Medallion Financial Q3 2024 Earnings Call Transcript

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October 30, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to the Medallion Financial Corp. 3rd Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

Operator

I would now like to turn the conference over to Ken Cooper, Investor Relations. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to Medallion Financial Corp's 3rd quarter earnings call. Joining me today are Andrew Murstein, President and Chief Operating Officer and Anthony Catrone, Executive Vice President and Chief Financial Officer. Certain statements made during the call today constitute forward looking statements made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

Speaker 1

Those risks and uncertainties are described in our earnings press release issued yesterday and in our filings with the SEC. The forward looking statements made today are as of the date of this call, and we do not undertake any obligation to update these forward looking statements. In addition to our earnings press release, you can find our Q3 supplement presentation on our website by visiting medallion.com and clicking Investor Relations. The presentation is near the top of the page. With that, I'll turn it over to Andrew.

Speaker 2

Thank you, Ken, and good morning. We executed well again in the Q3. We delivered $8,600,000 of net income and $0.37 of earnings per share for our shareholders. This was driven by good loan origination activity, stability in our loan portfolio metrics and continued strengthening of the credit quality of our borrowers. Year to date, we have delivered over $25,000,000 of net income and $1.09 per share of earnings.

Speaker 2

We are extremely pleased with these results. The hard work we have done over the past few years is helping drive our performance. This centers around targeting an enhanced borrower base with continued small movements to improve credit quality. We believe this lowers our risk profile and results in better financial performance since payment patterns stay more predictable and stable. Our current loan portfolio skews more prime to super prime borrowers, while we have been decreasing the level of subprime credit in the portfolio.

Speaker 2

In addition, we were pleased to see the Fed's initial move of dropping its rate. We believe that with this drop, we could be at the beginning of a longer term declining rate trend over time. This is good for Medallion as our business reacts well in a declining rate environment. We believe our cost of funds will eventually drop from current levels, which should further enhance our already strong net interest margin. Moving to our segments, rec lending had another strong quarter, which included $139,000,000 of new loan originations.

Speaker 2

Originations were up 50% from the Q3 of last year and down sequentially from the Q2 as expected. The Q2 is typically the most active quarter for RV and Bolt sales as it is the beginning of the season. This dips down in the Q3 as there is still 2 months of summer in the quarter, but past peak selling season. Importantly, most of these loans have high but competitive interest rates. Our average interest rate as of September 30 was 14.92%, up 19 basis points from a year ago and 12 basis points from just 1 quarter ago.

Speaker 2

Our home improvement lending segment grew 8% over the prior year quarter and now sits at 814,000,000 dollars Our current average rate of 9.76 percent is 38 basis points higher than a year ago and 5 basis points above the most recent prior quarter. Our commercial lending segment was stable with the loan portfolio staying the same as the Q2 at $110,000,000 and delivering a comparable average interest rate of nearly 13%. We like this segment since repayment history is strong and we have a long track record of over 25 years of realizing gains on the equity investments we typically receive as part of these transactions. As a reminder, this entire portfolio has virtually zero exposure to commercial real estate. Finally, I'd like to touch on capital allocation.

Speaker 2

We continue to be intensely focused on deploying capital for shareholders with the goal of maximizing overall returns. During the quarter, we repurchased $1,000,000 of our common stock at an average share price of $7.89 and still have over $15,000,000 remaining on our current authorized $40,000,000 share buyback plan. In addition, we are pleased to announce that our Board has increased our quarterly dividend 10% to $0.11 beginning with the dividend payable in November. As has always been the case with our dividend and particularly since it was reinstated in the Q1 of 2022, our goal continues to be providing a tangible return to our shareholders that is sustainable long term. We have now increased our dividend for a second time since its reinstatement, which underscores our confidence in the company's future and commitment to shareholder value.

Speaker 2

With that, I will now turn the call over to Anthony, who will provide some additional insight into our quarter.

Speaker 3

Thank you, Andrew. Good morning, everyone. For the quarter, net interest income grew 8% to $52,700,000 from a year ago and grew 6% from the prior quarter as our interest income earned on a growing loan portfolio outpaced the growth in our cost of funds with interest income benefiting from both a larger loan portfolio and an increased yield on new originations. Our net interest margin on gross loans was 8.11 percent for the quarter, down 1 basis point from the prior quarter and down 24 basis points from a year ago. During the quarter, we originated recreation loans at an average rate of 16 point 33% and home improvement loans at an average rate of 10.75%.

Speaker 3

We continue to originate both consumer loan products at rates above the current weighted average coupons of these portfolios. Our average rates charged on new originations in October remained above 16% for recreation loans and near 11% for home improvement loans. We anticipate that our average coupon and yield will continue to increase well after our cost of funds plateaus. Our average cost of funds was 4.05 percent during the quarter, up 77 basis points from a year ago with the average cost of deposits and borrowings at Medallion Bank increasing 78 basis points to 3.67 percent over that same period. The average interest rate on our deposits was 3.68 percent as of the end of September.

Speaker 3

During the quarter, we originated over $275,000,000 of loans, including $139,000,000 of recreation loans, dollars 97,000,000 of home improvement loans and $40,000,000 of strategic partnership loans. Total loans outstanding were $2,500,000,000 increasing 13% from a year ago and 4% from the prior quarter, with our corresponding yield increasing 47 basis points from a year ago to 11.75%. Consumer loans more than 90 days past due were $9,000,000 or 0.39 percent of the total consumer loans as compared to $6,900,000 or 0.34 percent a year ago. Our provision for credit loss was $20,200,000 for the quarter, an increase from both the $18,600,000 in the 2nd quarter and the $14,500,000 in the prior year quarter. The current quarter included a $2,500,000 net benefit related to taxi medallion loans, which compared to a $1,800,000 benefit in the prior year quarter.

Speaker 3

Dollars 2,200,000 of the current year quarter's provision specifically related to consumer loan growth. Net charge offs during the quarter were $13,400,000 or 2.18 percent of our average portfolio compared to $10,400,000 or 1.88 percent of average portfolio in the prior year. Operating expenses were $19,000,000 during the quarter, down from $20,000,000 experienced in the prior quarter and $19,100,000 incurred in the prior year quarter, with the decrease from the prior quarter overwhelmingly attributable to elevated costs experienced in that quarter associated with the contested proxy. For the quarter, net income attributable to our shareholders was $8,600,000 or $0.37 per share, which included approximately $0.07 per share related to additional credit allowances tied to consumer loan growth. Our net book value as of September 30 was $15.70 per share, up from $15.25 in the prior quarter $14.06 a year ago.

Speaker 3

That covers our Q3 results. Andrew and I are now happy to take your questions.

Operator

Thank you. We will now begin the question and answer session. And the first question will come from Christopher Nolan from Ladenburg Thalmann. Please go ahead.

Speaker 4

Hey, guys. Any non recurring items in the quarter?

Speaker 5

Hey, Chris. Good morning. No, it was fairly clean. Our taxi medallion recoveries were a little elevated than what we typically see, dollars 4,100,000 of cash collected. We tend to hover around $2,500,000 to $3,000,000 on a normal quarter.

Speaker 5

So that increased EPS slightly, but nothing significant other than that.

Speaker 4

Then, I guess, general turning to reserves. Is it fair to say that your reserve ratio is really a function also to sort of a calculation? Is that a fair assessment?

Speaker 5

Yes. You cut out there for a second, Chris. Could you just repeat that?

Speaker 4

Yes. Is your reserve ratio a function of CECL?

Speaker 5

Yes. So, big picture, we look at our historic losses to determine what the projected loss experience will be going forward and come up with an appropriate allowance.

Speaker 4

Okay. That said, does the Fed easing or future easing affect that calculation at all? In other words, do you expect a lower reserve ratio going forward as a result of

Speaker 6

I think

Speaker 5

we would expect that our allowance ratio be a function of delinquencies and historical loss experience, not so much Fed easing. Although if the Fed does lower rates and the consumer gets relief overall that should help delinquencies

Speaker 2

moving forward.

Speaker 4

Great. And the asset quality is hanging in there. And you guys are going to be in the same quarter, should we expect lower loan yields because you're going for a higher quality client?

Speaker 5

I don't think so. We've been able to keep our origination levels high. I think particularly in rec, we've continued with 16 ish on new originations and our average coupon is below that. So we'll continue to see that increase. Similarly on home improvements, we're riding at levels above our average.

Speaker 5

I think during Q3, we wrote at levels a little bit lower than what we did in Q2. That's not necessarily credit related. It's more about the mix and the type of loans that we're writing in Q3. We focused a lot on pool loans, rather than traditional home improvement loans when you think of windows and roofs. And the reason being is that we've seen that those have a better credit response in terms of charge offs down the line.

Speaker 5

So we've gotten slightly less yield on those new originations still more than what our book sits at, but we believe that it's going to perform better long term.

Speaker 4

Okay. That's it for me. Thank you for the quarter.

Speaker 5

Thanks, Chris. Thanks, Chris.

Operator

The next question is from Mike Grondahl from Northland Securities. Please go ahead.

Speaker 7

Hey, guys. Congrats on the quarter. Originations, especially rec was pretty strong. What do you why? And kind of what's your outlook for originations?

Speaker 5

Hey, Mike. How are you doing?

Speaker 6

Good, Troy. Thank you.

Speaker 5

Yes, we had a good Q3. And again, we've said this in the past, typically Q2 and Q3 is where we see big amounts of originations, particularly in rec and that comes in then in Q4. So we wouldn't expect Q3 to be indicative of what we see in Q4. The portfolio will probably stay flat, maybe a little bit of contraction similar to what we saw in Q4 of last year. The portfolio may have shrunk by about 1% before it starts to ramp up again in Q1 of next year.

Speaker 7

Got it. And then going back to the $4,100,000 of taxicab collections, what was the EPS benefit associated with that? I know some of it's running through the provision, but what would you call out in the $0.37

Speaker 5

So the $4,100,000 translates into about $2,800,000 of credits on the income statement that benefit the bottom line. So if you just quantify that $2,800,000 it's $0.08 a share. But again, collections were high. I think last quarter was more indicative of what we expect to see quarter in quarter out, which was about $2,500,000 and that generates about $0.04 So there was a couple of pennies added to EPS because of the collections. I mean, there was one larger collection.

Speaker 5

We probably brought in about $1,000,000 on a settlement that all hit the income statement. Typically, with a normal quarter of $2,500,000 of collections, 50% of every dollar collected is going to hit the income statement. In this quarter, it was more like 2 thirds.

Speaker 7

Got it. Got it. Okay. That's helpful. And then with the provision, let's call it $20,000,000 Clearly, there was the benefit of $2,500,000 from the collections, but also you called out the $2,200,000 going the other way kind of for growth.

Speaker 7

Is $20,000,000 the right way to think about kind of your core provision now? Or is it more like $22,000,000

Speaker 5

There's still a fair amount of uncertainty with where the economy goes. So I don't want to peg the number to 2020 or 2022. It could be closer to the 22 than 20 20. We'll continue to have medallion recoveries even if we collect our normal run rate. So I think it's somewhere in between there.

Speaker 5

Again, we go into our slower quarters in Q4 and in Q1 with seasonality. We might see delinquencies like we saw last year tick up. That's going to cause us to have to bolster our allowance. Growth should be slower, so we won't have the growth penalty that we experienced

Speaker 7

there.

Speaker 5

We're not seeing any indications that we're out of the woods in this economy yet. We're also not seeing any warning signs that something drastic is going to happen.

Speaker 7

Fair, fair. And then, hey, just 2 more. One, the overall margin was only down 1 bps sequentially. Are we getting closer to a bottom than what you anticipated? I mean, I don't know that you can call a bottom yet, but kind of how are you feeling about the margin?

Speaker 7

Yes.

Speaker 5

I think we're getting we're almost there. I think we've been looking at 8 ish, maybe slightly below that, but not meaningfully below that as what we think the bottom to be. I think in Q2, the NIM increased slightly. We dropped the basis point this quarter. I think we're almost there.

Speaker 5

Our cost of funds, it's interesting with CD costs leading up into the Fed cut in September, we saw 3 5 year CDs run down in terms of the cost. Since that rate cut, I guess everyone was baking in the possibility of 3 rate cuts by the end of the year. I think that expectation has waned a little bit. So we've seen those costs come back up. I think current issuances are in the 4 ish range.

Speaker 5

So we've got a little bit of ways to go before our CDs are priced at current levels. But another rate cut or 2 should help out significantly.

Speaker 7

Got it. And then, hey, lastly, congrats on the FinTech volume, the $40,000,000 in 3Q up from $24,000,000 But can you remind us of the economics on that 40,000,000

Speaker 8

dollars So the way that works is a FinTech will send a loan to us, we'll fund it and then they'll buy it back typically a few days later. So if done properly, there's no credit risk here. We're not really holding the paper and they provide guarantees in case there's anything happening to them, which is extremely rare, of course, within that 48 hour period or so. But it ranges, but let's just use an example of 50 bps. So we'll take a fee of 50 basis points of the loan and we'll get the float for a couple of days as well.

Speaker 7

Got it. So on that 40,000,000 dollars I guess 1% would be $400,000 I don't know you made about $200,000 Is that the right way to think about it in the quarter?

Speaker 8

We probably made close to that. It just happens to work the way that you're saying in this quarter. But the goal here is it's nice that it's a growing business. It's nice that it's breaking even and making a little bit of money. Our hope is to really accelerate this business.

Speaker 8

I think we're going to have a very strong Q4. So

Speaker 5

we were

Speaker 8

a little late to the game here. We kind of watched others go into the field just out of precaution. We weren't sure how the business would work and how the regulators would look at it and got comfortable with it. So we're gaining some steam now though. We've got a good group that we took a CEO of another bank that's very active in this space.

Speaker 8

We hired him a couple of years ago. And finally, it's starting to pay off for us.

Speaker 7

Great. And lastly, just as a follow-up to that, what line on the P and L does that come through?

Speaker 5

It's so the interest we earn on the 3 or 4 days that we hold the loans, that's up in interest income. And the fee that in Andrew's example, the 50 basis points, that's in other income.

Speaker 7

In other. Okay. Hey, thanks guys.

Speaker 5

Thank you. Thanks, Mike.

Operator

And the next question will be from Matthew Howlett from B. Riley. Please go ahead.

Speaker 6

Hi, good morning. Hi, Andrew. Hi, Anthony.

Speaker 5

Hi, Matt. Good morning. Good morning.

Speaker 6

Hey, look, congrats on the dividend bump and the continued share repurchases. I just want to ask you, what can we expect sort of going forward? Do you want to bump the dividend 10% -plus every year and obviously keep buying back shares? Sort of how are you thinking about capital return? What are you leaning towards?

Speaker 6

You want to just continue to do both?

Speaker 5

Sure. Yes. I mean, I think we've always said that we're committed to shareholder return. I don't think we want to commit to a 10% dividend increase annually. But long term, I think our intent and the Board's intent is to reward the shareholders for their ownership.

Speaker 5

So we don't want to get ahead of ourselves, but I don't think it's out of the question. But we're just happy that we're at $0.11 right now.

Speaker 8

Yes. And to add, the goal is definitely to increase it. It's hard as Anthony said to pick a percentage, but the goal should be to opportunistically look in what is in front of us. So the last couple of quarters, this is an extremely strong quarter with the growth rates that we had of 4% 5% from the prior quarter. So the stock buyback was small, it was only about $1,000,000 That will eventually slow.

Speaker 8

And then that will give us an opportunity to review jumping back into the market for buying stock. So between those three things, buying stock, paying a dividend and growing, if we look at all three and I think we've effectively accomplished success in all three recently.

Speaker 6

Yes. Look, I mean, we were surprised by the dividend increase and it's a it's stock starting paying a nice yield. So congratulations on that. The share repurchases, I mean, I know you said what was tangible? I know you said GAAP book is getting close to 16%.

Speaker 6

I know you think that's more of the real book, but what was tangible book at the end of the quarter?

Speaker 5

Sure. So we do believe that book value is the best measure for assessing the value of our company. But we understand that tangible book is something everyone likes to look at. So we don't actually think tangible book is a good indication of value, but adjusted tangible book is. So it's essentially the same calculation we just adjust for $43,000,000 deferred tax liability that sits on our balance sheet that relates specifically to the goodwill and intangible assets.

Speaker 5

So when you factor that in adjusted tangible book comes out to $10.17

Speaker 6

That was what was $9.75 last quarter or something?

Speaker 5

Yes. So as it increases the same as book value each quarter, slightly more because it's the benefit of backing out that amortization.

Speaker 6

Yes. That makes the stock rep.

Speaker 8

It's been growing a lot.

Speaker 6

Go ahead.

Speaker 8

Over the top of my head, years ago, it was probably $5 or so a share. So the last 3 years 9 months, our pre tax earnings have probably been, I don't know, about over $250,000,000 So it's starting to add up.

Speaker 6

Yes, you're probably the one of the only banks trading at a discount, not only the GAAP book, but the even tangible book. So those share repurchases make a lot of sense and they're great to see for shareholders. Moving towards the margin, I want to just drill down a little bit. Anthony, you said what the new CD rates are about 4 ish and currently have about 3.7% ish with CD rates at the end of the quarter?

Speaker 5

Yes. So at the end of September, 3.6a is our weighted cost on the CDs. And we're seeing new issuances recently ranging anywhere from 3.95 to 4.15. So it's in that 4 ish range. So we're probably about 30 basis points away from the current market.

Speaker 6

Yes. Look, I mean, it's incredible because you're continuing to push up coupons on your consumer lending businesses. And what I wanted to ask is the direct, what's the average loan term? I mean, because it's 492 and you're putting things on above 16%. So you're getting run off from these lower legacy yielding, rec loans, right, that you're replacing with?

Speaker 5

Yes. I mean, when we write these loans, we write them up to the terms up to 15 years. Realistically, overwhelmingly, they stay on our books for about 36 to 42 months.

Speaker 6

Okay. Wow. Okay. I was thinking more like 7 years. Okay.

Speaker 6

So they're rolling off pretty fast. You're getting several 100,000,000 of just amortization, right?

Speaker 5

Correct. On the rec?

Speaker 6

Yes. So having I mean, when we think about the margin, I don't want to give you put have you give guidance, but I mean we could be back to 9% if we in a couple of years, if not earlier, if the rates stay here or start to go lower?

Speaker 8

Yes. I was going to say that we were at those levels. Anthony has done a is being modest. He's done a very good job predicting where the bottom would be. And he's been saying publicly on these calls and elsewhere that he thought it would get down to 8% and then kind of bounce around there and then start going back up again.

Speaker 8

So that would be our goal is to get it back up. It's not going to happen overnight, but to get it back up to those levels. Yes.

Speaker 5

Once our cost of funds does hit that terminal level, it plateaus, it's not going to rise anymore for at least an extended amount of time, we should start to see that NIM expand. Our current book with the exception of that what rolls off is going to continue to have the coupon it has 14.92% currently. New originations are higher, so we should still see growth in that yield. We get further down the line and that's why we don't like to get too ahead of ourselves. We've got to look at competitive pricing and how that's going to affect our business.

Speaker 5

But we're comfortable seeing what we're seeing right now. And with the prospects of more cuts, we think that's going to have a good effect on us.

Speaker 6

Well, the way you're growing the portfolio and then potentially the margin to expand, it just has a and you're buying back shares. It just has a powerful impact on EPS and we can all do the math and what that implies. But congrats on managing that through this cycle. And I guess just the last one on those FinTech partnerships. So you have one, Andrew and Anthony, with what Solar, you got this personal loan one.

Speaker 6

I mean, how many I mean, are you going to do a few deals a year? I mean, what do you think? Because it's obviously to kind of morph into the FinTech space could really be interesting for you guys long term.

Speaker 8

I think the goal is probably to add 1 every 6 months or so. We could add more if we wanted to, but the trick in this business is not to get ahead of yourselves and over your skis and make mistakes. It's very compliance driven and we've got such a strong relationship with our regulators. We want to keep it that way. So slow and steady wins the race.

Speaker 8

We'll keep adding partners 1 or 2 every 6 months to a year or so. We've been very selective with those partners. We're getting a lot of applicants. A lot of our competitors have stumbled over the last year or so. So we're getting a lot of their looks now, so to speak.

Speaker 8

So hopefully we'll continue to add on new partners.

Speaker 6

Great. Well, congrats on the dividend lift. Great quarter. Thanks guys.

Speaker 8

Thank you, Matt. Thanks.

Operator

And ladies and gentlemen, this concludes today's question and answer session. I would like to turn the conference back to Andrew Murstein for any closing remarks.

Speaker 8

Thank you again for joining us this morning. We continue to be pleased with our performance and results and look forward to closing a great year on a strong note. We remain focused on delivering shareholder value, efficiently deploying our capital and driving each of our businesses with excellence. As always, if you have any questions, please feel free to contact our Investor Relations team. The contact information is on the last page of our earnings supplement as well as the IR section of our website.

Speaker 8

Have a great rest of your day.

Operator

The conference has concluded. Thank you for attending today's presentation. You may now disconnect.

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