Business context and reporting period
Medallion Financial Corp. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It is a finance company whose principal operating subsidiary, FDIC-insured Medallion Bank, originates consumer loans for recreational vehicles, boats and home improvements. The company is shifting away from taxi-medallion lending toward consumer finance; consumer loans were 82% of net loans at quarter-end. Assets under management were $1.62 billion.
Comparisons require care: Medallion withdrew its BDC election effective April 2, 2018 and began consolidating the Bank and other subsidiaries. Second-quarter 2018 results use the new accounting basis, but first-half 2018 figures combine periods reported under different accounting bases.
Financial results and position
Dollar amounts below are in millions unless otherwise noted.
- Quarterly results: Interest income was $32.0, versus $32.6 in Q2 2018; net interest income was $23.2, versus $24.7. The company reported a $7.5 net loss attributable to Medallion Financial, or $0.31 per diluted share, compared with a $14.6 million loss, or $0.60 per share, a year earlier. No common dividends were declared.
- Six-month results: Interest income was $62.1 and net interest income $45.5. Net loss attributable to the company was $6.3, or $0.26 per diluted share. Results included a $4.1 gain on extinguishment of debt in Q1.
- Margins and funding costs: Net interest margin was 8.46% in Q2, compared with 8.57% in Q2 2018. Average loan yield was 12.35%, up from 11.79%; average borrowing cost rose to 3.14% from 2.65%.
- Loans and credit: Gross loans were $1.088 billion, up from $1.018 billion at year-end 2018. The allowance for loan losses was $40.7 million, or 3.74% of loans. Six-month net charge-offs were $24.2 million. Loans more than 90 days past due were $8.3 million, down from $20.2 million at year-end; nonaccrual loans were $26.9 million. Medallion loans were $145.9 million, with a reported weighted-average loan-to-value ratio of approximately 210%.
- Cash flow and liquidity: For the six months, operating cash flow was $35.4 million, investing cash flow was negative $117.2 million, and financing cash flow was $96.3 million. Cash, cash equivalents and federal funds sold totaled $72.1 million at June 30.
- Debt and capital: Deposits were $927.7 million and total funds borrowed were $1.155 billion; total liabilities were $1.196 billion and total equity $285.5 million. Book value was $10.49 per share, versus $10.75 at year-end. Medallion Bank’s Tier 1 leverage ratio was 15.96%; an FDIC condition requires at least 15% and restricts the Bank’s ability to pay dividends to the parent.
Changes, outlook, risks and unusual items
- Consumer lending continued to expand while the medallion portfolio contracted. Recreation and home-improvement originations drove loan growth; medallion balances fell from $183.6 million at year-end to $145.9 million.
- The Q2 loan-loss provision was $15.2 million, below $30.6 million in Q2 2018. Management attributed the decrease partly to a smaller medallion portfolio and stable New York medallion values during the quarter. Chicago medallion values fell from $29,500 to $19,500, and collateral valuation adjustments reduced income.
- The company reported $52.4 million of loan collateral in process of foreclosure, primarily related to medallion loans. Management cited continued collection, foreclosure and collateral-liquidation activity. It also noted that collateral may not be adequate and that portfolio illiquidity could limit the ability to sell assets at favorable prices.
- Management gave no specific earnings or growth guidance. It described consumer finance as its strategic focus, is exploring additional funding options, and cautioned that additional liquidity may not be available on favorable terms or at all. The company faces refinancing and interest-rate risks; its one-year cumulative interest-rate gap was negative $253.2 million, or 21% of rate-sensitive assets.
- Near-term financing warrants attention: a facility was extended in July 2019, and the company paid $10.8 million at maturity on another facility. A separate lender’s waiver covering certain repayment obligations on a $3.1 million term note expired August 16, 2019; the company said it was seeking an extension, with no assurance of success.
- The company expects the upcoming CECL credit-loss accounting standard to have a significant impact on its loan-loss accounting, but had not quantified that impact. A $7 million Q2 sponsorship agreement with Victory Junction, a charity whose board includes RPAC minority shareholder Richard Petty, is a notable related-party matter.
- Management reported disclosure controls were effective and no material change in internal controls during the quarter. It said ordinary-course litigation was not expected to have a material adverse effect; no material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether the lender waiver was extended and how upcoming facility maturities were refinanced or repaid.
- Medallion collateral values, foreclosure recoveries and the adequacy of reserves, particularly given the 210% weighted-average loan-to-value ratio.
- The eventual CECL transition impact and trends in consumer-loan delinquencies, charge-offs and provisions.
- The availability, cost and maturity profile of deposit and other funding, and the effect of higher rates on margins and liquidity.
- The terms, approval and financial rationale for the Victory Junction sponsorship agreement and other related-party arrangements.