Medallion Financial Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 5, 2020. Financial statements are unaudited. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Medallion is a finance company whose growth strategy centers on Medallion Bank’s consumer lending for recreational vehicles, boats, trailers and home improvements. The company has shifted away from taxi-medallion lending. At September 30, consumer loans represented 91% of net loans; assets under management, including assets serviced for third parties, were $1.717 billion.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total interest income | $37.4 | $34.6 | $108.6 | $96.7 |
| Net interest income | $29.1 | $25.4 | $82.4 | $70.9 |
| Provision for loan losses | $39.7 | $8.3 | $73.2 | $36.9 |
| Net income (loss) attributable to Medallion | $(23.6) | $5.0 | $(41.3) | $(1.3) |
| Diluted loss per share | $(0.97) | $0.20 | $(1.69) | $(0.05) |
Net interest margin was 8.72% for Q3 and 8.58% year to date, approximately unchanged from the respective 2019 periods. Q3 average loan yield fell to 12.30% from 12.60%; management cited payment deferrals, higher reserves and nonaccrual treatment. Lower funding costs partly offset this: average borrowing cost was 2.55% in Q3 versus 3.13% a year earlier.
Other income (loss), net, was $1.0 million in Q3 versus $8.9 million; year-to-date it was a $2.8 million loss versus $17.4 million of income. The 2020 comparison reflects medallion collateral write-downs and a $3.51 million write-off of a non-core sports-related investment; 2019 included a $4.15 million debt-extinguishment gain.
Balance sheet, credit and liquidity
- Total assets were $1.604 billion, up from $1.542 billion at December 31, 2019. Gross loans rose 10% to $1.281 billion; net loans were $1.191 billion.
- The allowance for loan losses increased to $90.5 million from $46.1 million, or 7.07% of gross loans versus 3.97%. Q3 provision included a $24.75 million increase associated with the medallion portfolio.
- All medallion loans were deemed impaired and written down to estimated collateral value. The New York City medallion net realizable value used in the analysis fell to $90,300 from $119,500 at June 30. Medallion loans were $91.3 million gross, all classified as nonperforming; related allowance was $57.8 million.
- Total nonperforming loans were $114.7 million, about 9% of gross loans; loans 90 or more days past due were $13.4 million (1.07%), compared with $8.7 million (0.76%) at year-end. The filing notes COVID-related payment accommodations affected delinquency reporting. All medallion deferrals had ended by September 30; about 5% of deferred consumer loans remained on deferral.
- Cash, cash equivalents and federal funds sold totaled $49.7 million, down from $67.8 million at year-end. Deposits were $1.057 billion and total borrowings were approximately $1.271 billion. Reported debt-to-equity was 4.28x; book value per share was $9.05, down from $10.68.
- For the first nine months, operating cash flow was $56.6 million, investing cash outflow was $171.6 million and financing cash inflow was $97.0 million. Cash, equivalents and restricted cash declined $18.1 million.
- Medallion Bank’s Tier 1 leverage ratio was 15.47%, compared with the FDIC-imposed 15% requirement. The Bank’s other reported capital ratios also exceeded regulatory minimums.
Material changes, outlook and risks
Consumer loan growth—especially recreation and home improvement—supported higher interest income, but did not offset the sharply higher credit provision and collateral losses. The medallion portfolio contracted, and its deterioration drove the quarterly and year-to-date losses. Consumer originations continued; the Bank also began a small fintech strategic-partnership lending program.
Management provided no quantified earnings or loan-growth guidance. It said the pandemic’s duration, borrower repayment capacity, collateral values and economic recovery remained uncertain, and warned further medallion write-downs or charge-offs could be material. It expects the CECL credit-loss accounting standard, whose implementation for the company is deferred until fiscal years beginning after December 15, 2022, to have a material impact.
Liquidity and refinancing are important considerations. The company reported $25 million of new SBA debenture commitment, undrawn at September 30 and subject to conditions. It said it had extended maturing facilities to date; certain bank notes received 180-day payment deferrals that ended in August and were modified to interest-only payments through year-end. The company was in compliance with debt covenants. RPAC had received a $747,000 PPP loan and had not yet applied for forgiveness. No common dividends were declared; the company said it did not currently anticipate paying them.
Management reported ordinary-course litigation but did not expect an adverse decision to have a material financial effect. Future minimum payments under key employment agreements were approximately $12.5 million. The company reported effective disclosure controls and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether medallion collateral values and recoveries—particularly the New York City valuation—support the recorded allowance, and whether additional losses arise.
- Post-deferral performance and credit trends in recreation and home-improvement loans, including delinquency, charge-offs and reserve adequacy.
- Renewal or repayment of near-term funding obligations, access to liquidity and the conditions attached to the undrawn SBA commitment; also monitor the Bank’s 15% leverage requirement.
- The treatment and forgiveness status of RPAC’s PPP loan, and the effect of pandemic-related race disruptions on its results.
- The filing contains an apparent inconsistency in its selected-financial-data balance-sheet comparison, which repeats 2020 figures for the 2019 column; consult the primary financial statements and subsequent filings when checking comparative balance-sheet data.