,000 | $5,269,000 | $20,091,000 |
| Net Interest Income | $2,024,000 | $3,319,000 | $1,896,000 | $10,818,000 |
| Net Investment Loss (After Tax) | $(2,490,000) | $(4,218,000) | $(2,606,000) | $(1,969,000) |
| Net Realized Gains on Investments | $944,000 | $3,785,000 | $2,499,000 | $(7,000) |
| Net Unrealized Appreciation (Depreciation) | $2,165,000 | $(2,634,000) | $5,150,000 | $18,434,000 |
| Net Increase (Decrease) in Net Assets | $619,000 | $(3,067,000) | $5,043,000 | $16,458,000 |
| Earnings Per Share (Diluted) | $0.03 | $(0.13) | $0.21 | $0.68 |
| Net Asset Value Per Share | $11.68 | $11.68 | $11.61 | $11.61 |
| Total Assets | $665,420,000 | $665,420,000 | $689,377,000 | $689,377,000 |
| Total Funds Borrowed | $330,138,000 | $330,138,000 | $349,073,000 | $349,073,000 |
| Cash and Cash Equivalents | $19,281,000 | $19,281,000 | $20,962,000 | $20,962,000 |
Material Changes vs. Prior Period
- Performance Decline: Net increase in net assets resulting from operations decreased significantly compared to the prior year, dropping from $5.04 million to $0.62 million for the quarter and from $16.46 million to a loss of $3.07 million for the nine-month period. This was primarily driven by higher unrealized depreciation on the investment portfolio and lower interest income from the medallion loan portfolio.
- Portfolio Composition: The medallion loan portfolio decreased by 16% in 2017 to $224.6 million, representing 36% of the net portfolio (down from 49% a year ago). Conversely, the investment in Medallion Bank and other controlled subsidiaries increased 46% to $303.9 million, now representing 49% of the portfolio.
- Delinquencies: Loans 90 days or more past due increased to 27.9% of the total loan portfolio (up from 15.6% in 2016), driven largely by the medallion loan segment due to competition from ridesharing apps and declining medallion values.
- Tax Status: The Company recorded a significant income tax benefit ($6.2 million for the quarter, $15.1 million for nine months) due to its change in tax status from a Regulated Investment Company (RIC) to a corporation taxed under Subchapter C, effective for the 2016 tax year.
Guidance, Outlook, Risks, and Contingencies
- Strategic Shift: Management is actively transitioning away from medallion lending to focus on the consumer finance portfolio managed by Medallion Bank, which has grown at a compound annual growth rate of 18% since 2004.
- Medallion Bank Valuation: The Company recorded $563,000 of unrealized appreciation on Medallion Bank in 2017, following significant appreciation in 2015 and 2016. This valuation is based on external interest in the bank and market comparables, though it remains subject to regulatory restrictions.
- Key Risks:
- Medallion Collateral Decline: Values of NYC and Chicago taxicab medallions have declined significantly (Chicago medallions dropped from ~$370,000 in 2013 to ~$60,000 in 2017), increasing loan-to-value ratios and default risks.
- Non-Qualifying Assets: As of September 30, 2017, non-qualifying assets (primarily Medallion Bank and Chicago medallions) exceeded 30% of total assets. This precludes the Company from making further investments in these non-qualifying assets until the ratio is reduced.
- Liquidity and Debt Maturity: A significant portion of debt matures in 2017 and 2018. The Company is in discussions with lenders to extend facilities. There is a pending lawsuit regarding $8.8 million in notes due from five subsidiaries secured by Chicago medallions; while lenders have waived defaults, a judgment against the Company could trigger cross-defaults.
- Unusual Items: The Company recorded a $15.1 million income tax benefit for the nine months ended September 30, 2017, related to unrealized losses on investments, which is a non-cash item resulting from the change in tax status.
Important Facts for Investor Verification
- Asset Coverage Ratio: Verify the Company's ability to maintain the 200% asset coverage ratio required under the 1940 Act, especially given the high proportion of non-qualifying assets.
- Medallion Loan Delinquency: Monitor the trend of loans 90+ days past due, which reached 27.9% of the portfolio, and the impact of declining medallion collateral values on future write-downs.
- Debt Refinancing: Confirm the status of debt maturities due in 2017 and 2018, specifically the $101.4 million DZ loan and $82.4 million in bank notes, and the outcome of the litigation regarding the $8.8 million in subsidiary notes.
- Tax Status Impact: Assess the long-term impact of the loss of RIC status on distributable income and the Company's ability to pay distributions without incurring corporate-level taxes.
- Medallion Bank Valuation: Scrutinize the assumptions used to value Medallion Bank, which represents nearly half of the Company's portfolio, as this valuation is based on fair value determinations by the Board rather than a ready market.