Medallion Financial Corp. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The interim financial statements are unaudited. Medallion is a specialty finance company focused primarily on consumer recreation and home-improvement lending, alongside commercial mezzanine and legacy taxi-medallion lending.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Interest income | $51.7 | $41.5 | $142.1 | $116.0 |
| Net interest income | $42.0 | $34.1 | $116.9 | $92.2 |
| Provision (benefit) for loan losses | $10.0 | $(0.3) | $21.0 | $2.0 |
| Net income attributable to Medallion | $7.6 | $15.9 | $30.8 | $34.6 |
| Diluted earnings per share | $0.32 | $0.64 | $1.26 | $1.39 |
| Net interest margin | 8.91% | 9.48% | 9.09% | 9.19% |
- Balance sheet: Total assets were $2.20 billion at September 30, up from $1.87 billion at December 31, 2021. Gross loans were $1.86 billion; net loans were $1.79 billion, up from $1.44 billion. Recreation loans were 63% of gross loans and home-improvement loans 31%.
- Credit quality: The allowance for loan losses was $61.5 million, or 3.32% of loans. Nonaccrual loans were $30.8 million (1.7% of the portfolio), compared with $35.6 million (2.4%) at year-end. Loans 90 or more days past due were $6.0 million, or 0.33%, versus $4.0 million, or 0.28%, at year-end.
- Funding and liquidity: Deposits were $1.56 billion and long-term debt on the balance sheet was $219.4 million. The filing reports total borrowings of $1.78 billion, with a 2.16% weighted-average contractual rate. Cash, cash equivalents and federal funds sold totaled $98.2 million at quarter-end.
- Cash flow, first nine months: Operating activities provided $79.0 million; investing activities used $380.8 million; financing activities provided $275.5 million. Cash and cash equivalents, including federal funds sold, ended at $98.2 million.
- Capital and shareholder returns: Book value was $12.56 per share. The Bank’s Tier 1 leverage ratio was 16.2%. The company paid quarterly dividends of $0.08 per share and repurchased 2.39 million shares for $18.8 million during the nine-month period.
Material changes versus comparable periods
- Q3 interest income increased about 25%, reflecting loan growth, but attributable net income fell about 52%. Higher loan-loss provision, lower net interest margin, lower other income and higher expenses weighed on results.
- For the first nine months, interest income rose about 23%, while attributable net income declined about 11%. The allowance provision increased to $21.0 million from $2.0 million.
- Loans grew $366.6 million, or 25%, from year-end, supported by $792.0 million of originations. Management said consumer and commercial growth was significant but expected originations to moderate, particularly if the economy weakens.
- Interest expense rose to $9.7 million in Q3 from $7.4 million as average borrowings and deposit costs increased. The company reported that new certificates of deposit issued in Q3 carried rates up to 3.9%.
- Operating expenses were $19.4 million in Q3 versus $18.7 million; professional fees increased to $3.7 million from $2.0 million, primarily reflecting legal and professional costs that included SEC litigation.
Outlook, risks and unusual items
- Management expects funding costs to rise as deposits mature and are replaced, and expects net interest margin to tighten amid inflation and higher rates. It also expects consumer charge-offs to continue normalizing and potentially increase depending on economic conditions. No numerical earnings or revenue guidance is provided.
- The company’s one-year cumulative interest-rate gap was negative $357.5 million, or 18% of interest-sensitive assets. Its sensitivity analysis estimated that an immediate 1% rate increase would raise annualized net income by $1.0 million under one stated scenario, while a separate one-year impact estimate was a $1.3 million reduction. Management cautions actual outcomes may differ.
- Approximately $909 million of borrowings mature within the next two years, mostly brokered certificates of deposit; $484.8 million of reported borrowings are due within one year. The Bank also had $75 million available under federal-funds lines and $9.5 million of unfunded SBA commitments. Deposit renewal costs and access to funding are key liquidity risks.
- The SEC’s pending civil litigation alleges federal securities-law violations relating to 2015–2017 matters. The company and its President and COO deny the claims and intend to defend themselves. Potential remedies include unspecified disgorgement, interest and penalties, and an officer-and-director bar; the company says an adverse outcome could be material and expects significant legal costs.
- All medallion loans remained nonaccrual and nonperforming. The company used $79,500 as its New York City medallion value for loan-loss assessment despite transfer prices sometimes exceeding that amount; it reported a 330% weighted-average loan-to-value ratio for medallion loans. Further write-downs or losses remain possible.
- Q3 other income included a $1.1 million charge tied to a commercial-related equity investment and gains associated with medallion asset dispositions. The nine-month period included $3.0 million of net equity gains and $5.1 million of medallion collection and disposition recoveries. The prior-year comparison also included the race-team segment, which was disposed of in December 2021.
- Medallion anticipates adopting the current expected credit loss standard (CECL) on January 1, 2023, and estimated an initial 10%–15% increase in the allowance, with earlier loss recognition and potentially greater volatility.
Important facts for investors to verify
- Whether deposit renewal rates, borrowing costs and loan yields develop as management expects, and the resulting effect on net interest margin and liquidity.
- Whether credit deterioration and charge-offs continue to normalize, especially in recreation and commercial lending, and whether the current allowance remains adequate.
- Progress and financial consequences of the SEC litigation, including legal expense, potential penalties and any effect on management.
- The assumptions underlying medallion collateral valuations and the recoverability of medallion loans and foreclosure collateral.
- The eventual CECL adoption impact, including the allowance increase, earnings effects and any changes to credit-loss estimates.