Medallion Financial Corp. — Q1 2020 Form 10-Q
Business context and period: Unaudited quarter ended March 31, 2020; filed May 7, 2020. Medallion is a finance company whose growth focus is consumer lending through Medallion Bank, primarily recreational-vehicle, boat and home-improvement loans. Consumer loans were approximately 85% of net loans; medallion loans 9% and commercial loans 6%. Assets under management, including assets serviced for third parties, were $1.647 billion.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total interest income | $35.5 million | $30.0 million |
| Net interest income | $26.5 million | $22.3 million |
| Net interest margin | 8.80% | 8.56% |
| Provision for loan losses | $16.5 million | $13.3 million |
| Net income (loss) attributable to Medallion Financial | $(13.6) million; $(0.56) per diluted share | $1.2 million; $0.05 per diluted share |
| Operating cash flow | $16.8 million | $11.1 million |
| Cash, cash equivalents and restricted cash at quarter-end | $55.5 million | $86.1 million at March 31, 2019 |
Interest income growth reflected expansion in consumer lending. The return to a net loss reflected higher loan-loss provisions, a $6.3 million write-down of medallion collateral in foreclosure, a $3.5 million impairment charge on an equity investment, and higher operating expenses. The prior-year quarter included a $4.1 million gain on debt extinguishment. Operating cash flow was positive, while investing activities used $34.6 million and financing activities provided $5.5 million.
At March 31, total assets were $1.534 billion, net loans $1.130 billion, total liabilities $1.214 billion and total equity $320.6 million. Gross loans were $1.184 billion, up $22.9 million from year-end; the allowance increased to $54.1 million from $46.1 million. Total borrowings, including deposits, were $1.177 billion, with a reported weighted-average contractual rate of 2.77%. Book value per share was $10.08, down from $10.68 at December 31, 2019. The Bank’s Tier 1 leverage ratio was 18.78%; its FDIC-imposed minimum is 15%.
Material changes and credit trends
- Consumer loan balances continued to grow; recreation and home-improvement gross loans were $735.2 million and $255.9 million, respectively. Medallion loans declined to $124.4 million from $130.4 million at year-end.
- Nonaccrual loans increased to $61.6 million, or 5% of gross loans, from $26.5 million, or 2%, at year-end. Total loans 90 days or more past due were $7.0 million, down from $8.7 million at year-end.
- Medallion lending remains a high-risk exposure: 90% of that portfolio was in New York City, and its weighted-average loan-to-value ratio was estimated at 244%. The reported New York City medallion net realizable value fell to $124,500 from $167,000 at year-end.
- Net charge-offs were $8.6 million, versus $12.9 million in Q1 2019. The allowance was 4.57% of gross loans, compared with 3.97% at year-end.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management described the COVID-19 outlook as highly uncertain and warned that pandemic effects could materially harm borrower repayment, collateral values, loan demand, consumer spending, operations, liquidity and financial results. The company increased consumer reserve percentages by 25–50 basis points and began offering payment deferrals. It said the program had not materially affected Q1 results, but could reduce near-term revenue, earnings and cash flow.
Management reported that medallion-loan payments had fallen significantly after March 31 and that it was discussing deferrals with borrowers. Further medallion write-downs, charge-offs or impairments could be material. The NASCAR season was suspended through May 17, 2020. Management also announced that approximately 28% of parent-company employees would be furloughed effective May 11, 2020, citing cash-flow limitations; this excludes employees of consolidated subsidiaries.
Liquidity and refinancing are significant concerns. The company disclosed that it was not in compliance with a financial covenant on one bank note and had requested an amendment; approval was not assured. It had obtained 60–90 day payment deferrals on bank notes, expiring between May and June, and was seeking extensions without assurance of success. The SBA loan maturity for Freshstart had been extended to June 1, 2020. The Bank also had up to $45 million available under Fed Funds lines and $3 million of undisbursed SBA commitments. Management warned that it might need to reduce lending or sell assets below book value if additional liquidity could not be secured.
Other notable items: no common dividends were declared, and management did not anticipate paying them. The company expects the future CECL credit-loss standard to materially affect loan-loss accounting, with adoption deferred for smaller reporting companies to fiscal years beginning after December 15, 2022. Management said there were no legal proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Whether the bank-note covenant amendment and extensions of payment deferrals were obtained, and how upcoming debt maturities were addressed.
- Subsequent borrower payment performance, COVID-related accommodations and the resulting adequacy of loan-loss reserves, especially for consumer and New York City medallion loans.
- Further movement in medallion values, foreclosure collateral recoveries and potential additional write-downs.
- Availability and terms of liquidity sources, including brokered deposits, bank lines, SBA funding and any federal relief; assess the concentration of funding maturities.
- Actual effects of employee furloughs and the suspended racing schedule on costs, operations and cash flow.