Medallion Financial Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Business context
Medallion is a finance company whose primary operating subsidiary, Medallion Bank, originates consumer loans for recreational vehicles, boats and home improvements, and is developing fintech partnerships. The company is winding down legacy taxi-medallion lending. Consumer loans represented 94% of gross loans at quarter-end. Assets under management, including assets serviced for third parties, were $1.8 billion.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $41.5 | $37.4 | $116.0 | $108.6 |
| Net interest income | $34.1 | $29.1 | $92.2 | $82.4 |
| Provision (benefit) for loan losses | $(0.3) | $39.7 | $2.0 | $73.2 |
| Net income (loss) attributable to Medallion | $15.9 | $(23.6) | $34.6 | $(41.3) |
| Diluted earnings (loss) per share | $0.64 | $(0.97) | $1.39 | $(1.69) |
| Net interest margin | 9.48% | 8.72% | 9.19% | 8.58% |
At September 30, total assets were $1.805 billion, net loans $1.372 billion, deposits $1.197 billion, and total equity $338.6 million. Book value was $10.65 per share. The loan-loss allowance was $47.4 million, down from $57.5 million at December 31, 2020. Loans 90 or more days past due were $4.1 million, or 0.29% of loans, versus $6.9 million, or 0.57%, at year-end.
Nine-month operating cash flow was $62.0 million; investing activities used $202.1 million, mainly reflecting loan originations, and financing activities provided $113.5 million. Cash, cash equivalents and federal funds sold ended at $85.4 million, down $26.7 million from the beginning of the year. Total funds borrowed were approximately $1.426 billion, including deposits; the weighted average contractual rate was 1.90%.
Changes and notable items
- Results turned profitable versus the prior-year periods, substantially reflecting much lower loan-loss provisions after the large 2020 medallion portfolio reserve and charge-offs. Consumer lending growth also lifted interest income and net interest income.
- Gross loans rose 15% from December 31, 2020 to $1.420 billion. Recreation loans grew to $933.8 million and home-improvement loans to $398.8 million; medallion loans declined to $14.9 million.
- Nine-month other income included $7.3 million of gains on equity investments and a $4.6 million gain on debt extinguishment. The company also reported $5.4 million of loan-collateral write-downs for the period.
- Medallion Bank’s Tier 1 leverage ratio was 18.2%, above the 15% level specified by the FDIC. No common dividends were declared; management said it does not currently anticipate paying them.
Outlook, risks and contingencies
- Management gave no specific earnings or loan-growth guidance. It is considering alternatives for Medallion Bank, potentially including an IPO, sale, or spin-off, but gave no timetable or assurance of a transaction.
- COVID-19 and the Delta variant remain risks to borrowers, loan demand and collateral values. Management reported minimal consumer loans and no medallion loans remaining on payment deferral at quarter-end, but noted continuing uncertainty about the pandemic’s effects.
- The legacy medallion portfolio remains highly stressed: all medallion loans were nonperforming, and estimated weighted-average loan-to-value was 287%. Medallion values, recoveries and foreclosure collateral could require further losses.
- The SEC is investigating matters from 2015–2017 involving third-party online promotion and historical financial reporting and disclosures. The company is discussing a possible settlement; any fine is not estimable and may be material. Litigation may follow if a settlement is not reached. Management said it does not expect to change previously reported results.
- Funding and rate risks include approximately $669 million of borrowings maturing within two years, primarily brokered certificates of deposit. The company reported a negative one-year cumulative interest-rate gap of $316.2 million and warned that rising funding costs could pressure net interest income. It also expects CECL adoption, scheduled for fiscal years beginning after December 15, 2022, to materially affect credit-loss accounting.
Important facts for investors to verify
- Whether consumer-loan growth and improved credit performance persist, and how loss rates and the allowance change as economic conditions evolve.
- Progress in resolving the SEC investigation, including any settlement terms, fine, litigation or related costs.
- Medallion collateral valuations, foreclosure proceeds and remaining exposure, including assets outside the loan balance.
- Deposit renewal and refinancing needs, available liquidity, and the impact of changing interest rates on funding costs and margins.
- Any concrete decision or transaction regarding Medallion Bank, and the consequences for capital, earnings and shareholders.