Medallion Financial Corp. — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2022. Medallion is a specialty finance company focused on consumer lending (recreation and home improvement) and commercial lending, with a legacy taxi-medallion portfolio. Its FDIC-insured industrial bank originates consumer loans and funds lending principally through deposits.
Financial performance and position
| Metric | Q2 2022 | Comparable period / balance |
|---|---|---|
| Interest income | $47.1 million | $37.4 million in Q2 2021 |
| Net interest income | $38.9 million | $29.5 million in Q2 2021 |
| Provision for loan losses | $7.8 million | $0.7 million benefit in Q2 2021 |
| Net income attributable to Medallion | $13.3 million; diluted EPS $0.54 | $10.3 million; diluted EPS $0.41 in Q2 2021 |
| Net interest margin | 9.07% | 8.84% in Q2 2021 |
| Operating cash flow | $51.4 million for the six months ended June 30, 2022, versus $39.8 million in 2021 |
- For the first six months, interest income was $90.4 million, net interest income $74.8 million, provision for loan losses $11.0 million, and net income attributable to Medallion $23.1 million, or diluted EPS of $0.93. The comparable 2021 figures were $74.5 million, $58.2 million, $2.3 million, and $18.7 million, or $0.75 per diluted share.
- Total assets were $2.11 billion at June 30, up from $1.87 billion at year-end 2021. Gross loans were $1.73 billion, up from $1.49 billion; net loans were $1.68 billion after a $59.2 million allowance (3.41% of gross loans).
- Deposits were $1.47 billion and long-term debt was $219.4 million on the balance sheet. The company’s debt schedule reports $1.695 billion of total borrowings, including deposits and other funding. Cash and federal funds sold totaled $126.3 million.
- Stockholders’ equity was $294.1 million; book value was $12.13 per share. The Bank’s Tier 1 leverage ratio was 17.0%, above the 15% FDIC-imposed minimum.
- Six-month investing cash flow was a $250.2 million use, principally reflecting $528.1 million of loan originations against $270.0 million of loan principal receipts, sales, and maturities. Financing cash flow was a $200.6 million source, mainly from deposit and borrowing proceeds.
Material changes versus prior periods
- Loan growth drove higher interest income and net interest income: gross loans increased 16.5% from December 31, 2021. Recreation loans reached $1.10 billion and home improvement loans $526.3 million; commercial loans were $96.9 million.
- Q2 provision expense rose sharply from the prior-year benefit. For the six-month period, the provision increased to $11.0 million from $2.3 million.
- Quarterly net charge-offs were net recoveries of $0.7 million, compared with $10.2 million of net charge-offs in Q2 2021; first-half net charge-offs were $2.0 million versus $12.9 million. Management cautioned that consumer charge-offs, currently below historical levels, may return to normal over time.
- Average funding cost fell to 2.05% in Q2 from 2.36% a year earlier, while average interest-earning asset yield decreased to 11.00% from 11.17%. Management attributed yield pressure in part to portfolio mix, including growth in lower-yielding home improvement loans.
- Professional fees increased to $4.4 million in Q2 from $2.2 million, primarily reflecting legal and other corporate matters, including SEC litigation.
- Q2 2021 included race-team activity and gains on debt extinguishment; the race-team investment was disposed of in December 2021. Q2 2022 other income included a $4.2 million gain on an equity investment exit and medallion-asset disposition gains.
Outlook, risks, contingencies, and unusual items
- Management expects continued lending growth, but does not expect originations to maintain the recent pace long term. It began raising rates on new home improvement loans in Q2 and anticipated raising new recreation-loan rates in the second half of 2022. It also expected funding costs to rise as deposits mature and are replaced or raised to support growth.
- Liquidity depends significantly on brokered certificates of deposit. Approximately $794 million of borrowings mature within two years, mostly brokered CDs. The Bank also had $45 million available under Fed Funds lines and the SBICs had $9.5 million of undrawn SBA commitments. Management cautioned that additional funding may not be available on favorable terms or at all.
- The company reported a negative one-year cumulative interest-rate gap of $230.1 million, or 12% of interest-sensitive assets. Its modeled immediate 1% rate increase showed a $1.3 million annualized increase in net income, but the modeled one-year impact was a $0.3 million reduction; management cautioned actual results could differ.
- All medallion loans remain on nonaccrual and impaired. New York City medallion collateral was valued internally at $79,500 despite market transfer prices sometimes exceeding that level. Medallion loans had an estimated weighted-average loan-to-value ratio of 320%; the portfolio remains subject to further losses or valuation changes.
- The SEC’s December 2021 civil complaint alleges securities-law violations concerning 2015–2017 matters. The company and its COO moved to dismiss the amended complaint in August 2022 and intend to defend the case. Potential disgorgement, interest, penalties, an officer-and-director bar, legal costs, and related shareholder litigation could be material; amounts sought are unspecified.
- Management expected adoption of the CECL credit-loss standard, effective for the company after December 15, 2022, to materially affect estimated credit-loss accounting. COVID-19’s future effects on borrowers, the economy, and loan demand remain uncertain.
- The board reinstated a quarterly $0.08-per-share dividend in March 2022 and authorized a $35 million repurchase program in May. The company repurchased 1,272,150 shares for approximately $10.0 million in the first half, leaving about $25.0 million authorized. Future dividends are not assured.
- The company reported effective disclosure controls as of June 30, 2022, and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- How loan growth, new-loan pricing, deposit repricing, and borrowing costs affect net interest income and margins.
- Credit performance and allowance adequacy, particularly as consumer charge-offs normalize and commercial reserves increase.
- Medallion collateral values, recoveries, and the basis for the $79,500 New York City valuation assumption.
- Deposit retention and refinancing capacity for the approximately $794 million of borrowings maturing within two years, alongside available liquidity facilities.
- Developments and potential financial consequences of the SEC litigation, including legal expenses and any related shareholder claims.
- The filing’s six-month net interest margin figures are inconsistent: the selected financial data reports 9.50%, while the average-balance discussion reports 9.15%. Verify the intended figure against the filed financial statements.