Medallion Financial Corp. — Q2 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2020; balance-sheet comparisons are primarily with December 31, 2019. Medallion Financial is a finance company whose growth strategy centers on consumer loans for recreational vehicles, boats and home improvements through Medallion Bank. At quarter-end, consumer loans represented 87% of net loans; medallion loans represented 7% and commercial loans 6%. Assets under management, including assets serviced for third parties, were $1.764 billion.
Financial performance and position
- Q2 earnings: Net interest income was $26.8 million, up from $23.2 million a year earlier. Provision for loan losses was $16.9 million versus $15.2 million. Net loss attributable to Medallion Financial was $4.0 million, or $0.16 per share, compared with a $7.5 million loss, or $0.31 per share.
- First-half earnings: Net interest income was $53.3 million, up from $45.5 million. Provision was $33.5 million versus $28.5 million. Net loss attributable to Medallion Financial was $17.6 million, or $0.72 per share, versus a $6.3 million loss, or $0.26 per share. The year-over-year deterioration included higher loan-loss provisions, greater collateral write-downs, a $3.6 million equity-investment impairment, and the absence of the prior-year $4.1 million debt-extinguishment gain.
- Interest and margins: Q2 net interest margin was 8.23%, down from 8.46%; first-half margin was 8.48%, essentially unchanged from 8.49%. Average borrowing cost fell to 2.75% in Q2 from 3.14%, while average interest-earning asset yield declined to 10.95% from 11.67%.
- Loans and credit costs: Gross loans increased 9% from year-end to $1.261 billion; net loans were $1.194 billion. The allowance rose to $67.0 million from $46.1 million, or 5.31% of gross loans versus 3.97%. First-half net charge-offs were $12.6 million, down from $24.2 million, but payment deferrals and CARES Act reporting relief affect comparability.
- Cash flow: First-half operating cash flow was $33.4 million, compared with $26.2 million a year earlier. Investing activities used $120.4 million and financing activities provided $123.1 million. Cash, cash equivalents and federal funds sold totaled $103.9 million at June 30, versus $67.8 million at year-end.
- Debt and liquidity: Total borrowings were $1.296 billion, up from $1.170 billion at year-end; the reported weighted-average contractual rate was 2.48%. Deposits were $1.075 billion. Total equity was $318.3 million, including $70.7 million of non-controlling interest; book value was $9.98 per share, down from $10.68. The Bank’s Tier 1 leverage ratio was 16.96%, above its required 15% threshold. No common dividends were declared.
Material changes and notable items
- Consumer lending expanded: recreation loans rose to $786.8 million and home-improvement loans to $282.1 million from $713.3 million and $247.3 million, respectively, at year-end. Medallion loans declined to $120.3 million from $130.4 million.
- Reported loans 90 or more days past due increased to $15.6 million (1.26% of loans) from $8.7 million (0.76%) at year-end. Nonaccrual loans rose to $81.5 million from $26.5 million.
- Management reported $133.3 million of loans with payment deferrals outstanding at June 30, including $98.2 million of medallion loans. Without applicable deferral treatment, management estimated loans 90 or more days past due could have been substantially higher; the filing gives a potential $115.2 million figure under its stated assumptions.
- New York City medallion collateral values weakened: the stated net realizable value fell to $119,500 from $167,000 at year-end. Medallion lending remains concentrated in New York City, and the segment generated a first-half net loss of $18.8 million after tax.
- Q2 other income included lower collateral write-downs than the prior-year quarter, partly offset by lower race winnings amid the COVID-19 schedule interruption. First-half other income was a net loss of $3.7 million, versus $8.5 million of income in the prior-year period.
Outlook, risks and contingencies
Management gave no earnings or revenue guidance. It cautioned that the duration and economic effects of COVID-19 remain uncertain and may further impair borrowers’ ability to pay, collateral values, loan demand and consumer spending. The company increased consumer reserve assumptions and medallion general reserves; it warned that deferrals may not prevent further delinquencies, charge-offs or impairments. Taxi ridership and medallion payments had fallen sharply, and management was evaluating options for the medallion portfolio.
Liquidity and refinancing are material concerns. Certain bank-note payment deferrals ended in May and June, and the company was seeking extensions without assurance they would be granted. Significant deposits and other obligations mature within one year; the filing also identifies near-term SBA and bank-note maturities. A July 31, 2020 SBA commitment for up to $25 million was obtained after quarter-end, but $16.5 million of it depends on an $8.25 million capital infusion or retained earnings; $8.5 million was reserved to replace 2021-maturing debentures. Management said additional funding may not be available on favorable terms or at all. The company furloughed approximately 28% of parent-company employees effective May 11. It reported ordinary-course litigation with no known proceeding expected to have a material adverse effect, and compliance with debt covenants at June 30.
Most important facts for investors to verify
- How many deferred loans resume payment, and how reported delinquencies and losses change when accommodations expire; assess the underlying medallion exposure separately.
- Whether the $67.0 million allowance adequately reflects COVID-19 credit deterioration, collateral values and the expected adoption of CECL, which management expects to materially affect credit-loss accounting.
- Whether bank-note deferral extensions and upcoming debt maturities are resolved, and whether the SBA commitment’s capital conditions can be met.
- Whether Medallion Bank maintains regulatory capital above its 15% Tier 1 leverage requirement and whether deposits and other funding remain available.
- How consumer loan growth, yields, charge-offs and margins develop, and whether taxi-market weakness causes additional medallion collateral write-downs.