Q4 2021 Medallion Financial Corp Earnings Call
[music].
Good day and welcome to the medallion financial fourth quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions. You ask a question you May press Star then one on eight touchdowns out if you'd like to withdraw your question Press Star then two.
Please also note. This event is being recorded and I would now like to turn the conference over to Ken Cooper of Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to medallion Financial's fourth quarter earnings call. During our call. We will refer to our earnings supplement slides. This presentation is available on our website at medallion dot com by clicking Investor Relations. The presentation is near the top of the page joining me today are Andrew <unk>, President and Chief operating Officer.
And Anthony you could trone, 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.
<unk> to update these forward looking statements with that let me now turn the call over to Andrew Andrew.
Thank you Ken Good morning, everyone, we're doing things a little differently. This earnings call during our remarks, Anthony and then I will walk through a short slide deck to further illustrate our business drivers and trends. This is the first time. We've used this slide deck. We believe this will help our investor cumulatively fully.
<unk> and visualize the power of our strategy and model.
We executed well all year. This was clearly shown as we increased our earnings each quarter. We have now had sequential improvement for five consecutive quarters and this resulted in a record breaking year for earnings as we reported $54 1 million in net income and $2 17.
<unk> per share for 2021.
The most important component of our strategy and the driver for our performance in 2021 has been our consumer lending segments, which now account for 94% of our loans.
We experienced growth in both consumer lending segments, all year and this has continued so far in 2022.
Recreation, which is predominantly loans for total rvs and boats and home improvement which include loans for home projects like replacement Rus swimming pools and windows, both continue to do well.
Our commercial lending business is another important part of our strategy and also had a very good year.
After 18 months of slow loan origination activity caused primarily by Covid, we started to ramp up our origination volume in 2021.
This led to a 17, 5% year over year increase in our loan balances.
Cost of rigorous underwriting standards, our ability to take equity stakes in some of these early stage companies and the strong net interest margin of the loans commercial lending is an attractive business for us we have a wonderful team managing it.
Moving to a few business highlights one of our focus areas as loan originations and our consolidated loan origination volume was strong all year.
We had a 53% increase in loan originations this year, which totaled $747 million.
This is a testament to our teams and technology, we have a diligent process of working with qualified contractors and dealers and quickly assessing the credit profile of their customers.
Chairman borrower credit worthiness.
We are still operating below our historical averages for loan loss provisions.
We continue to work hard to maintain good credit quality, while adhering to our defined controls to keep losses at a minimum.
Our capital allocation philosophy is to be prudent.
First we look for how we can invest back in our business.
With their consumer lending and commercial lending segments, well capitalized our board of directors evaluate is how to give capital back to shareholders.
As you saw in our earnings release, our board approved the reinstatement of our quarterly dividend, which was suspended in 2016.
We are now in a position to resume our quarterly dividend starting in March at eight cents per share.
We are pleased to be able to pay a dividend and potentially expand our shareholder base with dividend seeking investors.
Before turning the call over to Anthony there were a few other items that do not directly impact our operational performance, but are deserving of mentioned.
First we have litigation with the SEC related to certain alleged actions from late 2014 to 2017.
As we said in our statement on December 29, 2021, we intend to vigorously defend against the SEC's unfounded charges.
Confident will be completely vindicated.
Our next step in the process is to file a response to the SEC, which we would do before March 20 seconds.
This is an open legal case, we cannot speak further on this matter.
Second we completed the exit of non core assets in 2021.
In December we divested our our Pac investment, which was a legacy investment from our days as a business development company.
With that I will now turn the call over to Anthony who will provide additional financial highlights on the quarter and year.
Thank you Andrew.
Morning, everyone.
My comments start on slide four.
In the fourth quarter, we attain near record net income of $19 5 million.
78 cents per diluted share.
Return on equity grew to 28%.
For the full year, we earned $54 1 million or $2.17 per diluted share. We grew our recreational loan portfolio by 21% and grew our oil equivalent loan portfolio by more than 30%.
As shown on slide five in just three years, we've grown our consumer and commercial portfolio significantly while reducing our medallion loans to just 1% of total loans.
Home improvement lending is the fastest growing segment at 138% since 2018 and.
And we have sustained strong growth recreational loans as well.
Increasing that portfolio by 64%.
Again, all in the last three years.
The results. We are seeing today are stark comparison to a little more than a year ago and on slide six you can see where we are today compared to the early days of the COVID-19 pandemic in 2020.
As we progressed through the past two years, we took the pain associated with the deterioration in the taxi medallion markets substantially reduced our exposure and have now both our fifth sequential quarter of positive earnings.
Everything starts with net interest income and as you can see on slide seven and any.
Both net interest income and net interest margins grew last year.
The growth in net interest income is comprised of a few parts.
The changing mix of our loan portfolio, primarily the increase in higher yielding consumer segments.
The overall growth in the loan portfolio and a continued decrease in our overall cost of funds.
Driven down significantly like the low cost of our brokered Cds.
Our net interest margin for the 2021 year was 9.25%.
60 basis point increase when compared to $8 six 5%.
2020.
Looking at our non interest operating costs and excluding the impact of our pack.
As shown on slide nine you can see that we are gaining efficiencies growing our topline much more than our costs as we continue to scale and grow we do expect our costs to increase but at a lower rate.
Looking at operating costs again, excluding the impact of <unk> as a percentage of our net interest margin. There was a nice trend from 2019 through 2021.
We started 2021 with 187 employees 138 of which were at medallion Bank, our packet medallion capital.
We finished the year with 136 employees.
Two of which were at medallion bank and medallion capital.
Decline is related to the exit of our attack and a 30% reduction in head count at the parent company.
Set by hiring at medallion bank.
Yeah.
Slide 10 gives an overview of the performance within our commercial segment.
With $15 $5 million of originations in the fourth quarter.
And we have a robust origination pipeline.
In 2022, we look to grow this segment.
Slides 11, and 12, our summary financial tables, we have included for your convenience.
A few other items to note.
During the quarter, we had $5 4 million dollar gain on an additional sale of shares in a fintech investment.
For the year, we sold 80% of this investment for gains of $11 3 million.
Salaries and benefits for the quarter.
We're up sequentially from the third and up.
Over here, primarily due to accruing compensation considerations.
With regard to a record year as well as hiring at medallion bank.
Lastly, a quick update on the medallion side.
During the quarter, we collected $8 4 million of cash.
Related to medallion and $24 9 million.
For the full year.
Our medallion exposure continues to decline.
Being at 40, and a half million.
And.
Representing less than 3% of our total assets.
As I hope you can see we had a great year and look forward to 2022.
With that enjoyed I are now happy to take your questions.
Yeah.
Yeah.
Yes.
Okay. We will now begin the question and answer session.
You'd like to join the question queue Press Star then one entering new yourself from the question queue Press Star then two.
If youre using a speakerphone please pick up your handset before pressing any of the keys.
The first question comes from Steve Moss with B Riley FBR. Please go ahead.
Good morning.
Morning, Steve maybe just.
Good morning, Andrew maybe just starting with the loan growth here you had a good quarter here on <unk>.
The recreation side and the home improvement my sense on the recreation side in particular as that remains strong unit, what's more typically seasonally weak.
So just kind of curious as to what you guys are seeing there and if you could expand a little bit as to how youre thinking about the commercial loan growth in the pipeline there and what the potential is for 2022.
I'll start Anthony So we're seeing the same trends continue into 2022, all the business lines look very solid and nothing has really changed.
In term in the consumer side.
<unk> continues to be a.
A nice growth area for us we got into that business back in 1998. So.
Pretty have a seasoned team there that's really done a great job through the years for us.
And they also have one of the strongest pipelines that they've had in years.
Right year for them in 2020.
<unk> and their trends are continuing into 2022.
I think the only thing you know just to reaffirm what Andrew said, you know, especially in the home improvement side.
Demand is still strong there we.
We don't anticipate foresee any dramatic changes in origination volumes in 2022.
But we do expect a year over year growth.
Okay.
Got it and then in terms of maybe just.
Funding loan growth here heading into a fed tightening cycle and interesting to see how that will play out in terms of how many hikes just kind of curious are you guys, making any adjustments to your funding strategy.
Or you know should we expect more of the same in terms of a staggered.
Staggered.
The ratio on the CD portfolio.
Yeah, I think that's accurate you know.
We don't have any plans on changing our funding strategy.
We've been successful with the brokerage fee model.
You know I think are looking you know to the first half of 2022. The C. D that'll be rolling off that will be replacing awesome or higher rates than current rates. So you will see an impact, but it'll be the latter part of the year.
Right.
Okay, and then in terms of just on the capital deployment front here.
Nice to see the dividend declared here.
Just kind of curious how you guys are thinking about the dividend payout ratio.
And the potential for any share repurchases.
Yeah.
So I think that the idea has always been to reward shareholders.
Five years have been difficult as we've navigated through the taxi medallion.
Deterioration.
We like to think that we're on the.
The other side of that now.
So it's a it's the right time to reinstate the dividend.
You know and I think that's the clearest way to provide a return to shareholders buyback.
Buybacks are nice.
There's a lot of macro items that could occur that impact you know volatility in stock prices that we cant control so by giving the shareholders' cash they can they can make their own decisions.
Alright, great. Thank you very much.
Thanks, Steve.
Yeah.
Yeah.
The next question comes from Mike Dahl with Northland Securities. Please go ahead.
Hey, guys. Thank you and congrats on the progress first off.
Andy on the.
Men's side.
$15 5 million of new loans, you know that that's a huge improvement.
What sort of drove that did you guys, just say hey post COVID-19 .
Capital from.
Selling Richard Petty racing.
And then maybe just average loan size. If you have it just be curious about about that a little bit.
That business has always been a little choppy for us.
Through the years.
There's areas you know, sometimes you had big gains and therefore, you get pay offs. Other times, it's kind of flat for a while and you have to wait so it's really been a almost a perfect storm for them.
The economy is doing well they're experiencing gains.
You're taking their option and warrant profits.
Got more capital to grow when they get paid off the loans like that we have more capital now to put into them. So it's really all of those factors has led them to really excel the way that they have been doing.
In terms of average loan size historically, it's been about $3 million per loan. So we tried to fly under the radar Theres a lot of Mezz players are much larger size deals than that with these guys have developed a great niche through the years against since through the 19 nineties are so average loan size is probably picking up a little bit now, but probably only from about three.
To three $5 million to $4 million.
Got it got it.
And.
The P&L has I think 10 million.
Gains from equity investments I think you guys called out $5 4 million in the quarter from the selling a piece of the Fintech investment.
And then NASCAR.
Sale was 0.7, what's still remaining to get up to that 10 million.
It all relates to that that additional $10 million or so that's our equity portfolio. Most of which is is related to the commercial and mezzanine. So these are the the equity Kickers. If you will that we are we get when we make these loans we had a few successful exits in the quarter and throughout the year.
<unk>.
Got it got it okay.
And then maybe.
In the third quarter 10-Q, you guys mentioned strategic alternatives that you were looking at for the bank any updates there.
You know I think I think the company and the board.
Our desire is to increase shareholder value, however that might be.
So we're always looking at options.
With all of our segments, how do we return value to the shareholders.
As of right now, there's there's nothing on the table.
But you know that that changes you know.
With markets and things of that nature, but but but you know I think that's a that's a statement just to address the concerns that you know we are cognizant of shareholder value and that's something we're looking at you know if if something were to arise.
Got it and then maybe lastly.
Can you remind us where the medallion values are.
On your books I think your last told US it was like 79 or 80000 per medallion and kind of where the market is today.
So.
Our medallion exposure, we've got loans, but.
And we keep those reserved down the roll on non accrual the reserve down to collateral value, which in New York is net of collection costs is we come up with a number of 79 and a half thousand that's.
That's the same for Newark, Chicago's $6000.
Our loans in the process of foreclosure.
<unk>.
We account for that at the lower of cost or market or.
Net realizable value.
Most of those are held below the 79000 dollar value.
Got it and then I guess, just one more I'm sorry related to that the $8 4 million of collections.
Had related to the medallions that we've built.
I believe previously charged off.
Is that one or two is it a bunch of small ones how would you characterize that and whats your outlook. There yeah. It's all the above I think historically and I think we've said this before and you know if you go back years, our our medallion.
Exposure, our medallion loans have been weighted more towards fleet operators are larger.
Borrowers.
So the you know the.
The bailout type plan that you see in New York City, presenting some other lenders or are utilizing they don't work for those borrowers because they own too many medallions.
For for a number of years, we've been you know.
We spent you know spending real dollars on collection efforts and I think what you're seeing in 2021 is that all of those efforts come to fruition.
I think going forward I would hope that that would continue these collections will continue to be lumpy.
We can't really project that.
I think all of our efforts over the years are starting to pay off.
Got it Okay, hey, thank you.
This concludes our question and answer session I'll turn the conference back over to Andrew.
For Clinton.
Thank you as you can tell we had a great year I'm looking forward to building on this momentum into 2022, we're focused on our team is talented we're very confident in our strategy and our ability to execute we appreciate everyone. Taking the time today to participate in all of your interest in medallion.
If you have any additional questions feel free to contact our IR team that can be reached at 212328 to $1 76 or at Investor Relations at medallion Dot com.
You again, everyone and have a great day.
Okay.
The conference is now concluded.
You for attending today's presentation and you may now disconnect.
Yes.
[music].
Okay.
[music].