Medallion Financial Corp (MFIN) Q1 2022 Earnings Call Transcript

Greetings. Welcome to Medallion Financial's First Quarter 2022 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to Ken Cooper of Investor Relations. Thank you. You may begin.

Thank you, and good morning, everyone. Welcome to Medallion Financial Corp.'s first quarter earnings call. During our call, we will refer to our earnings supplement slides. This presentation is available on our website at medallion.com by clicking Investor Relations. The presentation is near the top of the page. Joining me today are Andrew Murstein, President and Chief Operating Officer; and Anthony Cutrone, 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. 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. With that, let me turn the call over to Andrew.

Thank you, Ken. Good morning, everyone. Before Anthony takes you through our presentation, I would like to just touch upon a few general comments about our business and our quarter. As you saw, we started the year off well. Our net income for the quarter was $9.8 million, up 17% from a year ago. Our net interest income was up 25% to $35.9 million, and our net interest margin was a strong 9.2%. Our success over the past six quarters has positioned us well from a capital perspective. This allowed us to declare and pay a dividend of $0.08 per share and resume purchases under our stock repurchase program. Our growth lending segments are both consumer and commercial. Our consumer lending segments account for 94% of our loans. We continue to grow both our recreational and home improvement lending businesses. We originated $204.2 million of new loans in the quarter, which was up 44% from the prior year quarter. Our home improvement continues to be our fastest-growing segment, and we continue to work hard to build our consumer business by increasing the contractors and dealers we partner with. Our commercial lending business is our other growth segment. We originated $4.4 million of loans in the quarter, which helped our overall loan balance grow from $76.7 million at the end of the fourth quarter to $77.9 million at the end of the first quarter. Like our consumer loans, we have a strong interest rate for our commercial portfolio, which was at 12.41% for the first quarter. Moving to a few business highlights. During the quarter, we had approximately $10 million less noninterest income than we did in the fourth quarter of 2021. This is due to no sales or exits of investments in the quarter. As a reminder, we make small investments in fintech companies through our early looks of diligence for our strategic partnership program and through our commercial business. The timing and return on these exits are not predictable. However, when we do execute exits, we have been successful and hope to continue such success in the future. And finally, I hope you saw our announcement yesterday regarding our most recent Board and corporate governance enhancements. The Board will add two independent directors and has created a lead independent director position on the Board. Brent Hatch has been appointed to the Board and has assumed a lead independent director role, effective immediately. Our Board will engage a third-party executive search firm to assist in the search process for the additional independent director. These are further examples of our long-standing commitment to strong corporate governance. With that, I will now turn the call over to Anthony, who will provide additional financial highlights on the quarter and the year.

Thank you, Andrew. Good morning, everyone. As you could see on Slide 3, we have a focused business plan. As we have continued to see in the trailing quarters, the growth in our consumer and commercial segments has resulted in bottom-line success and accretion to shareholder value. As shown on Slide 4, we had several financial highlights in the first quarter. We earned net income of $9.8 million and earned diluted EPS of $0.39. We continue to have success with loan originations, which grew 44% over the prior year quarter, almost entirely in our recreation and home improvement loan portfolios. As shown on Slide 5, 99% of our nearly $1.6 billion of loans are consumer and commercial loans. Our business plan is clear: grow our consumer and commercial portfolios. Home improvement lending is our fastest-growing segment, growing 158% since 2018 while recreation lending, far and away, remains our largest segment. We are very pleased with the mix and performance of our overall loan portfolio. Net interest income continued to grow, as reflected on Slide 6. This continues to be driven by our loan growth in the consumer lending segments. As we anticipate the effects of rising interest rates throughout the remainder of 2022 and beyond, while we could see some compression in our margins, we still believe that the growth in our consumer segments should help mitigate that compression and have a positive effect on our bottom line. Slide 7 does a good job of showing a key competitive advantage for us over nonbank competitors: our high net interest margin, which we maintained in the first quarter. Our home improvement portfolio is our fastest-growing segment, but has a lower net interest margin than our recreational segment. Continued success in growing those segments at similar rates could put pressure on overall net interest margins. However, this is a worthwhile exchange in our minds for increasing our size and decreasing our credit risk exposure, all with the goal of increasing earnings as the portfolio grows. Looking at our noninterest operating costs. As shown on Slide 8, we continue to expect to grow our top line at a faster rate than our costs. During the quarter, we had higher incremental professional fees than a typical quarter. These costs were primarily associated with the cooperation agreement we announced yesterday and other litigation. We expect professional fees to fluctuate over the coming quarters. Lastly, Slide 9 provides a summary income statement with some key financial ratios for the quarter, and Slide 10 provides our summary March 31 balance sheet with some key metrics. A few other financial items to note. During the quarter, we paid a dividend of $0.08 per share and purchased just over 67,000 shares of our common stock as we resumed purchases under our stock repurchase plan. As announced yesterday, we have a new and increased stock repurchase plan, and we declared a quarterly dividend of $0.08 payable in May. Lastly, a quick update on our medallion segment. During the quarter, we had $5.2 million of cash collections related to medallion assets. These collections have helped further reduce our net medallion exposure, which now stands at $37 million and represents less than 2% of our total assets. The recent activity in the taxi medallion industry, including Uber's recent announcement that it is partnering with New York City taxis and the general recovery of taxi use continues to be favorable for this business segment. That covers our first quarter financial overview. With that, Andrew and I are happy to now take your questions.

Our first question is from Steve Moss with B. Riley Securities.

Maybe just starting, Andrew, can you share your thoughts on loan pricing and your expectations for loan growth as we move into a Fed-tightening cycle?

Sure. In the first quarter, we experienced a 44% growth compared to the same period last year. There remains a strong demand for our products, and our origination experience indicates that pricing is roughly consistent with what we saw at the end of the fourth quarter. For the recreation portfolio, the weighted average yield on these loans was 4.5% at the end of the fourth quarter, and it rose to about 14.36% in the first quarter. Meanwhile, the home improvement segment remained stable at 8.47%.

That's helpful. I'm interested in your thoughts on funding costs, especially with the margin pressure you've mentioned. As we look at the current pricing of CDs, I would like to know how you plan to approach funding over the next year.

Sure. We haven't experienced a significant impact in the first quarter. Our average rate on certificates of deposit is 124 basis points, compared to 120 basis points in the fourth quarter. The issuances in the first quarter were likely around 149 basis points blended, which is lower than in the fourth quarter. In the CD market, we're observing an increase in interest rates ranging from 100 to 140 basis points for 36-month CDs in the first quarter, and this rate is changing daily. We believe the market is anticipating multiple Federal Reserve rate hikes, not just one. Looking at our maturities over the next two years, the blended rate for maturities for the remainder of 2022 was 152 basis points, and for 2023, it is expected to be 163 basis points.

Okay. That's helpful. And then in terms of just maybe just going a little further into the settlement here with the activist. Maybe just a little bit of color, if you guys could, around the decision and the rationale to settle here. Just kind of curious as to any thoughts or insight you could give.

Sure. First, we've been very open to our shareholders' concerns and have maintained an ongoing dialogue with this group for many years. We have a policy of openness and have engaged in healthy discussions throughout this time. Secondly, we aim to excel in corporate governance and will be appointing our sixth new independent director in the last five years once this process is complete. Third, we have successfully repositioned the business, which has been positively noted, and we are continuing to enhance shareholder value through improved governance, the recently announced dividends, and the increased buyback we disclosed yesterday.

Our next question is from Mike Grondahl with Northland Securities.

Could you give us an update on where delinquency stood for kind of the RVs, the boat loans and maybe home improvement as of March 31?

Sure. Yes, they continue to be low. 90-plus delinquencies for the RV portfolio, at March, were about $3.8 million. It's almost identical to where it was at year-end. In the 60- to 90-day buckets, we're at $6.1 million versus $6.6 million at the end of Q4. And home improvement also continues to be near historic lows.

Got it. And in terms of the yields you're getting on those, do you think you have any pricing power as rates rise?

Yes, I believe we do. We've been cautious because we want to assess how the overall market in this area performs before we decide to raise rates for our borrowers. We want to avoid pricing ourselves out of the market. However, we do anticipate that there will be rate increases over the next few quarters.

Got it. And then I think you guys mentioned you're working to expand contractors and dealers. Can you give us an update on those counts at the end of March?

I believe they are slightly above their position at the end of Q4. This is an ongoing effort. We are continually seeking to enhance our relationships. A substantial portion of our business is derived from a small number of our partners. While we have 5,000 dealers we collaborate with, much of our business comes from just a couple of dozen. It's not limited to that section, and we maintain strong relationships with those groups.

Got it. Got it. Where were you carrying the New York medallions at March 31? Have those been written up at all? Or are they still about $80,000?

This seems to be a question we get frequently. We are still carrying the medallions at $79,500. Recently, New York City published some information on their transfer prices, showing values ranging from $120,000 to $180,000 for New York City medallion transfers. To explain briefly, we categorize our medallion assets into two groups: loans and loans in the process of foreclosure, with the majority of our assets being the latter. These assets are classified as held for sale and must be recorded at net realizable value according to GAAP, which is the lower of cost or market value. Therefore, we cannot increase the value of these medallions. Once we have recorded them at $79,500, they remain at that value. Even if they are sold for $140,000, we do not recognize that gain until the asset is sold. On the loan side, we continue to reserve down to the $79,500 level because we still consider this portfolio to be impaired. Many of these loans are under some form of modified deferral and are not making full principal and interest payments. Until there is a significant change, we do not see a reason to adjust our reserve levels.

Got it. And maybe two more questions on the medallions. One is if you have a rough utilization for your portfolio? You gave that out a couple of years ago, I think. And then secondly, you've now collected about $5 million in previously kind of charged-off taxi collections. Are you feeling comfortable? How much more is there to collect out there? Kind of what's your outlook for collections?

We believe there is still a significant amount more to collect. From the $5.2 million we've collected, approximately $3.5 million was used to reduce our assets, which is reflected in our exposure decreasing from about $40.5 million to around $37.1 million. The remaining amount has appeared on the profit and loss statement, particularly in the other income line, which shows approximately $2 million as gains from previously written-off medallions. I'm curious if you believe it's possible to collect another $20 million this year. What is the overall target you're aiming for, and what do you expect to achieve by the end of the year? A portion of that consists of traditional principal and interest payments that are received regularly. As we've mentioned in previous quarters and probably over the past years, some of these settlements fluctuate, making them difficult to project. We have a few that we're currently addressing, but we prefer not to disclose specific numbers. However, we believe collections could reach that level, although we're not certain. Considering the current market prices and the trends we're observing, we see significant potential for some substantial recoveries.

And then maybe just lastly, how are you thinking about loan loss reserves overall?

Sure. On the consumer side, I think we're at, on a percentage of the loan balance where we were around Q4, a slight change. I think recreation is down slightly, and that's just because of the loss experience we have been seeing over the past 12 months. Home improvement is up slightly a couple of basis points. On the medallion and the commercial segments, one, the medallion reserves are slightly lower, and that's because of cash collections. So to the extent that we collect cash on a loan, it's reducing the reserve. And on the commercial side, we had an exit of one of our mezzanine loans in Q1, which had a reserve. So that came down slightly.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Andrew for closing comments.

Thank you again for joining us on the call today. 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 day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.