Medallion Financial - Q3 2024

Transcript

Operator (participant)

Good day and welcome to the Medallion Financial Corp Q3 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ken Cooper, Investor Relations. Please go ahead.

Ken Cooper (Head of Investor Relations)

Thank you and good morning, everyone. Welcome to Medallion Financial Corp's Q3 Earnings Call. Joining me today are Andrew Murstein, President and Chief Operating Officer, and Anthony Cutrone, 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. 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.

Andrew Murstein (President and COO)

Thank you, Ken, and good morning. We executed well again in the Q3. We delivered $8.6 million 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 million of net income and $1.09 per share of earnings. 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. 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 would further enhance our already strong net interest margin. Moving to our segments, rec lending had another strong quarter, which included $139 million of new loan originations. 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 boat sales as it is the beginning of the season. This dips down in the Q3 as there are still two 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 30th was 14.92%, up 19 basis points from a year ago and 12 basis points from just one quarter ago. Our home improvement lending segment grew 8% over the prior year quarter and now sits at $814 million. Our current average rate of 9.76% is 38 basis points higher than a year ago and five 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 million 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. We continue to be intensely focused on deploying capital for shareholders with the goal of maximizing overall returns. During the quarter, we repurchased $1 million of our common stock at an average share price of $7.89 and still have over $15 million remaining on our current authorized $40 million 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. With that, I will now turn the call over to Anthony, who will provide some additional insight into our quarter.

Anthony Cutrone (EVP and CFO)

Thank you, Andrew. Good morning, everyone. For the quarter, net interest income grew 8% to $52.7 million 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% for the quarter, down one 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 16.33% and home improvement loans at an average rate of 10.75%. 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 yield will continue to increase well after our cost of funds plateaus. Our average cost of funds was 4.05% 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% over that same period. The average interest rate on our deposits was 3.68% as of the end of September. During the quarter, we originated over $275 million of loans, including 139 million of recreation loans, 97 million of home improvement loans, and 40 million of strategic partnership loans.

Total loans outstanding were $2.5 billion, 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 million, or 0.39% of the total consumer loans, as compared to $6.9 million, or 0.34% a year ago. Our provision for credit loss was $20.2 million for the quarter, an increase from both the $18.6 million in the Q2 and the $14.5 million in the prior year quarter. The current quarter included a $2.5 million net benefit related to taxing medallion loans, which compared to a $1.8 million benefit in the prior year quarter. $2.2 million of the current year quarter's provision specifically related to consumer loan growth.

Net charge-offs during the quarter were $13.4 million, or 2.18% of our average portfolio, compared to $10.4 million, or 1.88% of average portfolio in the prior year. Operating expenses were $19 million during the quarter, down from $20 million experienced in the prior quarter and $19.1 million 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 $8.6 million, 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 30th was $15.70 per share, up from $15.25 in the prior quarter and $14.06 a year ago. That covers our Q3 results. Andrew and I are now happy to take your questions.

Operator (participant)

Thank you. We will now begin the Q&A session. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. And at this time, we'll just pause momentarily to assemble our roster. And the first question will come from Christopher Nolan from Ladenburg Thalmann. Please go ahead.

Christopher Nolan (Analyst)

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

Andrew Murstein (President and COO)

Hey, Chris. Good morning. No, it was fairly clean. Our taxi medallion recoveries were a little elevated than what we typically see, $4.1 million of cash collected. We tend to hover around $2.5 million to $3 million on a normal quarter, so that increased EPS slightly, but nothing significant other than that.

Christopher Nolan (Analyst)

Then, I guess, generally turning to reserves. Is it fair to say that your reserve ratio is really a function of CECL, so it's a sort of a calculation? Is that a fair assessment?

Andrew Murstein (President and COO)

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

Christopher Nolan (Analyst)

Is your reserve ratio a function of CECL?

Andrew Murstein (President and COO)

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.

Christopher Nolan (Analyst)

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

Andrew Murstein (President and COO)

I think 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 moving forward.

Christopher Nolan (Analyst)

Great. And the asset quality is hanging in there. And you guys are up five quarters to eight. Should we expect lower loan yields because you're going for a higher quality client?

Andrew Murstein (President and COO)

I don't think so. We've been able to keep our origination levels high. I think that 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 writing at levels above our average. 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.

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.

Christopher Nolan (Analyst)

Okay. That's it for me. Thank you. Quarter.

Andrew Murstein (President and COO)

Thanks, Chris.

Operator (participant)

Again, if you would like to ask a question, please press star then one. The next question is from Mike Grondahl from Northland Securities. Please go ahead.

Matthew Howlett (Analyst)

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

Andrew Murstein (President and COO)

Hey, Mike. How you doing?

Anthony Cutrone (EVP and CFO)

Good. Thank you.

Andrew Murstein (President and COO)

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.

Anthony Cutrone (EVP and CFO)

Got it. And then going back to the $4.1 million 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?

Andrew Murstein (President and COO)

The 4.1 translates into about $2.8 million of credits on the income statement that benefit the bottom line. So if you just quantified that 2.8 million, it's 8 cents 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 $2.5 million, and that generates about 4 cents. So there was a couple of pennies added to EPS because of the collections. There was one larger collection. We probably brought in about $1 million on a settlement that all hit the income statement. Typically, with a normal quarter of $2.5 million of collections, 50% of every dollar collected is going to hit the income statement. In this quarter, it was more like two-thirds.

Anthony Cutrone (EVP and CFO)

Got it. Got it. Okay. That's helpful. And then with the provision, let's call it $20 million, clearly there was the benefit of $2.5 million from the collections, but also you called out the $2.2 million going the other way kind of for growth. Is $20 million the right way to think about kind of your core provision now, or is it more like $22 million?

Andrew Murstein (President and COO)

There's still a fair amount of uncertainty with where the economy goes. So I don't want to peg the number to 20 or 22. It could be closer to the 22 than 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. 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 there. 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.

Anthony Cutrone (EVP and CFO)

Fair. Fair. And then hey, just two more. One, the overall margin was only down one basis point 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?

Andrew Murstein (President and COO)

We're almost there. I think we've been looking at 8-ish, maybe slightly below that, but not meaningfully below that is what we think the bottom to be. I think in Q2, the NIM increased slightly. We dropped a basis point this quarter. I think we're almost there. Our cost of funds, it's interesting with CD costs leading up into the Fed cut in September, we saw three and five-year CDs run down in terms of the cost. Since that rate cut, I guess everyone was baking in the possibility of three 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. So we've got a little bit of ways to go before our CDs are priced at current levels.

But another rate cut or two should help out significantly.

Anthony Cutrone (EVP and CFO)

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

Andrew Murstein (President and COO)

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 basis points. 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.

Anthony Cutrone (EVP and CFO)

Got it. So on that $40 million, 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?

Andrew Murstein (President and COO)

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 or making a little bit of money. Our hope is to really accelerate this business. I think we're going to have a very strong Q4. So we were 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. We hired him a couple of years ago. And finally, it's starting to pay off for us.

Anthony Cutrone (EVP and CFO)

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

Andrew Murstein (President and COO)

So the interest we earn on the three or four days that we hold the loans, that's up in interest income. And the fee, in Andrew's example, the 50 basis points, that's in other income.

Anthony Cutrone (EVP and CFO)

In other. Okay. Hey, thanks, guys.

Andrew Murstein (President and COO)

Thank you. Thanks, Mike.

Operator (participant)

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

Matthew Howlett (Analyst)

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

Andrew Murstein (President and COO)

Hi, Matt. Good morning.

Matthew Howlett (Analyst)

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? You want to just continue to do both?

Anthony Cutrone (EVP and CFO)

Sure. 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. 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.

Andrew Murstein (President and COO)

And to add, the goal is definitely to increase it as far as Anthony said, to pick a percentage. But the goal should be to opportunistically look at 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% and 5% from the prior quarter.

So the stock buyback was small, was only about $1 million. That'll eventually slow. And then that'll 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, we look at all three. And I think we've effectively accomplished success in all three recently.

Matthew Howlett (Analyst)

Look, I mean, we were surprised by the dividend increase, and stocks are already paying a nice yield. So congratulations on that. The share repurchases, I mean, I know you said what was tangible? I know you said tangible book's getting close to 16. I know you think that's more the real book. But what was tangible book at the end of the quarter?

Andrew Murstein (President and COO)

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 a $43 million deferred tax liability that sits on our balance sheet that relates specifically to the goodwill and intangible assets. So when you factor that in, adjusted tangible book comes out to $10.17.

Matthew Howlett (Analyst)

Wow, that was what? It was 9.75 last quarter or something?

Andrew Murstein (President and COO)

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

Matthew Howlett (Analyst)

That makes the stock buyback.

Andrew Murstein (President and COO)

It's been growing a lot.

Matthew Howlett (Analyst)

Go ahead.

Andrew Murstein (President and COO)

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

You're probably one of the only banks trading at a discount, not only to GAAP Book, but to even Tangible Book. So those share repurchases make a lot of sense, and they're great to see for shareholders.

Matthew Howlett (Analyst)

Moving towards the margin, I want to just drill down a little bit. Anthony, you said the new CD rates are about 4-ish and currently have about 3.7%-ish CD rates at the end of the quarter.

Anthony Cutrone (EVP and CFO)

So at the end of September, 368 is our weighted cost on the CDs. And we're seeing new issuances recently ranging anywhere from 395-415. So it's in that 4-ish range. So we're probably about 30 basis points away from the current market.

Mike Grondahl (Senior Research Analyst)

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

Anthony Cutrone (EVP and CFO)

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

Matthew Howlett (Analyst)

Okay. Wow. Okay. I was thinking more like seven years. But okay. So they're rolling off pretty fast. You're getting several hundred millions of just amortization, right, on the REC?

Anthony Cutrone (EVP and CFO)

Yes.

Matthew Howlett (Analyst)

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

Anthony Cutrone (EVP and CFO)

I was going to say that we were at those levels. Anthony 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. 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. 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 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. 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.

Matthew Howlett (Analyst)

The way you're growing the portfolio and then potentially that margin to expand, and you're buying back shares. It just has a powerful impact on EPS. We can all do the math and what that implies. Congrats on managing that through this cycle. I guess just the last one on those fintech partnerships. You have one, Andrew and Anthony, with, what, Solar. You've got this personal loan one. 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.

Anthony Cutrone (EVP and CFO)

I think the goal is probably to add one every six 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. We'll keep adding partners, one or two every six 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. So hopefully, we'll continue to add on new partners.

Matthew Howlett (Analyst)

Great. Congrats on the dividend lift. Great quarter. Thanks, guys.

Anthony Cutrone (EVP and CFO)

Thank you, Matt.

Andrew Murstein (President and COO)

Thanks.

Operator (participant)

Ladies and gentlemen, this concludes today's Q&A session. I would like to turn the conference back to Andrew Murstein for any closing remarks.

Andrew Murstein (President and COO)

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. Have a great rest of your day.

Operator (participant)

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