Medallion Financial Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. The financial statements are unaudited. Medallion is a specialty finance company focused on consumer lending—principally recreation and home-improvement loans—and commercial lending, alongside a legacy taxi-medallion portfolio.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $65.9 million | $51.7 million | $183.5 million | $142.1 million |
| Net interest income | $48.8 million | $42.0 million | $139.1 million | $116.9 million |
| Provision for credit losses | $14.5 million | $10.0 million | $27.0 million | $21.0 million |
| Net income attributable to Medallion | $11.2 million | $7.6 million | $40.8 million | $30.8 million |
| Diluted earnings per share | $0.48 | $0.32 | $1.77 | $1.26 |
| Net interest margin, before allowance | 8.35% | 8.63% | 8.42% | 8.79% |
- At September 30, total assets were $2.56 billion, up from $2.26 billion at December 31, 2022. Gross loans were $2.20 billion, up 15%; recreation loans were $1.35 billion and home-improvement loans $750.5 million.
- The allowance for credit losses was $79.1 million, or 3.59% of gross loans, versus $63.8 million, or 3.33%, at year-end. The January 2023 adoption of CECL increased the allowance by $13.7 million and reduced opening retained earnings by $9.9 million after tax.
- Credit indicators included $20.6 million of nonaccrual loans (0.9% of gross loans), down from $32.1 million (1.7%) at year-end; loans 90 or more days past due were $7.0 million, down from $8.9 million. Nine-month net charge-offs rose to $25.5 million from $9.7 million in the prior-year period.
- Net cash provided by operating activities was $94.1 million for the nine months, versus $79.0 million. Investing activities used $328.2 million and financing activities provided $256.1 million. Cash and federal funds sold totaled $127.6 million at period-end.
- Funding included $1.86 billion of deposits and $218.1 million of long-term debt, plus $18.5 million of short-term borrowings on the balance sheet. Gross outstanding borrowings, including deposits, were reported as $2.10 billion, at a 3.35% weighted-average contractual rate. Stockholders’ equity was $328.5 million; total equity including non-controlling interest was $397.3 million. Book value per share was $14.06.
Changes and notable items
- Year-over-year loan growth and higher loan yields increased interest income. Average loan yield before allowance rose to 11.28% in Q3 from 10.61%; however, funding costs rose faster, with average borrowing cost at 3.28% versus 2.20%. The gross net interest margin narrowed to 8.35% from 8.63%.
- Q3 net income improved despite a higher credit-loss provision. Nine-month earnings also increased; taxi-medallion recoveries contributed, while the company cautioned that recent collection levels were unusually high and may not recur.
- In September, the company issued $39 million of 9.25% senior notes due 2028 and repurchased $33 million of its 8.25% notes due 2024. The Bank had $65 million available under commercial-bank lines and approximately $37 million of unused Federal Reserve discount-window capacity. Management reported covenant compliance.
- The company paid a $0.08-per-share dividend in August. On October 24, the board authorized a $0.10 quarterly dividend, payable November 30, 2023. No shares were repurchased during the first nine months; approximately $20.0 million remained authorized under the repurchase program.
- After quarter-end, the company received $9.4 million from a taxi-medallion borrower and expected to recognize an approximately $8.0 million recovery in Q4 2023.
Outlook, risks and contingencies
- No specific earnings or loan-growth guidance was provided. Management said it is moderating growth in response to inflation and potential economic weakness. It expects funding costs to rise as deposits mature and are replaced, and anticipates some continued margin pressure as loan repricing lags funding-cost increases.
- Approximately $1.3 billion of borrowings mature within the next two years, primarily brokered certificates of deposit. Management noted that liquidity could be affected by funding-market conditions and the potential difficulty of selling illiquid loans or investments without a discount.
- Interest-rate sensitivity is material: the one-year cumulative rate gap was negative $475.5 million, or 20% of interest-sensitive assets. The filing’s modeled immediate 1% rate increase showed a $2.5 million annualized increase in net income under one measure, but a $1.1 million reduction over a one-year period under another; management cautioned that actual results may differ.
- A pending SEC civil action, filed in 2021 and concerning alleged conduct and reporting from 2015–2017, seeks injunctive relief, disgorgement, penalties and an officer-and-director bar. The company and its president/COO intend to defend the case; the potential financial impact is unspecified and could be material. Further legal expense and shareholder litigation are possible.
- Taxi-medallion loans remain a legacy workout portfolio: all are nonaccrual, and collateral valuations involve estimates. The company also cited inflation, recession risk, borrower repayment capacity, consumer credit losses, interest-rate movements and regulatory oversight as uncertainties.
- Management said disclosure controls and procedures were effective as of September 30, 2023, and reported no material quarterly change in internal control over financial reporting. CEO Alvin Murstein notified the company that his employment will end May 28, 2027; President/COO Andrew Murstein’s agreement was amended to provide for annual three-year renewals beginning in 2024, subject to its terms.
Important facts for investors to verify
- Whether consumer-loan delinquencies, charge-offs and provisions stabilize as the recreation and home-improvement portfolios expand.
- Deposit renewal pricing, the pace of funding-cost increases, and the effect on net interest margin and earnings.
- The timing and consequences of the SEC litigation, including any damages, penalties, management restrictions or additional legal costs.
- Whether taxi-medallion recoveries and collateral values support recorded estimates, and how much of the unusually high 2023 collections can recur.
- The ability to refinance upcoming deposit and debt maturities, maintain liquidity and preserve Bank regulatory capital; the Bank’s Tier 1 leverage ratio was 16.1% versus a 15% FDIC-imposed minimum.
- Whether the proposed Bank alternatives—such as a sale, spin-off or IPO—advance; the filing provides no timeline or assurance of a transaction.