Medallion Financial (US:MFIN)2023-08-07 20:12PART I – FINANCIAL INFORMATION Financial Statements This section presents unaudited consolidated financial statements for Q2 and H1 2023, detailing balance sheets, operations, and cash flows, showing $2.52 million in total assets and increased net income Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,519,137 | $2,259,879 | | Net Loans Receivable | $2,082,027 | $1,853,108 | | Total Deposits | $1,813,785 | $1,607,110 | | Total Equity | $387,764 | $370,524 | Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $46,691 | $38,881 | $90,293 | $74,809 | | Net Income to Medallion Financial | $14,170 | $13,300 | $29,531 | $23,141 | | Diluted EPS | $0.62 | $0.54 | $1.29 | $0.93 | - Net cash provided by operating activities was $58.3 million for the six months ended June 30, 2023, up from $51.4 million in the prior-year period, while net cash used for investing activities increased to $265.3 million primarily due to higher loan originations32 Loans and Allowance for Credit Losses The gross loan portfolio grew to $2.16 million, primarily in Recreation and Home Improvement, with CECL adoption increasing the allowance for credit losses to $75.0 million - On January 1, 2023, the company adopted the CECL methodology (ASC 326), resulting in a $13.7 million increase to its allowance for credit losses and a $9.9 million net-of-tax reduction to retained earnings58 Gross Loan Portfolio Composition (in thousands) | Loan Category | June 30, 2023 | % of Total | | :--- | :--- | :--- | | Recreation | $1,331,114 | 62% | | Home improvement | $728,468 | 34% | | Commercial | $92,637 | 4% | | Medallion & Other | $4,779 | <1% | | Total Gross Loans | $2,156,998 | 100% | Allowance for Credit Losses Activity - YTD (in thousands) | Description | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Beginning Balance | $63,845 | $50,166 | | CECL Transition Amount | $13,712 | - | | Net Charge-offs | ($15,100) | ($2,013) | | Provision for Credit Losses | $12,514 | $10,999 | | Ending Balance | $74,971 | $59,152 | Funds Borrowed Total funds borrowed increased to $2.06 million, primarily from deposits, with a new $28.0 million Federal Reserve discount window line established in March 2023 Outstanding Funds Borrowed (in thousands) | Borrowing Type | June 30, 2023 | Interest Rate | | :--- | :--- | :--- | | Deposits | $1,815,943 | 2.70% | | Privately placed notes | $121,000 | 7.66% | | SBA debentures and borrowings | $66,880 | 3.13% | | Federal reserve discount window | $28,000 | 5.25% | | Preferred securities | $33,000 | 7.62% | - In March 2023, Medallion Bank established a discount window line of credit with the Federal Reserve, with $28.0 million utilized out of a total capacity of $38.7 million as of quarter-end111 Segment Reporting Recreation and Home Improvement lending segments drive interest income and asset growth, with Recreation generating $11.1 million and Home Improvement $2.2 million in Q2 2023 net income Segment Net Income After Taxes - Q2 2023 (in thousands) | Segment | Q2 2023 Net Income | Total Assets | | :--- | :--- | :--- | | Recreation Lending | $11,083 | $1,294,925 | | Home Improvement Lending | $2,204 | $718,383 | | Commercial Lending | $942 | $99,713 | | Medallion Lending | $4,900 | $18,724 | | Corporate and Other Investments | ($3,447) | $387,392 | - The Recreation lending segment's loan portfolio is concentrated in Texas (15%) and Florida (10%), with RVs and boats making up 59% and 19% of the portfolio, respectively145 Commitments and Contingencies The company faces ongoing material litigation with the SEC, filed in December 2021, regarding alleged federal securities law violations from 2015 to 2017 - The SEC filed a civil complaint against the Company and its President in December 2021, alleging violations related to activities from 2015 to 2017, and the Company is defending itself vigorously but notes that an adverse outcome could be material161162 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights strong H1 2023 performance driven by consumer finance growth, increased net interest income despite rising costs, and CECL adoption impacting credit loss allowances Consolidated Results of Operations Net income increased to $14.2 million in Q2 2023, driven by a 20% rise in net interest income from loan portfolio growth, despite tightening net interest margins - Net income for Q2 2023 was $14.2 million ($0.62/share), up from $13.3 million ($0.54/share) in Q2 2022, and for the six-month period, net income was $29.5 million ($1.29/share) compared to $23.1 million ($0.93/share) in the prior year278 - Interest income increased due to growth in the recreation and home improvement loan portfolios, while interest expense also rose, reflecting higher average borrowings and increased borrowing costs, with the average cost of funds rising to 3.05% in Q2 2023 from 2.05% in Q2 2022279282 - Professional fees decreased to $1.4 million in Q2 2023 from $4.4 million in Q2 2022, primarily due to lower legal costs associated with the SEC litigation285 SEGMENT RESULTS Recreation and Home Improvement loan portfolios grew 13% to $1.3 million and 16% to $728.5 million respectively in H1 2023, while Medallion lending saw $23.9 million in cash collections - The recreation loan portfolio grew 13% in the first six months of 2023 to $1.3 billion, with the average interest rate on the portfolio increasing 39 basis points year-over-year to 14.62%252 - The home improvement portfolio grew 16% in the first half of 2023 to $728.5 million, with the average interest rate increasing 71 basis points from the prior year to 9.21%257 - In the first half of 2023, the company collected $23.9 million related to taxi medallion assets, resulting in net recoveries and gains of $15.6 million267 Liquidity and Capital Resources The company maintains liquidity through diverse sources, including brokered CDs and a new Federal Reserve discount window line, while paying a $0.08 per share quarterly dividend - Primary sources of liquidity include brokered CDs, SBA debentures, and debt securities, with the Bank also having access to $113.7 million in Fed Funds lines as of June 30, 2023297 - The company's board reinstated a quarterly dividend in March 2022, and a dividend of $0.08 per share was paid in May 2023318 - No common stock was repurchased during the six months ended June 30, 2023, with approximately $20.0 million remaining authorized for repurchase under the current program319325 Quantitative and Qualitative Disclosures About Market Risk No material changes in quantitative and qualitative market risk disclosures have occurred since the 2022 Annual Report on Form 10-K - There has been no material change in market risk disclosures since the company's 2022 Form 10-K320 Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023321 - No changes occurred during the second quarter of 2023 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting322 PART II—OTHER INFORMATION Legal Proceedings This section refers to Note 10 of the financial statements for details on ongoing legal proceedings, primarily the SEC litigation - For details on legal proceedings, the report refers to Note 10, which describes the ongoing SEC litigation323 Risk Factors No material changes to risk factors have been reported since the 2022 Annual Report on Form 10-K - No material changes to risk factors were reported since the filing of the 2022 Form 10-K324 Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock in H1 2023, with $20.0 million remaining authorized for future repurchases under the program - The company did not repurchase any common stock in the first six months of 2023, and approximately $20.0 million remains authorized for repurchase under the existing program325