Medallion Financial Q1 2024 Earnings Call Transcript

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May 1, 2024

There are 8 speakers on the call.

Operator

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

Speaker 1

Thank you, and good morning, everyone. Welcome to Medallion Financial Corp's Q1 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 Q1 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 Murstein, President.

Speaker 2

Thank you, Ken. Good morning, everyone. Coming off a record breaking 2023, we had a nice start to 2024. This included growing our loan portfolio on strong bottom line performance. Our recreational lending segment had a standout quarter and is now at $1,400,000,000 Originations were up 4% versus the prior year quarter.

Speaker 2

We continue to originate new loans at elevated interest rates as compared to prior years and the segment's average interest rate was up 38 basis points to 14.80 percent@quarterend. The average loan size in our portfolio stayed at roughly $20,000 Our allowance for credit loss level of 4.40 percent was up from 4.12 percent a year ago. Our other major consumer lending business, the Home Improvement Lending segment, grew approximately 12% over the prior year quarter to $752,000,000 This growth rate came down from the last year or so as origination activity slowed due to credit tightening. This segment continues to be focused on super prime borrowers with credit scores in the mid to upper 700s, which keeps our delinquency and loss levels low. Our average interest rate for the home improvement lending segment was 9.60% atquarterend with a 77 basis points of increase from a year ago, reflecting our ability to pass on some of the Fed rate increases to our borrowers just like we have done in the rec lending segment.

Speaker 2

Our allowance for credit loss level of 2.38% was up slightly from the 2.19 percent a year ago. Our commercial lending segment had a strong quarter and included an equity investment exit, which resulted in a $4,200,000 net gain. The loan portfolio was up 12% to 106,000,000 with our average interest rate up 58 basis points to 13.0%. Our goal is to grow this segment prudently over time and although exits can be unpredictable, they are key elements of the return on the business. The segment generated after tax earnings of $3,600,000 during the quarter.

Speaker 2

Finally, our taxi medallion segment collected $3,100,000 in the 1st quarter. As we indicated on our call last quarter, we expect a sizable slowdown in cash collections related to taxi medallion assets and our Q1 unfolded as expected. During the quarter, cash collections translated into $1,600,000 of net benefits to the income statement and this segment continued to be profitable, generating after tax net income of approximately $600,000 Our strategy continues to be to increase net interest income through smart loan growth with pricing that is optimal given the markets and competitive pressures we face. We expect to maintain high credit standards and use pricing to our advantage. We anticipate loan growth to continue to moderate similar to 2023 and the levels we saw in 2022.

Speaker 2

Finally, during the Q1, we used some of our excess cash to buy back $2,100,000 of our common stock. Our authorized share buyback plan has $17,900,000 remaining of the $40,000,000 approved. And going forward you should expect us to use it opportunistically rather than on any regular cadence. Our share buyback activity together with our $0.10 per quarter dividend and net income performance continues to deliver positive results for our shareholders. 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.

Speaker 4

For the quarter, net interest income grew 10% to $47,900,000 from the prior year, driven by increased interest rates on new loan originations and growth in our loan portfolio during the past 12 months. Our net interest margin on gross loans was 8.1% for the quarter, down 32 basis points from the Q1 last year and down 10 basis points from the Q4 of 2023. Compression in on NIM continues to be attributable to the higher interest rate environment with our average cost of funds increasing 100 basis points from last year, offset by a 56 basis point increase in our yield as we continue to pass along a portion of these higher rates on new originations. During the quarter, we originated recreation loans at an average rate of 15.31% and home improvement loans at an average rate of 12.05 percent, both in excess of the current weighted average coupons on those portfolios at 14.8% 9.6%. As we've said in the past and which still holds true today, given the fixed rate nature of our loans, increasing the average coupon and yield is a slow process, slower than the rise of cost of funds.

Speaker 4

That said, we do anticipate that our average coupon and yield will continue to increase well after our cost of funds pilotoes, at which point the compression we've seen in our margin should reverse and begin to expand. Although we do still expect additional compression over the next several quarters, we believe that we are closer to the bottom than not. And despite further compression anticipated, we do believe that our level of NIM positions us well above industry norms. During the quarter, we originated $173,000,000 of loans with total loans outstanding increasing 12% to $2,200,000,000 from a year ago and we saw our yield increase to 11.34% from 10.78% over the same period. We maintained tighter credit criteria, which is consistent with our view of ongoing uncertainty in the economy.

Speaker 4

Non prime recreation loans were 36% of the portfolio and non prime originations during the quarter were 30%, down from the 34% 35% levels originated during the full 20232022 years. Our home improvement portfolio continues to be overwhelmingly prime and super prime credits with only 1% of loans being non prime. Our provision for credit loss was $17,200,000 for the quarter compared to $4,000,000 in the prior year quarter. The provision included a net benefit related to taxi medallion loan recoveries of $900,000 in the current quarter compared to a net benefit of $7,100,000 in the prior year quarter. Higher charge off activity in both consumer products, partly attributable to seasonality, the lower taxi medallion recoveries and benefits, along with increases in credit loss allowance related to growth in the recreation portfolio were the key drivers related to our change in provision from a year ago.

Speaker 4

Operating expense was $18,200,000 during the quarter, which was down sequentially from $19,100,000 in the 4th quarter and down slightly from $18,400,000 in the Q1 of 2023. Our quarterly supplement on our website shows how over the past several years and continuing into the current quarter, how operating expense as a function of net interest income has migrated lower. Quarter to quarter, this may fluctuate, but you could see that over time, the growth in our net interest income has well outpaced any growth in operating costs as we continue to grow and scale our lending businesses. For the quarter, net income attributable to Medallion Financial Shareholders was $10,000,000 $0.42 per diluted share. That covers our Q1 results.

Speaker 4

Andrew and I are now happy to take your questions.

Operator

Thank you. We will now begin the question and answer session. And today's first question comes from Christopher Nolan with Ladenburg Thalmann. Please proceed.

Speaker 3

Hey, guys. Let's see. Anthony, have you guys do you know what the nonperforming loan

Speaker 5

volumes were in the quarter?

Speaker 3

Seasonally, those numbers are higher throughout the Q1 as we come out of our slow period and work down. But if we'd look at the end of the you're looking for delinquencies?

Speaker 5

Yes, 90 day plus delinquencies.

Speaker 3

We're just pulling it up. Okay. On the rent, it's $6,400,000 $1,400,000 in home improvement.

Speaker 5

Got you. Okay. So it's down quarter over quarter. Last quarter was $13,800,000 dollars So is that a fair assessment?

Speaker 3

Yes. And it's typical what we see seasonally is November, December, January, things are slower, especially in the rec side of the business. People aren't towing their trailers and they're not getting on their boats, but that starts to improve and the weather starts to improve.

Speaker 5

All right. And then have you guys sort of heard any flexibility from regulators in terms of reserving? In the past, regulators have sort of come down in terms of not having the reserves sort of be like an earnings piggy bank and see whether or not there's more flexibility for financial services companies like yours to boost reserves more than?

Speaker 3

Yes. So our reserving and our allowance model isn't predicated upon necessarily what the regulators want. It's the models that we've put together, particularly with the implementation of CECL. So we look at historic losses, we look at economic factors, but there's really no flexibility there as it pertains to the regulators' desires.

Speaker 5

Okay. And then on that note, given that you don't have flexibility on reserving, any plans to boost capital ratios at all? Or are you going to continue to run at the similar capital ratios?

Speaker 3

Yes. I mean at the end of the quarter, we're at 16.4%. So we need to maintain at least a 15% based on our capital maintenance requirement at Medallion Bank. So we're comfortable that we stay above that number.

Speaker 5

All right. Final question, tax rate. It went up in the quarter. Should we expect a higher tax rate in 2024 or is it just sort of a seasonal thing?

Speaker 3

Yes, it's seasonal, non deductible expenses, different aspects of the code get picked up in the Q1. That should smooth out to a lower rate as we go through the year.

Operator

The next question comes from Mike Grondahl with Northland Capital Markets. Please proceed.

Speaker 6

Hey, guys. This is Luke on for Mike. Just looking at the P and L, so this was the Q1 in a while where net interest income dropped sequentially, I think down just over $1,000,000 from 4Q. So wondering if you guys just talk a little bit about what drove this and then how you're sort of thinking about this line item as we progress into 2Q and into the back half of the year?

Speaker 3

I'm sorry, could you just rephrase that question real quick?

Speaker 6

The net interest income dropping sequentially by a little over $1,000,000 Just wondering about what drove that in the quarter since it's sequentially gone up the past several quarters?

Speaker 3

Yes. So we it's a function of our volume. So as our home improvement book stayed pretty stagnant from December. We did grow our rec portfolio a little bit, but total loans only grew less about 0.5% in the 3 months. So that's going to drive it.

Speaker 3

We've seen an increase in our cost of funds. Been transparent about that. We've seen that. I think looking ahead, we don't anticipate that to be a trend that continues. April, our volumes were quite strong.

Speaker 3

We originated about $100,000,000 in loans, 80% of those in rec. Just given where those rates are right now, we expect net interest income to start increasing beginning with Q2.

Speaker 6

Got it. That's helpful. And then just looking at the EPS, the $0.42 and then you back out the $0.04 medallion collection benefit. And then as far as that 4 point $2,000,000 equity gain in the quarter, if we kind of back that out, should more of a core EPS number for the quarter be like at $0.25

Speaker 3

dollars Yes, we don't regarding that $4,200,000 gain, that's tied to our commercial lending business. So we don't view that as a non core item. It's not a one off investment. That's part and parcel with that business and what we do there. The equity investments are probably 10% of the overall commercial assets.

Speaker 3

So we wouldn't back that out. Unfortunately, those don't model out well. They're equity investments in PE and sponsors backed companies. So we never know when these things do exit, but they do and we've shown a track record of them doing it. But yes, we wouldn't back that out.

Speaker 3

The $0.04 we quantify that because that's what we've done all through 2023 just given the sizable amount of recoveries we had. We wanted to make sure that the readers and the shareholders understood what was going on. We collected $3,000,000 of cash. We've got $10,000,000 of exposure. On a run rate, we think that we collect anywhere between 1.5 and 2 a quarter going forward based upon where our portfolio is positioned.

Speaker 3

It's going to generate bottom line quarter in, quarter out. As Andrew said, after tax, we did about $600,000 in that segment. So again, you could back it out, but I don't necessarily we wouldn't.

Speaker 6

Okay. Yes, that makes sense. And just lastly here, can you guys just touch on the month of April as far as originations and credit and any sort of trends you saw in the month of April?

Speaker 3

Yes. So the volumes were good. I think we just said we originated I think when we closed the month yesterday, we originated about $100,000,000 in loans, dollars 80,000,000 of them are in rec. And just to give you an idea, in Q1, the rates we were getting on these originations averaged just over 12% in home improvement, 15.3% in rec, and that's consistent with what we saw in April. So we're happy with that volume.

Speaker 3

We think those trends continue through Q2.

Speaker 7

And just as a point of reference, the $100,000,000 is probably compared to about $80,000,000 or so in April 2023. So it's up about 25%.

Speaker 6

Okay, got it. Well, thanks for taking the time today guys and congrats on the quarter. Thank you. Thank you.

Operator

The next question is from Matthew Howlett with Nomura. Please proceed. Hey guys, with B. Riley. But hey, first, I got to congratulate you on the buyback.

Operator

Both my congratulations to you for buying, I think it was almost a quarter 1000000 shares. My question to you, Andrew, was with these you said that you'll be opportunistic with the buyback as you get these cash collections in from the medallions. I mean, how should we view how much do you want to execute on that $17,000,000 left on the authorization? Your stock is at a 30% discount to how I calculate tangible book, you're doing a mid teens ROE. Clearly, it looks accretive to put Bologna to work via the buyback.

Speaker 7

I think we'll get to the full amount eventually. It's just hard to predict the timing and I would like to do what we say. So the $40,000,000 that was approved by the Board, as you pointed out, we're more than halfway through. I'm a fan of buybacks that think they're good use of our capital at the appropriate times. So it's just hard to predict sometimes, as Anthony just said, the volume looked great in April.

Speaker 7

So we'll put more money to use there where the ROEs are so high for us in that rec portfolio. So it will be sporadically with the stock drops where we have extra capital available, I think it's a good time to jump in the market and pick up cheap stock.

Speaker 3

Yes, I'd echo what Andrew just said and just to add to that. Again, our loan book, it grew 0.5% in the quarter. Originations look really strong in April. We would expect that growth to be much higher in Q2. So to the extent that we didn't have to deploy it in growth in Q1, we did have that availability of capital to give back to the shareholders.

Operator

Got you. Just remind me again where the ending share count is currently?

Speaker 7

We'll get the exact number. It's 23 and change.

Speaker 3

23, 377, 564.

Operator

Okay. Good. Look, you can really work that down. And then certainly, that's going to be accretive to any buybacks you do to our EPS. So congratulate on that.

Operator

And certainly appreciate the loan growth, but the buyback makes a lot of sense here at these valuations. Next question on CDs and deposits, where do you how far out are you going? I mean, it's higher people I think have generally agreed it's higher for long run. How far are you going on the CDs? I mean, how do you think about the rate cycle here if we start to get some easing next year or late this year?

Speaker 3

Yes, right. 3, 4 months ago was a different conversation than today. We were looking at 3 rate cuts. Maybe we get one now, I don't know, I'm not an economist. But typically, we match fund.

Speaker 3

We're not to the expected life of our loans. We're not seeing a significant change. Maybe a few months have been tacked on to that average life that hovers between the 2 consumer products around 36 months, a little higher and a little lower depending upon the product. But we go out match funded, we're still issuing 3 5 year CDs, some shorter term, but nothing drastic.

Operator

Has CD pricing changed at all recently with the moving rates? I'm sure it's probably up a little bit.

Speaker 3

Yes, it's up a little bit. It's going to fluctuate. But we think we're closer to the top than not. That's going to translate into higher interest expense as we go through the quarter, a little bit more compression in NIM. But I think we're positioned well, just given where we're at.

Operator

It's like a pen. It's like a pendulum, right? I mean, you'll start to move the other way when the Fed stops or Fed starts easing and your rate I guess, the coupons coming down are going to be slower than probably than you just on the liabilities. I mean, in other words, do I think about the margin moving back to 9% over time to normalization? Or how to just sort of think about the margin in the next, call it, 24 months?

Speaker 3

Yes. Maybe it drops a little bit more. I don't think there's any substantial legs down. But then once our costs stop rising, we've done a really good job of increasing the yield on our current book and with new originations, that's just going to continue to as the older lower yielding loans roll off, the newer loans become more of more prominent. I think it's that pendulum, right?

Speaker 3

We're swinging one way, but eventually we're going to start expanding that NIM.

Operator

Yes. And 8% margin is terrific just by itself. Any improvement that is just terrific. Okay, look, we can do the modeling on that. Last question, TriBeam, talk a little bit about the partnership.

Operator

What could we put in our how do we think about modeling it? I mean, I'm assuming this is capital light, you're really putting up no capital, you're getting some origination fee or success fee and how many more of these could you do?

Speaker 3

Yes, so I think I don't think Andy would disagree with this, He'll tell me if he does. I think the strategic partnership operations have been somewhat disappointing. We just haven't found that right partner that could generate the type of volumes that make this a viable business. We think we might have that with this new partner. They're backed by some strong companies and it's in a space that we understand really well, they do primarily solar installations.

Speaker 3

So we know the business, it's home improvement and there's a lot of potential for significant volumes. It is But we're optimistic that this is going to be what makes this segment profitable. And again, full year, if it generates the type of returns we're expecting, we could think about adding another $1,000,000 or $2,000,000 to the bottom line. Obviously, it's never going to eclipse the rec business.

Operator

Is this after tax something like $0.05 to $0.10 or something a year?

Speaker 7

I think it could. It's hard to back up other people's projections. As Anthony said, you see a lot of hockey stick projections in the FinTech industry. So this group though, I think is heads and shoulders above many of the others that we've passed on through the years. So, it easily could add $1,000,000 to $2,000,000 of earnings if they are coming through on the projection models that they gave us and so far it looks pretty solid.

Operator

No, that would be terrific, especially given you're really taking on no credit risk. So you said maybe over time you could add some of these loans to the book, but now this is just what an origination fee and that's it?

Speaker 7

Yes, we'll probably hold the paper for anywhere from 30 to 90 days, a little bit of paper. And they're all 760 type FICO scores, so a quality paper.

Operator

Going forward, do you think I know you said you had some misses on the FinTech side, but what do you think in terms of doing more deals like this? It seems like with the bank and some of these FinTech companies out there, is there room to do other asset classes? Are you talking to other people? Anything exciting?

Speaker 7

Yes. And the misses aren't strikeouts. They're just kind of taking the pitch, meaning that you're not losing money, but it's not adding anything to the bottom line. So exactly as you said, Matt, it's a fee business, so there's very little downside here. On the ROEs, if you look at the other banks that are public and are in this sector, they're north of well north of 20%, 25%.

Speaker 7

So if done right, it's a very profitable business. Yes, the hope would be to add on another player like this next year or so. As good as this business is, you can't grow too fast because you have compliance risk here. So the bank, our bank has an exceptional reputation with regulators. They do a great job for us and you don't want to kind of stumble just for the sake of growth by adding on volume.

Speaker 7

So they've been doing it very prudently and I think we've been in it for 3 or so years now. So it's kind of matured to the point where potentially it could start to take off.

Speaker 3

Yes. I think the compliance is key for us and there's a cost associated with that. So where other players in this space might be able to just originate massive, massive amounts of volumes and operate on a margin of 5 to 10 basis points, that model just doesn't work for us. We're not willing to jeopardize our franchise to operate on that bit of a margin. So compliance is the key issue here.

Speaker 3

And if this works and we can get more partners just like it, we're open to that and that's what we're going to look to do.

Operator

Look, I got to commend you. I mean, the ROE is clearly moving in the right direction. With the growth, the buyback, things like this really just go to improve our already pretty industry leading ROE. So I got to congratulate you guys and keep up the good work.

Speaker 7

Thank you. Appreciate it.

Operator

At this time, we are showing no further questioners in the queue. And this does conclude our question and answer session. I would now like to turn the conference back over to Andrew Murstein for any closing remarks.

Speaker 7

Thank you again for joining us this morning. We're off to a great start of the year as you just heard. Each of our business segments has been part of this performance and have helped us navigate the current environment very well. Our teams are doing an excellent job of balancing growth of our loan portfolio and net interest income while maintaining high credit standards. We remain focused on delivering shareholder value, including earnings, our dividend and periodic repurchases of our common stock.

Speaker 7

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. Thank you again and have a great rest of your day.

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Key Takeaways

  • Loan portfolio grew across all segments, boosting net interest income by 10% to $47.9 million, though net interest margin compressed to 8.1% due to higher funding costs.
  • Credit quality remained high: home improvement loans stayed super-prime with low delinquencies, non-prime recreation loans represent 36% of the portfolio, and allowances for credit losses rose to 4.40% (recreational) and 2.38% (home improvement).
  • The taxi medallion segment generated $3.1 million in collections, translating into $1.6 million of net benefits and $0.6 million of earnings, but collections are expected to slow to a $1.5–2 million quarterly run-rate.
  • Capital returns included a $2.1 million share buyback (with $17.9 million remaining under authorization) and a $0.10 quarterly dividend, deployed opportunistically given the stock’s discount to tangible book value.
  • Management expects moderating loan growth, further NIM compression over the next few quarters before expansion as yields on new originations continue to rise, and operating expenses remaining well below net interest income growth.
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Earnings Conference Call
Medallion Financial Q1 2024
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