Medallion Financial Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The unaudited consolidated results cover the finance company and its subsidiaries, principally Medallion Bank. The Bank originates consumer loans for recreational vehicles, boats, and home improvements and serves fintech partners; the company also conducts commercial mezzanine lending and is winding down legacy taxi-medallion lending.
Financial performance and condition
| Metric | Q1 2022 | Q1 2021 or prior period |
|---|---|---|
| Total interest income | $43.3 million | $37.1 million |
| Net interest income | $35.9 million | $28.7 million |
| Net interest margin | 9.20% | 9.18% |
| Provision for loan losses | $3.2 million | $3.0 million |
| Net income attributable to Medallion Financial Corp. | $9.8 million | $8.4 million |
| Diluted earnings per share | $0.39 | $0.34 |
| Operating expenses | $18.0 million | $14.6 million |
| Net cash provided by operating activities | $24.7 million | $21.1 million |
- Total assets were $1.97 billion at March 31, up from $1.87 billion at December 31, 2021. Gross loans rose to $1.57 billion from $1.49 billion, led by recreation and home-improvement lending; Q1 loan originations were $213.7 million.
- At quarter-end, deposits were $1.33 billion and long-term debt was $220.0 million on the balance sheet. The company reported total borrowings of approximately $1.56 billion, with a weighted-average contractual rate of 1.84%. Net loans were $1.52 billion and the allowance for loan losses was $50.7 million.
- Cash and cash equivalents plus federal funds sold totaled $138.8 million at March 31. The company also reported a $45 million Bank Fed Funds borrowing capacity. Financing activities provided $77.3 million, while investing activities used $87.7 million; cash and cash equivalents, including federal funds sold, increased $14.3 million during the quarter.
- Total equity was $362.0 million; book value per share was $11.50, compared with $11.40 at year-end. The Bank’s Tier 1 leverage ratio was 17.5%, above its FDIC-imposed 15% minimum.
Material changes and operating trends
- Interest income increased with growth in consumer lending, while interest expense fell to $7.4 million from $8.4 million as the average cost of funds declined to 1.99% from 2.61%. Management expects funding costs to rise through the remainder of 2022 as lower-cost deposits mature and are replaced.
- Operating expenses increased $3.4 million, including professional fees of $4.0 million versus $0.5 million, primarily reflecting legal and other corporate matters, including the SEC litigation. Salaries and benefits also rose.
- Consumer lending growth was strong: recreation gross loans increased to $1.00 billion from $822.9 million a year earlier, and home-improvement loans to $473.4 million from $342.1 million. Home-improvement segment net income declined to $3.0 million from $3.2 million; its provision rose to $1.2 million from $0.5 million.
- The commercial mezzanine segment recorded a $1.0 million after-tax loss, versus $0.3 million income, reflecting higher provisions and expenses, including exits of two aged investments. The company disposed of its RPAC racing investment in December 2021; prior-year results included its racing activity.
- Total nonperforming loans were $33.2 million, or 2.11% of gross loans, compared with $36.1 million, or 2.42%, at year-end. Loans 90 or more days past due were $4.2 million, or 0.27% of the portfolio. Net charge-offs were $2.7 million, versus $2.8 million a year earlier.
Outlook, risks, and unusual items
- No formal earnings guidance was provided. Management described continued consumer-lending growth and is exploring potential alternatives for Medallion Bank, including a possible offering, sale, or spin-off; there is no assurance of a transaction.
- The legacy medallion portfolio remains a material uncertainty. All medallion loans are on nonaccrual; the company continued to use an internally determined $79,500 value for New York City medallions despite market transfer prices that may be higher. The portfolio’s estimated weighted-average loan-to-value ratio was approximately 295%. Medallion loans and related collateral in foreclosure totaled about $46.3 million; further write-downs or losses are possible.
- The SEC’s December 2021 civil action alleges securities-law violations relating to 2015–2017 matters. The SEC seeks unspecified disgorgement, interest and penalties, injunctive relief, and an officer-and-director bar. The company and its President and COO intend to defend the case; an adverse outcome could be material, and legal expenses may remain significant. The SEC filed an amended complaint after quarter-end.
- Management cited continuing COVID-19 and economic uncertainty, borrower repayment and collateral risks, interest-rate exposure, and funding and refinancing risk. Approximately $703.6 million of borrowings were scheduled to mature within two years, largely brokered certificates of deposit. The one-year cumulative interest-rate gap was negative $229.5 million.
- The company reinstated a quarterly dividend of $0.08 per share, paid in March, but stated it may reconsider future dividends. On May 1, 2022, the Board authorized a new share-repurchase program of up to $35 million, replacing the prior program.
- The company expects the upcoming CECL credit-loss standard to have a material impact on its estimated loan-loss accounting; adoption was scheduled for fiscal years beginning after December 15, 2022 for the company.
Key facts for investors to verify
- Track deposit renewal rates, funding costs, and the ability to refinance or replace the substantial maturities due over the next two years.
- Assess consumer-loan growth alongside delinquency, charge-off, and allowance trends, particularly in recreation and home-improvement lending.
- Review the assumptions and realizability of medallion collateral values, recoveries, and any further impairment or charge-off exposure.
- Monitor SEC litigation developments, potential penalties or other remedies, and associated legal costs.
- Confirm the effect of CECL adoption on the allowance and capital, and whether the dividend and new repurchase authorization are sustained.