MEDALLION FINANCIAL CORP annual report, FY2023

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Medallion Financial Corp. — 2023 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023, with comparisons to 2022 and 2021. Medallion is a specialty finance company focused on consumer recreation and home-improvement lending, alongside commercial mezzanine lending and a shrinking legacy taxi-medallion portfolio. The filing does not provide standalone fourth-quarter results.

Key financial results and position

  • Earnings: Net income attributable to Medallion Financial Corp. was $55.1 million, or $2.37 per diluted share, versus $43.8 million, or $1.83, in 2022. Consolidated net income after taxes, before non-controlling interests, was $61.1 million. Income before taxes was $86.0 million, compared with $67.9 million.
  • Interest revenue and margins: Total interest income increased 28% to $251.0 million. Net interest income rose to $188.1 million from $160.4 million. Gross net interest margin narrowed to 8.38% from 8.73%, as the average cost of funds rose to 3.16% from 2.17%—faster than asset yields repriced.
  • Credit costs: Provision for credit losses was $37.8 million, compared with $30.1 million. Net charge-offs increased to $31.1 million from $16.4 million; loans 90 days or more past due rose to $16.8 million from $8.9 million. The allowance was $84.2 million, or 3.80% of gross loans, versus $63.8 million, or 3.33%.
  • Loan growth and mix: Gross loans grew 16% to $2.216 billion; net loans were $2.132 billion. Recreation loans were $1.336 billion, home-improvement loans $760.6 million, commercial loans $114.8 million, and taxi-medallion loans $3.7 million. Consumer loans represented 95% of gross loans.
  • Cash flow: Operating cash flow was $113.8 million; investing activities used $340.7 million and financing activities provided $271.2 million. Cash and cash equivalents, including federal funds sold, increased by $44.2 million to $149.8 million. Loan originations were a major investing cash use.
  • Debt and liquidity: Total borrowings were $2.117 billion, at a 3.50% weighted-average contractual rate; cash and federal funds sold were $149.8 million. Approximately $679 million of borrowings mature in 2024, largely brokered certificates of deposit, and about $1.2 billion mature within two years. The Bank’s funding relies substantially on brokered deposits. Unused capacity included a $38 million Federal Reserve discount-window facility and up to $75 million of bank lines, both undrawn at year-end.
  • Capital: Medallion Bank’s Tier 1 leverage ratio was 16.2%, meeting the 15% leverage requirement in its FDIC capital-maintenance agreement. Its reported CET1, Tier 1, and total risk-based capital ratios were 13.6%, 16.8%, and 18.1%, respectively.
  • Shareholder returns: Quarterly common dividends were $0.08 per share for three 2023 payments and $0.10 in November after the board raised the rate. Management said it currently expects to continue quarterly dividends at $0.10, but may reassess; future payments are not assured.

Material changes versus 2022

  • Interest income and net interest income increased with loan growth and higher yields, but funding costs rose substantially and margin compressed. Management expects further margin tightening in 2024.
  • Consumer originations totaled $804.4 million in 2023, down from $905.6 million in 2022. Management cited tighter underwriting, efforts to moderate growth and concentration, and lower demand than in the post-pandemic period.
  • Recreation and home-improvement balances grew 13% and 21%, respectively. Recreation originations fell to $447.0 million from $513.1 million; home-improvement originations fell to $357.4 million from $392.5 million.
  • Charge-offs rose, especially in recreation lending. The company also adopted CECL on January 1, 2023, increasing the opening allowance by $13.7 million and reducing beginning retained earnings by $9.9 million net of tax.
  • Reported net income benefited from taxi-medallion recoveries: the segment recorded a $26.3 million credit-loss benefit, and the company collected $45.2 million related to taxi-medallion assets, producing $29.6 million in net recoveries and gains. Management cautioned that collections at this level are unlikely to recur.
  • Debt issuance included $39.0 million of 9.25% senior notes due 2028 and $12.5 million of 9.00% notes due 2033; proceeds partly funded repurchase of $33.0 million of 8.25% notes due 2024. The remaining $3.0 million of those notes was outstanding at year-end.

Outlook, risks and unusual items

  • Outlook: No numerical earnings or origination guidance is provided. Management said it is moderating growth amid inflation and economic uncertainty, expects deposit and funding costs to continue rising as lower-rate deposits mature, and expects net interest margin to tighten in 2024. It also expects taxi-medallion recoveries to be below 2023 levels.
  • Credit and concentration: Recreation lending includes a substantial non-prime component: 38% of the recreation portfolio. The top ten dealer/FSP relationships generated 43% of recreation originations; the top ten home-improvement contractor/FSP relationships generated 57%. Rising delinquencies, loss rates, collateral depreciation, or weaker consumer demand could pressure earnings and reserves.
  • Funding and interest-rate exposure: Heavy use of brokered deposits makes Bank funding dependent on capital status and market access. The company warns that higher funding costs can outpace loan repricing. Its stated sensitivity analysis estimated a hypothetical immediate 1% rate rise would increase annualized net income by $1.6 million, but a 1% rise over a one-year period would reduce net income by $1.9 million under the assumptions used.
  • SEC litigation: The SEC’s pending civil action against the company and its President/COO concerns alleged securities-law violations relating to 2015–2017 conduct. The SEC seeks injunctive relief, disgorgement, interest, civil penalties in unspecified amounts, and an officer/director bar. The company disputes the claims and intends to defend itself; it says outcomes could nevertheless produce material losses, penalties, legal costs, and reputational harm.
  • Taxi-medallion legacy: All taxi-medallion loans remain on nonaccrual. The remaining loan balance was $3.7 million, with $10.0 million of taxi collateral in foreclosure; the company uses an estimated New York medallion value of $79,500 net of liquidation costs. Future collateral values and recoveries remain uncertain.
  • Other items: Operating expenses were $75.6 million, including $37.6 million in salaries and benefits. Professional fees fell to $5.9 million from $13.1 million, reflecting lower legal and professional costs than in 2022, when SEC-related costs were elevated. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Track consumer delinquencies, charge-offs and allowance adequacy, separating CECL effects from underlying credit trends.
  • Assess whether loan yields can keep pace with the repricing of brokered deposits and other funding, and review 2024 deposit maturities and renewal costs.
  • Evaluate the repeatability of 2023 taxi-medallion recoveries and the assumptions used to value collateral in foreclosure.
  • Monitor progress and potential financial or governance consequences of the SEC litigation.
  • Confirm Medallion Bank’s regulatory capital and continued access to brokered deposits, and review the sustainability of the common dividend.