Medallion Financial - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 net income of $10.1M ($0.43 diluted EPS) was the strongest quarter of 2024, up sequentially vs Q3 ($8.6M, $0.37), but down YoY due to much lower taxi medallion recoveries; NII grew 6% YoY to $52.0M while NIM (gross) compressed to 7.84% as funding costs rose and a nonaccrual interest reversal hit yield.
• Credit costs were elevated: provision of $20.6M (vs $10.8M YoY) with net charge-offs in Recreation at 4.35% of average loans and Home Improvement at 1.75%; management reiterated Q4 is the seasonal peak for delinquencies/charge-offs.
• Strategic partnership loan volume accelerated sharply ($124M in Q4 vs $40M in Q3), and the company signed an LOI to sell up to $121M of recreation loans at a premium, supporting capital efficiency; dividend raised 10% to $0.11/share.
• One-off items: $3.0M charge tied to SEC settlement-in-principle and a $5.5M insurance benefit on related legal costs; equity investment gains were $3.8M in Q4; these “noisy” items partially offset each other.
• Estimates context: S&P Global consensus (EPS/Revenue) unavailable at time of analysis; estimate comparisons could not be shown (S&P Global data unavailable).

What Went Well and What Went Wrong

What Went Well

• Net interest income grew YoY; Q4 NII was $52.0M (+6% YoY), with full-year NII at a record $202.5M; management highlighted record total interest income, NII, assets, strategic partnership volume, and total equity.
• Strategic partnership program scaled rapidly (Q3: $40M → Q4: $124M), adding fee/interest income with limited credit risk (short hold, partner takeout), and management expects continued partner additions.
• Capital allocation: dividend increased 10% to $0.11, ongoing buybacks ($4.6M in 2024), and LOI to sell up to $121M of rec loans at a premium to recycle capital; book value/share rose to $16.00 (vs $14.63 FY23).

Quote: “We finished the year with record total interest income, net interest income, assets, strategic partnership loan volume, and total equity. We believe we are well-positioned for 2025” — Andrew Murstein.

What Went Wrong

• NIM compression persisted: Q4 gross-loan NIM was 7.84% (down 27 bps QoQ and 36 bps YoY), pressured by higher cost of funds and an interest reversal (~13 bps hit) from two commercial loans put on nonaccrual; management sees funding costs somewhat decoupled from Fed cuts near term.
• Higher credit costs: provision rose to $20.6M (vs $10.8M YoY); rec NCOs at 4.35% and home improvement at 1.75%; management reiterated Q4 is seasonally the worst for delinquencies/charge-offs.
• External overhang: SEC settlement-in-principle led to a $3.0M charge (offset by $5.5M insurance benefit); activist ZimCal criticized Bank NIM and credit trends and flagged governance/comp issues, creating headline risk into 2025.

Transcript

Operator (participant)

Good morning, and welcome to the Medallion Financial Corp fourth quarter 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. For today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. 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 and Investor Relations. Please go ahead.

Ken Cooper (Head of Investor Relations)

Thank you and good morning. Welcome to Medallion Financial Corp's fourth quarter and full year 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 fourth quarter 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, everyone. We appreciate you spending some time with us to hear our business update. We ended the year well with nice contributions coming from each business. Our fourth quarter net income was our highest quarter of net income in 2024, which topped off another successful year for our company. For the fourth quarter, we delivered $10.1 million of net income and $0.43 of earnings per share for our shareholders. For the full year, we delivered $35.9 million of net income and $1.52 of earnings per share. Helping drive these results were several important achievements. Towards the top of the list was generating over $1 billion of loan originations for the year for the first time in our history.

What was especially pleasing about this milestone is that we accomplished this while continuing with our high credit standards and the related credit quality of our borrowers. The vast majority of our total loan portfolio is to super prime, prime, and near prime borrowers, which we believe insulates us from significant volatility and strengthens our risk profile. We continue to target an enhanced borrower base and to improve the credit quality of our portfolio. We are now originating loans to borrowers with an average FICO score of 686 for recreational and an even stronger 781 for home improvement. We have done a wonderful job further improving the overall credit of this segment in just a few short years. Another achievement in the fourth quarter was the exit of a portfolio investment within our Medallion Capital segment, which resulted in net gains of $3.8 million.

For the year, we had $6.9 million of net gains driven by two highly successful exits. This transaction is reflective of the type of equity kicker we get within our commercial lending group. We have proved time and time again that this is a very creative part of our business model. As a reminder, we currently hold around $9 million of other equity investments on our balance sheet. Although the timing of exits is not predictable, this division has generated nearly $15 million of net gains over the past three years. Over the past 10 years, on a pre-tax basis, this division has returned on average in excess of 17% annually. Moving to our segments, RET lending had a good quarter, which included $72 million of new loan originations as compared to $63 million in the 2023 fourth quarter.

Just four short years ago, our RET loans were just under $800 million, which shows the great growth we have had recently. Total outstanding RET loans of $1.5 billion were down $11 million from the prior quarter and up $207 million from a year ago. The drop in total outstandings from Q3 is a function of seasonality for our business, with the fourth quarter typically being our slowest of the year. Importantly, these loans carry our highest interest rate across our loan books. Our average interest rate as of the end of the year was 15.07%, up 28 basis points from a year ago and up 15 basis points from just one quarter ago. Our home improvement lending segment originated $83 million of loans during the quarter, which led to our loan book being up 9% from a year ago to $827 million.

The growth of this segment has been even more robust than RET over the last four years. This growth rate comes with good interest rates. The current average interest rate of 9.81% is 30 basis points higher than a year ago and five basis points above the most recent prior quarter. Our commercial lending segment ended the year with $111 million of loans, which was just below the loan balance of the portfolio at the beginning of the year. The average interest rate was up 10 basis points to 12.97%. We like this segment because of the strong yields we earn, and as I mentioned earlier, we have a long track record of realizing gains on the equity investments we typically make as part of these loans. Our tax and Medallion business continues to be in a normal run rate zone.

We collected $2.6 million of cash in the fourth quarter and $12.1 million of cash for the full year of 2024. We believe this level of performance is sustainable in the near term. One quick update on our strategic partnership program. You likely saw the significant growth in our loan volumes for this segment of the fourth quarter. We went from $40 million in the third quarter to $124 million in the fourth quarter. This is mostly attributed to the addition of our most recent partner, which started in the fourth quarter. These trends have continued so far in 2025. As of now, we only hold these loans for a few days. Therefore, right now, it is not as impactful to net interest income or EPS as it is to our loan origination levels, but we certainly took a nice step this year on that business line.

As to capital allocation, our board recently approved an increase of our quarterly dividend by 10% to $0.11, beginning with the dividend that was paid in the fourth quarter. As has always been the case, our goal with every dollar of our capital is to provide a tangible return to our shareholders that is sustainable long term. We have increased our dividend for a second time since its reinstatement back in 2022, which underscores our confidence in the company's future and commitment to shareholder value. During the year, we repurchased over 570,000 shares of our common stock at an average per share price of $8.07. We still have over $15 million remaining on our current authorized $40 million share buyback plan, and we'll continue to be opportunistic when it makes sense.

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 6% to $52 million from a year ago and was down 1% from the prior quarter. For the year, net interest income increased 8% to $202.5 million from $188.1 million in 2023. Our net interest margin on gross loans was 7.84% for the quarter, down 27 basis points from the prior quarter and down 36 basis points from a year ago. In addition to a 7 basis point rise in our cost of funds, during the quarter, we placed two commercial loans on non-accrual and reversed $427,000 of interest income, which pressured our yield. This reduced our net interest margin by approximately 13 basis points during the quarter. For the year, our net interest margin was 8.05% on gross loans compared to 8.38% in 2023.

During the fourth quarter, we originated recreation loans at an average rate of 16.02% and home improvement loans at an average rate of 10.94%. We continue to originate both consumer loan products at rates above the current weighted average coupon in these portfolios. Importantly, the average rates charged on new originations in January were above 16% for recreation loans and above 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 4.12% during the quarter, up 60 basis points from a year ago, and was 3.93% for the full year, up 77 basis points from the year ago. The average interest rate on our deposits was 3.71% as of the end of December.

Total loans outstanding were $2.5 billion, increasing 12% from a year ago, and included both loans held for investment and those held for sale. This is comprised of $1.5 billion of recreation loans, $827 million of home improvement loans, and $111 million of commercial loans. For the year, the average yield on our loan portfolio increased 32 basis points from a year ago to 12.01%. Consumer loans more than 90 days past due were $11.4 million, or 0.49% of the total consumer loans, as compared to $10.6 million, or 0.52% a year ago. Our provision for credit loss was $20.6 million for the quarter, an increase from both the $20.1 million in the third quarter and the $10.8 million in the prior year quarter, and reflected the release of $3.9 million of allowance for credit loss associated with $121 million of recreation loans being moved to held for sale.

In addition, the current quarter included $1.7 million of net benefits related to tax and Medallion loans, which compared to $12.1 million of benefits in the prior year quarter. Net charge-offs in the recreation portfolio during the quarter were $16.9 million, or 4.35% of the average portfolio, and for the home improvement portfolio were $3.6 million, or 1.75% of the average portfolio. Operating expenses were $17.2 million during the quarter, down from $19 million experienced in the prior quarter and $19.1 million incurred in the prior year quarter. Included in operating expenses for the quarter were a couple of items related to moving closer to a resolution of the SEC matter.

First, we booked a $3 million charge in connection with entering into an agreement in principle on terms of settlement with the SEC's Division of enforcement, which still remains subject to approval of the commissioners of the SEC and the court. Additionally, we recognized $5.5 million of a benefit in connection with previously received insurance coverage related to legal costs associated with this matter. For the quarter, net income attributable to our shareholders was $10.1 million, or $0.43 per share. Our net book value per share as of December 31 was $16, up from $15.70 in the prior quarter and $14.63 a year ago. Our adjusted tangible book value per share, which excludes the value of goodwill, intangible assets, and the correlated deferred tax liability associated with those assets, was $10.50 as of December 31, up from $10.17 a quarter ago and $9.15 a year ago.

That covers our fourth quarter and full year results. Andrew and I are now happy to take your questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question will come from Mike Grondahl, with Northland Capital Markets. Please go ahead.

Hey, guys. This is Logan on for Mike. First off, just congrats on the quarter. We kind of want to dig into, can you provide some color around why you are selling the $121 million of the RET loans and when you expect that to close? Thank you.

Andrew Murstein (President and COO)

Hi, Logan. Thanks for the question. We are selling it because the volume was stronger than anticipated during the year. We continue to grow both those lines very well, the RV Marine and home improvement. It just gives us another good funding option. It's good to have a lot of options at our disposal. If we continue to have better than expected growth in 2025, then we could always revisit that again. In terms of when it could close, my guess it would be sometime in the next 30-60 days.

Perfect. Yeah, thank you for the color. One last one from us. Can you talk about how you guys are feeling about credit quality going forward and delinquency levels and any sense that they are peaking currently?

Anthony Cutrone (EVP and CFO)

Hey, Logan. Yeah, annually, Q4 is when we see delinquencies and charge-offs hit that seasonal high, and then they start to settle in towards the end of Q1, ramping up to our lower seasons in Q2 and Q3. I think it's hard to say. We're not quite sure how everything plays out with what's going on in DC right now, but we do see, and we have been seeing, better performance in our more recent vintages. Those loans that we've issued over the past 12 to 24 months, those seem to be performing better, and that tracks with when we actually started tightening and increasing our credit standards halfway through 2023.

Yep. Thank you. Thank you, guys. Congrats on getting on the quarter, and I'll hop back on the queue.

Thanks, Logan.

Operator (participant)

With no further questions, this concludes our question and answer session. I would like to turn the conference back over to Andrew Murstein for any closing remarks.

Andrew Murstein (President and COO)

I think Logan may have had some additional questions, perhaps. Maybe we could revert to him for a second, see if he had anything else.

Operator (participant)

Just one moment. Logan, if you have any questions, please hop on the queue. You can press star, then one. Okay. We'll have another question from Mike Grondahl again. Please go ahead.

Could you guys, sorry about that. Can you provide some additional color about margins and how you guys see those bottoming and if you see those bottoming in 2025?

Anthony Cutrone (EVP and CFO)

Sure. I think for a while now, we've been hesitant to call a bottom. I think what we're seeing with our cost of borrowings is that it's somewhat decoupled from Fed decisions. The cost of our CDs currently are at rates near or above what we were seeing six months ago. I think until we see further clarity on where the Fed goes with additional interest rate cuts, we're not sure exactly where we end. We don't think we get significantly lower from where we are now, but we will bounce around a little. I will say that in Q4, we originated loans—as I said before—we originated loans at levels higher than our average coupon. In January and February, we were originating loans at levels above that.

Our loan book is fixed, the rates, but we do have the option and the ability to increase rates on new originations, and that's what we're doing. We think that counteracts any additional cost of funds increase we experience.

Perfect. Okay. Thank you. Can you provide some additional color about loan growth that you're seeing currently and then throughout 2025?

Sure. Yeah. I mean, we're seeing a fair amount of demand for both products, the home improvement and the recreation loans. We haven't loosened credit. We have no intentions of loosening credit anytime soon, but there's still a fair amount of volume to be had out there. In terms of growth of the portfolio, we probably see 2025 growing anywhere from mid to high single digits, which is a little bit lower than what we've done in past years. With a $2.5 billion loan book, we think it's appropriate given where earnings are and where we're deploying capital.

Perfect. Yep. Then one final modeling question from us. How should we think about operating expense going forward? Is $20 million kind of the right number to sit around, or just any insight there?

I think it's probably closer to 21 or 21 and a half a quarter, which is higher than what we've experienced putting Q4 aside. It's a little bit higher. As we grow and as an insured deposit institution, we've got to make sure that we've got the right people and the right staffing levels to handle our growth. There are additional costs there. Additionally, we've got a fair amount of initiatives that we've been undertaking related to our loan system, analytics departments within the bank specifically that are going to require capital. We expect costs to increase. Again, these increases in costs are going to be covered by the increases in income that we expect to generate.

Perfect. Thank you. Those are all the questions I have for now. I appreciate you guys. Let me ask some additional ones. Thank you.

Thanks, Logan.

Operator (participant)

Again, if you have a question, please press star, then one. We'll pause momentarily to assemble our roster. With no further questions, I think this will conclude our question and answer session. I would like to turn the conference back over to Andrew Murstein for any closing remarks.

Andrew Murstein (President and COO)

Thank you. For 2025, we expect to continue executing a similar strategy as we have for the past several years, that being prudent growth of our lending businesses. We anticipate keeping our credit standards at the current levels, which have served our businesses so well. Over the past several years, we've strengthened, optimized, and transformed our company into a highly efficient business that generates strong profitability and cash flow. Our commitment to our shareholders remains as strong as ever, evidenced by our growth, dividend, and opportunistic buybacks. We eagerly anticipate maintaining the path we have established. Thank you again for your investment and interest in Medallion Financial Corp. Have a great rest of your day.

Operator (participant)

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