Medallion Financial (US:MFIN)2022-11-03 20:03PART I – FINANCIAL INFORMATION Financial Statements Total assets increased to $2.2 billion by September 30, 2022, driven by loan growth, while nine-month net income decreased to $30.8 million due to higher loan loss provisions and professional fees Consolidated Balance Sheet Highlights (Unaudited) | (Dollars in thousands) | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $24,754 | $64,482 | | Net loans receivable | $1,793,975 | $1,438,758 | | Total assets | $2,199,541 | $1,873,057 | | Liabilities & Equity | | | | Deposits | $1,555,832 | $1,250,880 | | Long-term debt | $219,448 | $219,973 | | Total liabilities | $1,839,652 | $1,517,229 | | Total equity | $359,889 | $355,828 | Consolidated Statements of Operations Highlights (Unaudited) | (Dollars in thousands, except per share data) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net interest income | $116,850 | $92,235 | | Provision for loan losses | $21,046 | $2,000 | | Total other income, net | $8,655 | $16,909 | | Total other expenses | $56,255 | $53,185 | | Net income attributable to Medallion Financial Corp. | $30,777 | $34,638 | | Diluted net income per share | $1.26 | $1.39 | Consolidated Statements of Cash Flows Highlights (Unaudited) | (Dollars in thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $78,989 | $61,976 | | Net cash used for investing activities | ($380,764) | ($202,125) | | Net cash provided by financing activities | $275,493 | $113,483 | | Net decrease in cash and cash equivalents | ($26,282) | ($26,666) | Note 4: Loans and Allowance for Loan Losses Gross loans grew to $1.86 billion by September 30, 2022, primarily in Recreation and Home Improvement, with the allowance for loan losses increasing to $61.5 million and a $21.0 million provision for loan losses due to portfolio growth and normalizing credit trends Loan Portfolio Composition (Gross Loans) | (Dollars in thousands) | Sep 30, 2022 | % of Total | Dec 31, 2021 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Recreation | $1,171,819 | 63% | $961,320 | 65% | | Home improvement | $575,210 | 31% | $436,772 | 29% | | Commercial | $93,735 | 5% | $76,696 | 5% | | Medallion | $13,973 | 1% | $14,046 | 1% | | Total gross loans | $1,855,510 | 100% | $1,488,924 | 100% | Activity in Allowance for Loan Losses (Nine Months Ended Sep 30) | (Dollars in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Beginning Balance | $50,166 | $57,548 | | Total charge-offs | ($27,139) | ($27,075) | | Total recoveries | $17,462 | $14,975 | | Net charge-offs | ($9,677) | ($12,100) | | Provision for loan losses | $21,046 | $2,000 | | Ending Balance | $61,535 | $47,448 | - Total nonaccrual loans decreased to $30.8 million (1.7% of gross loans) at September 30, 2022, from $35.6 million (2.4% of gross loans) at December 31, 202191 Note 9: Segment Reporting The company's four lending segments saw Recreation contribute $37.7 million and Home Improvement $9.3 million to nine-month net income, while Commercial incurred a loss and Medallion reported a small profit from recoveries Net Income (Loss) by Segment (Nine Months Ended Sep 30, 2022) | (Dollars in thousands) | Net Income (Loss) Attributable to Medallion Financial Corp. | | :--- | :--- | | Recreation | $37,657 | | Home Improvement | $9,307 | | Commercial Lending | ($807) | | Medallion Lending | $447 | | Corporate and Other Investments | ($11,292) | | Total | $30,777 | - The Recreation lending segment remains the primary earnings driver, accounting for 71% of total interest income in Q3 2022, with its loan portfolio concentrated in RVs (58%), boats (20%), and trailers (13%)144148 - The Home Improvement lending segment is the second-largest contributor, with loans concentrated in roofs (37%), swimming pools (23%), and windows (12%)144 - All Medallion loans were deemed impaired and placed on nonaccrual status in Q3 2020, with the segment's results driven by recoveries and valuation adjustments207261 Note 10: Commitments and Contingencies The company is involved in civil litigation with the SEC, filed in December 2021, alleging violations related to 2015-2017 activities, and while the company intends to defend itself vigorously, the outcome could result in a material loss - On December 29, 2021, the SEC filed a civil complaint against the Company and its President/COO162 - Allegations relate to the 2015-2017 period and include issues with third-party promotions and financial reporting when the company was a Business Development Company (BDC)162 - The SEC is seeking injunctive relief, disgorgement, civil penalties, and an officer and director bar, with the company intending vigorous defense but acknowledging a potential material loss163 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q3 2022 results to strong consumer loan growth driving a 23% increase in net interest income, offset by a $10.0 million provision for loan losses and higher legal fees, as credit metrics normalize and the company focuses on growing its lending businesses - The company's strategic focus is on its consumer finance (Recreation and Home Improvement) and commercial lending businesses, with consumer loans representing 94% of the gross loan portfolio as of September 30, 2022195 - Net interest margin for Q3 2022 was 8.91%, down from 9.48% in Q3 2021, reflecting a changing loan mix and rising funding costs, with management expecting further tightening as interest rates rise212277 - The company is preparing for the adoption of the CECL accounting standard on January 1, 2023, anticipating an initial 10-15% overall increase in the allowance for credit losses75201 - The company reinstated its quarterly dividend in March 2022 and has an active stock repurchase program, under which it repurchased $18.8 million of its common stock in the first nine months of 2022311312 Consolidated Results of Operations For Q3 2022, net income attributable to shareholders decreased to $7.6 million ($0.32/share) from $15.9 million ($0.64/share) in Q3 2021, primarily due to a $10.0 million provision for loan losses and increased professional fees, despite a $7.9 million increase in net interest income from loan growth Q3 Performance Comparison (2022 vs 2021) | (Dollars in thousands) | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Net Interest Income | $42,040 | $34,071 | | Provision for Loan Losses | $10,047 | ($337) | | Professional Fees | $3,722 | $1,963 | | Net Income Attributable to Shareholders | $7,636 | $15,940 | - Net charge-offs in the consumer businesses began to normalize in Q3 2022, contributing to the higher provision for loan losses, a trend management expects to continue275 - Net other loss was $0.2 million in Q3 2022, compared to income of $7.2 million in Q3 2021, with the current quarter including a $1.1 million charge on an equity investment278 Liquidity and Capital Resources The company's liquidity is primarily from brokered certificates of deposit, privately placed notes, and SBA debentures, with total debt outstanding at $1.78 billion as of September 30, 2022, and a new $40 million stock repurchase program authorized with $21.8 million remaining available Debt Composition as of September 30, 2022 | (Dollars in thousands) | Balance | Percentage | Rate | | :--- | :--- | :--- | :--- | | Deposits | $1,558,702 | 87% | 1.63% | | Privately placed notes | $121,000 | 7% | 7.66% | | SBA debentures and borrowings | $68,763 | 4% | 2.94% | | Preferred securities | $33,000 | 2% | 5.27% | | Total outstanding debt | $1,781,465 | 100% | 2.16% | - The company's board authorized a new stock repurchase program of up to $40 million, with $21.8 million remaining available for repurchases as of September 30, 2022312 - A hypothetical immediate 1% increase in interest rates is estimated to increase net income by $1.0 million on an annualized basis as of September 30, 2022304 Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the company's disclosures regarding quantitative and qualitative market risk since its Annual Report on Form 10-K for the year ended December 31, 2021 - There has been no material change in disclosure regarding market risk since the 2021 Form 10-K314 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting identified during Q3 2022 - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2022315 - No changes in internal control over financial reporting that materially affected or are likely to materially affect controls were identified in Q3 2022316 PART II—OTHER INFORMATION Legal Proceedings The company refers to Note 10 of the financial statements for details on its legal proceedings, prominently featuring the ongoing civil litigation with the U.S. Securities and Exchange Commission (SEC) - For details on legal proceedings, the report refers to Note 10, subsections (c) and (d) of the consolidated financial statements, which describe the SEC litigation and other matters317 Risk Factors There have been no material changes to the company's risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - No material changes in risk factors have occurred since the company's 2021 Annual Report on Form 10-K318 Unregistered Sales of Equity Securities and Use of Proceeds The company has an active stock repurchase program, increased to $40 million in August 2022, under which it repurchased 1,053,870 shares for $8.2 million during Q3 2022, with $21.8 million remaining authorized for future repurchases Share Repurchase Activity (Q3 2022) | Period | Total Shares Repurchased | Average Price Paid per Share | Total Amount Paid ($) | | :--- | :--- | :--- | :--- | | July 1 - July 31 | — | $— | $— | | August 1 - August 31 | 734,547 | $7.93 | $5,822,227 | | September 1 - September 30 | 319,323 | $7.54 | $2,408,673 | | Total Q3 | 1,053,870 | $7.81 | $8,230,901 | - As of September 30, 2022, up to $21.8 million of shares remain authorized for repurchase under the company's stock repurchase program319320 Exhibits This section lists the exhibits filed with the Form 10-Q, including an amendment to a cooperation agreement, a form of Performance Stock Unit agreement, and various officer certifications as required by the Sarbanes-Oxley Act