Medallion Financial Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The financial statements are unaudited. Medallion is a specialty finance company focused primarily on consumer recreation and home-improvement lending through Medallion Bank, alongside commercial mezzanine lending.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Interest income | $67.1 million | $55.8 million |
| Net interest income | $47.9 million | $43.6 million |
| Provision for credit losses | $17.2 million | $4.0 million |
| Income before taxes | $17.9 million | $23.3 million |
| Net income attributable to Medallion | $10.0 million; diluted EPS $0.42 | $15.4 million; diluted EPS $0.67 |
| Net interest margin, before allowance | 8.10% | 8.42% |
| Operating cash flow | $32.3 million | $29.1 million |
At March 31, 2024, total assets were $2.62 billion, gross loans $2.23 billion, net loans $2.14 billion, and the allowance for credit losses $83.8 million. Deposits were $1.88 billion; total borrowings, including deposits and excluding deferred financing costs, were $2.14 billion. Stockholders’ equity was $349.0 million, total equity including non-controlling interests was $417.8 million, and book value was $14.93 per share. Cash and cash equivalents plus federal funds sold totaled $169.1 million.
Cash flows included $32.9 million used in investing activities and $19.9 million provided by financing activities; cash and cash equivalents including federal funds sold increased to $169.1 million from $149.8 million. The company paid a $0.10-per-share dividend and repurchased 264,160 shares for approximately $2.1 million.
Material changes and credit trends
- Interest income rose with loan growth and higher yields, but interest expense increased to $19.2 million from $12.2 million. Average funding cost increased to 3.67% from 2.67%; management said rising deposit and borrowing costs compressed margins.
- Net income attributable to Medallion fell to $10.0 million from $15.4 million. The larger credit-loss provision was associated with higher consumer charge-offs, lower taxi-medallion recoveries, and provisioning for recreation-loan growth.
- Net charge-offs were $17.6 million, versus $11.3 million. Gross charge-offs were $23.0 million, partly offset by $5.4 million of recoveries. Loans 90 days or more past due were $16.1 million, or 0.74% of loans, compared with $16.8 million, or 0.77%, at year-end.
- Gross loans increased $12.5 million from year-end. Recreation loans grew to $1.37 billion; home-improvement loans declined to $752.3 million. Q1 originations were $105.8 million in recreation, $51.6 million in home improvement, and none in commercial lending.
- Other income included $4.2 million of net gains on equity investments, compared with a $0.1 million loss in the prior-year quarter. Q1 2023 included $1.9 million of gains on taxi-medallion loan and asset dispositions.
Outlook, risks and contingencies
- Management expects funding costs to continue rising as certificates of deposit mature and are replaced, and anticipates some continued net-interest-margin pressure. It says higher-rate new loan originations should gradually lift portfolio yields, and that it is moderating growth amid inflation and potential economic weakness.
- The company expects to continue quarterly dividends at $0.10 per share for the foreseeable future, subject to reassessment; future payments are not assured. No specific earnings or revenue guidance was provided.
- Approximately $1.3 billion of borrowings mature within two years, including about $1.2 billion of brokered CDs that have no voluntary withdrawal right. The Bank’s $75 million commercial-bank borrowing arrangements are terminable at any time; $20 million was drawn. A Federal Reserve discount-window facility had about $36.9 million of secured capacity, none used.
- The Bank reported a 16.4% Tier 1 leverage ratio, above the 15% FDIC-imposed minimum, and reported its regulatory capital ratios above stated minimum and “well-capitalized” thresholds. The company said it was compliant with debt covenants.
- The SEC’s pending civil litigation alleges securities-law violations relating to 2015–2017 conduct and disclosures. The SEC seeks injunctive relief, disgorgement, interest, civil penalties, and an officer-and-director bar against the President and COO. The company and executive intend to defend the case; an adverse outcome could be material, and further legal costs or shareholder litigation may arise. The company maintains that it does not expect to change previously reported financial results.
- Management identifies credit-loss estimates, goodwill and intangible-asset impairment, and deferred taxes as critical accounting estimates. Recreation lending has dealer/FSP concentration: the top ten accounted for 45% of Q1 originations; the top ten home-improvement contractors/FSPs accounted for 54%.
Important facts for investors to verify
- Whether credit losses and charge-offs remain elevated, particularly in recreation and home-improvement loans, and how delinquency trends develop.
- Whether deposit repricing and other funding costs continue to outpace loan-yield increases and further reduce margins.
- Near-term deposit maturities, refinancing capacity, and the availability and terms of alternative liquidity.
- Developments in the SEC litigation, potential financial exposure, and associated legal expenses.
- Concentration in key loan-originating partners and the sustainability of loan growth under tighter underwriting standards.
- Future equity-investment valuation gains or losses and the extent to which they affect reported earnings.