Medallion Financial Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The financial statements are unaudited. Medallion is a specialty finance company focused on consumer loans, primarily recreation and home improvement, alongside commercial lending; its legacy taxi-medallion portfolio is being wound down.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $61.7 million | $47.1 million | $117.6 million | $90.4 million |
| Net interest income | $46.7 million | $38.9 million | $90.3 million | $74.8 million |
| Provision for credit losses | $8.5 million | $7.8 million | $12.5 million | $11.0 million |
| Net income attributable to Medallion | $14.2 million | $13.3 million | $29.5 million | $23.1 million |
| Diluted earnings per share | $0.62 | $0.54 | $1.29 | $0.93 |
- Q2 net interest margin before credit-loss allowance was 8.48%, down from 8.78% a year earlier; average funding cost rose to 3.05% from 2.05%. Management said funding costs may continue rising and pressure margins.
- Operating cash flow was $58.3 million for the first half, versus $51.4 million. Investing activities used $265.3 million and financing activities provided $226.0 million. Cash and cash equivalents, including federal funds sold, ended at $124.6 million.
- At June 30, total assets were $2.52 billion, gross loans $2.16 billion and net loans $2.08 billion. Loans grew 13% from year-end 2022, led by recreation and home-improvement lending.
- Deposits were $1.81 billion. The funding schedule reports approximately $2.06 billion of total outstanding borrowings, including deposits and the Federal Reserve discount-window advance; $28.0 million was drawn at the discount window. Approximately $1.3 billion of borrowings mature within two years.
- Stockholders’ equity was $319.0 million; total equity including non-controlling interest was $387.8 million. Book value was $13.66 per share. The Bank’s Tier 1 leverage ratio was 16.0%.
Material changes and credit quality
- Year-over-year earnings increased, supported by higher loan balances and yields. Higher interest expense, credit-loss provisions and operating costs partly offset the increase.
- Recreation and home-improvement portfolios grew; commercial originations were $7.8 million in the first half, versus $23.7 million in the prior-year period. Gross medallion loans declined to $3.4 million from $13.6 million at year-end.
- The allowance for credit losses was $75.0 million, or 3.48% of gross loans, compared with $63.8 million, or 3.33%, at year-end. Adoption of CECL on January 1 increased the allowance by $13.7 million and reduced opening retained earnings by $9.9 million net of tax.
- Loans 90 or more days past due fell to $6.2 million (0.29% of loans) from $8.9 million (0.47%) at year-end. Nonaccrual loans were $16.1 million versus $32.1 million. First-half gross charge-offs were $31.0 million, partly offset by $15.9 million of recoveries.
- Management reported $10.6 million of medallion-related collections in Q2 and $23.9 million in the first half, generating net recoveries and gains of $6.6 million and $15.6 million, respectively. It cautioned that collections were unusually high and are unlikely to recur at those levels.
Outlook, risks and contingencies
- No formal earnings or loan-growth guidance was provided. Management expects funding costs to rise as deposits reprice and mature, while higher loan yields are expected to flow through gradually; it anticipates some continued net-interest-margin pressure.
- Interest-rate, funding and liquidity risks include a negative one-year cumulative rate gap of $598.0 million, or 26% of rate-sensitive assets, and substantial deposit maturities. Management’s modeled immediate 1% rate increase showed a $1.8 million annualized increase in net income, but a $1.1 million reduction over a one-year period; actual results may differ.
- The SEC’s pending civil litigation concerns alleged securities-law violations relating to 2015–2017. The SEC seeks unspecified disgorgement, interest, penalties and an officer-and-director bar. The company and its COO intend to defend the case; management says an adverse outcome could be material and legal costs may remain significant. Shareholder litigation is also possible.
- Other risks include inflation or recession, changing borrower credit performance, loan and funding-rate repricing differences, and concentration in loan originators. The top ten relationships accounted for 37% of Q2 recreation originations and 61% of home-improvement originations.
- Management continues to consider alternatives for Medallion Bank, including a possible IPO, sale or spin-off, but gave no timetable or assurance of a transaction. A subsequent event: the SBA committed $20.0 million of debenture financing to Medallion Capital; $4.8 million was initially drawable, with the balance subject to a $7.6 million capital contribution or retained-earnings capitalization.
Important facts for investors to verify
- Track deposit pricing, maturities, available borrowing capacity and the company’s ability to fund loan growth while preserving margins.
- Review quarterly credit trends, especially recreation and home-improvement charge-offs, delinquency, CECL assumptions and allowance adequacy.
- Monitor actual medallion recoveries against management’s warning that first-half collections were unusually strong, and assess collateral valuation assumptions.
- Follow SEC litigation developments, potential financial exposure, legal expense and any effect on the COO’s ability to serve.
- Check progress and conditions on the SBA commitment, any Medallion Bank strategic transaction, and the sustainability of dividends.