Medallion Financial Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Medallion is a specialty finance company focused on consumer recreation and home-improvement lending, commercial mezzanine lending, and a legacy taxi-medallion portfolio. Consumer loans were 95% of gross loans. The unaudited results may not indicate future performance.
Key financial results
Dollars in millions, except per-share data and percentages.
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Interest income | $55.8 | $43.3 |
| Interest expense | $12.2 | $7.4 |
| Net interest income | $43.6 | $35.9 |
| Provision for credit losses | $4.0 | $3.2 |
| Income before taxes | $23.3 | $16.2 |
| Net income attributable to Medallion | $15.4 | $9.8 |
| Diluted EPS | $0.67 | $0.39 |
| Net interest margin | 8.42% | 8.91% |
| Return on average assets | 2.99% | 2.41% |
| Return on average equity | 18.50% | 12.77% |
| Operating cash flow | $29.1 | $24.7 |
- Interest income grew 29% year over year, mainly on growth in recreation and home-improvement loans. Net income attributable to Medallion rose about 56%.
- Higher funding costs partly offset loan growth: average cost of funds increased to 2.67% from 1.99%, and interest expense rose about 66%. Management expects funding costs to rise further and net interest margin to remain under pressure.
- Gross loans were $1.984 billion at quarter-end, up $67.2 million from December 31, 2022. Recreation loans were $1.213 billion; home improvement $669.6 million; commercial $95.3 million; medallion $4.1 million; and strategic-partnership loans $1.8 million.
- Allowance for credit losses was $70.3 million, or 3.54% of gross loans, versus $63.8 million, or 3.33%, at year-end. The company adopted CECL on January 1, 2023, increasing the allowance by $13.7 million and reducing opening retained earnings by $9.9 million after tax.
- Net charge-offs were $11.3 million, versus $2.7 million in Q1 2022; the charge-off ratio was 2.35% versus 0.75%. Management attributed the higher consumer charge-offs partly to normalization from unusually low prior-year levels. Loans 90 or more days past due fell to $4.7 million from $8.9 million at year-end; the company said a new bankruptcy charge-off practice for recreation loans contributed to the decline.
Financial position and liquidity
- Total assets were $2.352 billion at March 31, 2023, versus $2.260 billion at December 31, 2022. Net loans were $1.914 billion; total equity was $375.2 million, including $68.8 million of non-controlling interest. Book value per share was $13.14.
- Deposits were $1.695 billion and long-term debt $175.9 million; short-term borrowings were $38.5 million. Total borrowings, excluding deferred financing costs, were approximately $1.914 billion, with a 2.79% weighted-average contractual rate. Debt-to-equity was 5.1x versus 4.3x in the comparable prior-year measure.
- Cash, cash equivalents, and federal funds sold totaled $132.4 million, up from $105.6 million at year-end. Cash flow was $29.1 million provided by operating activities, $81.4 million used in investing, and $79.1 million provided by financing.
- About $1.1 billion of borrowings mature within two years, primarily brokered certificates of deposit. Management identified continued access to deposits and other funding as important to liquidity.
- The Bank’s Tier 1 leverage ratio was 16.4%, above the 15% FDIC condition and the 5% well-capitalized threshold. The company reported a negative one-year cumulative interest-rate gap of $462.9 million, or 22% of interest-sensitive assets.
Outlook, significant items, and risks
- No formal earnings or revenue guidance was provided. Management expects funding costs to increase as maturing deposits are replaced, margin pressure to continue, and consumer charge-off expense to normalize or potentially increase depending on economic conditions.
- Medallion collections generated a $7.1 million provision benefit in Q1, and contributed to $1.9 million of gains on loan and medallion sales. Management cautioned that collections were substantially above normal and are not expected to recur at that level. All remaining medallion loans were nonaccrual; management continued to use a $79,500 New York City medallion value in its collateral assessment.
- The SEC’s pending civil litigation alleges securities-law violations relating to 2015–2017 matters. The SEC seeks unspecified disgorgement, interest, penalties, injunctive relief, and an officer-and-director bar against the President and COO. The company says it intends to defend the case; an adverse outcome could be material, and legal costs may remain significant.
- Subsequent event: on April 12, 2023, a correspondent bank terminated a $40 million unsecured line, as part of action affecting its correspondent relationships nationally. By April 30, total short-term lines were $72.4 million ($35.0 million unsecured and $37.4 million secured), down from $88.6 million at March 31. Management considered this sufficient given brokered-deposit stability.
- The filing notes inflation, recession risk, interest-rate exposure, deposit repricing and maturities, loan-credit risk, and uncertainty in collateral values. The Bank’s certificates of deposit are largely brokered. The company also continues to consider strategic alternatives for the Bank but gave no timetable or assurance of a transaction.
- The Board paid a $0.08-per-share dividend in March; future dividends are not assured. No shares were repurchased in Q1, and approximately $20.0 million remained authorized under the repurchase program.
- CEO Alvin Murstein notified the company that he will not renew his employment term; his employment is scheduled to expire May 28, 2027, unless earlier terminated. The COO’s agreement was amended to provide for a term through May 28, 2027, with annual renewals under specified conditions.
Investor verification priorities
- Track deposit renewal rates, funding costs, liquidity-line availability, and the roughly $1.1 billion of borrowings maturing within two years.
- Reconcile credit performance by loan segment, including charge-offs, delinquencies, CECL assumptions, and the sustainability of medallion recoveries.
- Monitor the SEC litigation, potential penalties or restrictions, related legal expense, and any shareholder litigation.
- Assess whether loan growth and repricing can offset rising funding costs and the decline in net interest margin.
- Review the April correspondent-line termination and subsequent liquidity position, as well as any developments in the Bank’s strategic alternatives.