Medallion Financial (MFIN) - 2019 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's unaudited consolidated financial statements for the period ended September 30, 2019, reflect its transition to Bank Holding Company Accounting from Investment Company Accounting effective April 2, 2018, resulting in the consolidation of subsidiaries like Medallion Bank and a strategic shift towards consumer lending, with total assets reaching $1.52 billion Basis of Preparation The company transitioned to Bank Holding Company Accounting from Investment Company Accounting effective April 2, 2018, consolidating subsidiaries like Medallion Bank and shifting focus to consumer finance - Effective April 2, 2018, the Company withdrew its election to be regulated as a business development company (BDC) and began reporting under Bank Holding Company Accounting, which requires the consolidation of its subsidiaries, including Medallion Bank[10][11][15] - The company has strategically transitioned away from medallion lending to focus on its growing consumer finance portfolio, originated through Medallion Bank[12] - Total assets under management grew to $1.649 billion as of September 30, 2019, from $1.522 billion at the end of 2018[12] Consolidated Financial Statements The unaudited consolidated financial statements present the company's financial position and performance, reflecting key balance sheet and income statement metrics for Q3 2019 and year-to-date Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | Sep 30, 2019 ($ in thousands) | Dec 31, 2018 ($ in thousands) | | :--- | :--- | :--- | | Net loans receivable | 1,099,169 | 981,487 | | Total assets | 1,519,754 | 1,381,846 | | Deposits | 962,987 | 848,040 | | Total liabilities | 1,226,964 | 1,091,642 | | Total equity | 292,790 | 290,204 | Consolidated Statement of Operations Highlights (Unaudited) | Income Statement Item | Q3 2019 ($ in thousands) | Q3 2018 ($ in thousands) | Nine Months 2019 ($ in thousands) | | :--- | :--- | :--- | :--- | | Net interest income | 25,415 | 24,265 | 70,930 | | Provision for loan losses | 8,337 | 18,205 | 36,851 | | Net income (loss) attributable to Medallion | 4,975 | (4,697) | (1,297) | | Diluted net income (loss) per share | $0.20 | $(0.19) | $(0.05) | Notes to Consolidated Financial Statements Detailed notes provide insights into loan portfolio composition, allowance for loan losses, nonaccrual loans, and accounting policy changes like CECL deferral and VIE deconsolidation Loan Portfolio Composition (Gross) | Loan Category | Sep 30, 2019 ($ in thousands) | % of Total | Dec 31, 2018 ($ in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Recreation | 706,393 | 62% | 587,038 | 58% | | Home improvement | 230,726 | 20% | 183,155 | 18% | | Commercial | 68,209 | 6% | 64,083 | 6% | | Medallion | 136,954 | 12% | 183,606 | 18% | | Total Gross Loans | 1,142,282 | 100% | 1,017,882 | 100% | Allowance for Loan Losses Activity (Nine Months Ended Sep 30, 2019) | Activity ($ in thousands) | Amount | | :--- | :--- | | Beginning Balance (Dec 31, 2018) | 36,395 | | Total Charge-offs | (39,248) | | Total Recoveries | 9,115 | | Net Charge-offs | (30,133) | | Provision for loan losses | 36,851 | | Ending Balance (Sep 30, 2019) | 43,113 | - Total nonaccrual loans decreased to $27.1 million (2% of gross loans) as of September 30, 2019, down from $34.9 million (3% of gross loans) at December 31, 2018[106] - The company will defer implementation of the new CECL credit loss standard to fiscal years beginning after December 15, 2022, as permitted for smaller reporting companies[93] - Effective October 31, 2018, the company deconsolidated the Taxi Medallion Loan Trust III (Trust III), a variable interest entity (VIE), as it was no longer determined to be the primary beneficiary[258] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's strategic shift from medallion lending to consumer finance, which now constitutes 84% of the net loan portfolio, with Q3 2019 results showing a return to profitability driven by higher net interest income and a lower provision for loan losses Results of Operations Q3 2019 vs. Q3 2018 Performance | Metric | Q3 2019 | Q3 2018 | | :--- | :--- | :--- | | Net Income (Loss) Attributable to Stockholders | $4,975,000 | $(4,697,000) | | Diluted EPS | $0.20 | $(0.19) | | Net Interest Income | $25,415,000 | $24,265,000 | | Provision for Loan Losses | $8,337,000 | $18,205,000 | | Net Interest Margin | 8.71% | 7.94% | - The improvement in net income for Q3 2019 was driven by a lower provision for loan losses, reflecting a smaller medallion portfolio and stable medallion values, and continued growth in the higher-yielding consumer lending segments[343][344][345] - For the nine months ended September 30, 2019, the company recorded a net loss of $1.3 million, which included a one-time gain of $4.1 million on debt extinguishment[138][354] Loan Portfolio and Credit Quality - The consumer loan portfolio (Recreation and Home Improvement) grew significantly, with total originations of $351.8 million in the first nine months of 2019[287] Loans 90+ Days Past Due as a % of Total Portfolio | Date | Percentage | | :--- | :--- | | Sep 30, 2019 | 0.7% | | Dec 31, 2018 | 2.0% | | Sep 30, 2018 | 1.3% | - The estimated weighted average loan-to-value ratio of the medallion loan portfolio was approximately 202% as of September 30, 2019, an improvement from 220% at year-end 2018[300] Segment Performance - Recreation Lending: This segment remains the primary earnings driver, accounting for 75% of interest income and generating $7.1 million in net income in Q3 2019[310][313] - Home Improvement Lending: This segment continues to grow, contributing $1.9 million in net income for Q3 2019[317] - Medallion Lending: The segment recorded a net loss of $4.2 million in Q3 2019 due to continued non-accruals, charge-offs, and portfolio contraction, with New York City medallions representing 88% of this portfolio[325][327][328] Liquidity and Capital Resources - Primary sources of liquidity include brokered certificates of deposit from Medallion Bank, SBA debentures, and various credit facilities, with deposits constituting 81% of total debt as of September 30, 2019[385][390] - In 2019, the company enhanced liquidity by completing private placements of 8.25% unsecured notes, raising a total of $36 million[387] - The one-year cumulative interest rate gap was negative $301.9 million, or 25% of interest-rate sensitive assets, indicating a liability-sensitive position in the short term[384] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its quantitative and qualitative disclosures about market risk since its Annual Report on Form 10-K for the year ended December 31, 2018 - There has been no material change in market risk disclosures from the company's 2018 Form 10-K[410] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2019, with no material changes to internal controls over financial reporting occurring during the quarter - The company's disclosure controls and procedures were evaluated and found to be effective as of September 30, 2019[411] - No changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the company's internal control were identified during the quarter[412] PART II—OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings incidental to its ordinary course of business, with management believing no pending or threatened proceedings will have a material adverse effect on its financial condition or results of operations - Management believes that no current legal proceedings are expected to have a material adverse impact on the company's financial condition or results[414] Risk Factors There have been no material changes to the company's risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 - No material changes in risk factors were reported compared to the 2018 Form 10-K[415] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any of its shares during the third quarter of 2019, with approximately $22.9 million remaining authorized for future repurchases under the existing stock repurchase program - No shares were repurchased during the three months ended September 30, 2019, and the company has $22,874,509 remaining under its authorized stock repurchase program[416] Exhibits This section lists the exhibits filed with the Form 10-Q, including a lease agreement amendment, CEO and CFO certifications pursuant to the Sarbanes-Oxley Act, and XBRL data files - The exhibits filed with this report include CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL interactive data files[418]