Q1 2022 Medallion Financial Corp Earnings Call

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Telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Ken Cooper and Investor Relations. Thank you you may begin.

Thank you and good morning, everyone welcome to medallion Financial Corp, first 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 Burstein, President and Chief operating offer.

Sure Anthony Petrone, 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 provision 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 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 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 on our quarter.

You saw we started the year off well or 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 nine 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 eight cents per share and resumed purchases under our stock repurchase program.

Our gross lending segments are both consumer and commercial.

Our consumer lending segments account for 94% of our loans. So we continue to grow both our recreational and home improvement lending businesses.

We originated 204 point to millions 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 reporting 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 balances grow from $76 7 million at the end of the fourth quarter to $77 9 million at the end of the first quarters.

Like our consumer loans, we have a strong interest rate for our commercial portfolio, which was at 12 point at four 1% 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 2020 one this.

This is due to no sales or exits of investments in the quarter.

As a reminder, we make small investments in Fintech companies, who are early looks of diligence goal, our strategic partnership program to our commercial business. The timing can be turned 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 that's created a lead independent director position on the board.

Brent Hatch has been appointed to the board and is assumed to lead independent director role effective immediately.

Our board will engage a third party executive search firm to assist our 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 can see on slide three 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 four.

We had several financial highlights in the first quarter.

We earned net income of $9 8 million.

And diluted.

EPS of <unk> 39 cents.

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.

Yeah.

As shown on slide 599% of our nearly $1 6 billion of loans, our consumer and commercial loans.

Our business plan is clear.

Growing our consumer and commercial portfolios.

Home improvement lending is our fastest growing segment.

Growing 158% since 2018.

Well recreation lending foreign 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 six.

This continues to be driven by our loan growth in the consumer lending segments.

And we anticipate the effect of rising interest rates throughout the remainder of 2022 and beyond.

We could see some compression in our margins, we still believe that the growth in our consumer segment should help mitigate that compression and have a positive effect on our bottom line.

Slide seven 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.

It has a lower net interest margin and then I'll 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 mind for increasing our size and decreasing our credit risk exposure.

All with the goal of increasing earnings as the Pea.

Portfolio grows.

Looking at our noninterest operating costs as shown on slide eight 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 and a typical corner.

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 nine provides a summary income statement with some key financial ratios for the quarter.

Slide 10 provides our summary march 31st balance sheet with some key metrics.

A few other financial items to note.

During the quarter, we paid a dividend of eight cents per share.

And purchased just over 67000 shares of our common stock how do 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 eight cents payable in may.

Lastly, a quick update on Allo medallion segment.

During the quarter, we had $5 2 million of cash collections related to medallion assets.

These collections have helped to 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 Ubers 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.

Thank you and he would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is in the class C. Kim you May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.

Yes.

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

Good morning, Good morning, Steve.

Maybe just starting to Andrew with a little more color in terms of you know your thoughts on loan pricing and kind of where you know how you think loan growth could shake out as we progress into a fed tightening cycle.

Sure.

I think Q1, we saw a 44% growth over Q1 of last year Theres still continues to be you know a lot of demand for our products.

And all origination experience shows that as far as pricing.

We're about where we were at the end of Q4.

Direct portfolio are our weighted average yield is a weighted average interest rate on these loans is 4.5% at Q4, it's about $14 36 in Q1 and home improvement was flat at 847.

Okay. That's helpful and then just thinking about funding cost.

I heard you on the margin pressure here, just kind of curious as to.

You know, but as we think about you know where Cds are pricing here and kind of curious as to how youre thinking about.

But funding over the next 12 months.

Sure Yeah, we haven't seen a big impact in Q1, I worry about 124 basis points average rate on our Cds at Q4, we were 120 basis points.

You know the the issuances we did in Q1.

We're probably a 149 basis points blended.

Compared to you know lower than that in Q4.

What we.

The interest rates of you know in the CD market, we're seeing anywhere from 100 to 140 basis point increase.

36 month Cds.

In Q1 and that is changing daily we think the market's priced in a couple of fed hikes not just one.

You know looking are looking to our maturities over the next two years and you know.

The blended rate them.

Our maturities through the balance of 2022 was 152 basis points and in 'twenty, three it's 163 basis points.

Okay.

That's helpful.

And then in terms of just die you know maybe just go into a little further into the settlement here with the activist, maybe just a little bit of color. If you guys can wait around.

The decision and the rationale for settling here just kind of curious as to any thoughts or insight you can give.

Sure you know first we've always been very receptive to shareholders' concerns we've engaged with us.

In this particular case with this group for many years, we have an open door policy and leave them, having a healthy dialogue throughout the years and throughout this process.

Secondly, we strive to always be best in class corporate governance. So we've added.

When this is done it'll be our six new independent director in the past five years.

And third we have successfully repositioned the business and he has noted that in it.

There's been pleased I believe with it and we're continuing to enhance shareholder value through among other things this enhanced governance.

If it ends that we announced in the increased buyback that we announced yesterday.

Alright, well, thank you very much and I appreciate all the color.

Yeah.

Our next question is from Mike Grondahl with Northland Securities. Please proceed.

Hey, Thanks, guys and good morning.

Could you give us an update on where delinquencies stood for kind of.

The rvs.

Loans, and maybe home improvement as of March 31st.

Sure, yes, they continue to be low.

90, plus delinquencies for the RV portfolio at.

At March was was about $3 8 million, it's almost identical to where it was at.

At year end.

You know in the 60 to 90 day buckets, you know, we're at $6 1 million versus $6 6 million.

At the end of Q4.

And in home improvement also continues to be you know near historic lows.

Got it.

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

Yeah.

We do we we've been has it didn't.

We want to see what the overall market in this space does before we pull the trigger on raising rates.

Our borrowers are we don't want to price ourselves out of the market, but we do think.

Over the next couple of quarters, there will be a rate increases.

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.

They're slightly above where they were at the end of Q4, that's that's an ongoing process, we're always looking to expand.

You know, where we stand with our relationships and a.

A significant amount of our business is generated from a.

You know what.

If we've got 5000 dealers that we work with there's a lot of business that comes from you know you know a couple of dozen so it's.

It's not.

It's confined to that portion and we've got really good relationships with those those groups.

Got it got it.

Where were you hearing the New York medallions.

March 31st have those been written up at all or are they still about 80000.

This is a this seems to be a.

A question, we get a lot. So we're continuing to carry those medallions at 79 five.

Although as recently as April I think New York City has published some information on their transfer prices.

We've seen you know and we're seeing values anywhere from you know.

One 'twenty up to $180000 for the transfers of New York City medallions.

Our accounting.

Our two bug.

Go over real quick the two buckets of assets, we have for medallions or our loans and our loans in the process of foreclosure all loans in the process of foreclosure is a majority of our assets.

These these assets are held for sale and GAAP accounting requires that they're held at net realizable value, which is the lower of cost or market. So we don't have the ability to write these these medallions up so once we've written them down to 79 five to continue to stay there and you know so even though we might.

Be able to sell them for you know a 140, when we dispose of them, we don't recognize that gain until the assets disposed of.

On the loan side, we're continuing to reserve down to.

To that 79 five.

Level.

And the reason that we haven't changed our reserve policy with that is because still you know well.

We look at this portfolio was impaired.

Hum.

Fair amount of these loans are still on you know some sort of modified deferral.

Whether or not paying full payments of P&I.

And until something substantial changes there.

We don't see there being any any reason to change our reserve levels.

Got it maybe two more questions on on the medallions one is just.

If you have a rough utilization.

For your portfolio you gave that out a couple of years ago, I think and then secondly.

You know you've known collected about 5 million.

And previously kind of charged off.

Z collection.

Are you feeling comfortable how much more is there to collect out there kind of what's your outlook for collections.

Yeah.

We think theres a fair amount more to collect you know all of that the $5 2 million we collected about.

About three and a half of it went to reduce our assets and you can see that in our our exposure going from.

45 million to 37.1 or so.

The other half actually ended up on the P&L. So so you see that it's in the other income line. There's a fair amount of that other income which is just around $2 million on the income statement. That's that's gains on previously written off medallions.

Got it got it.

Is your outlook can you collect another 20 million the rest of this year, what what is the total pie you're kind of going after and what do you think you can get the rest of this year.

A portion of that is is traditional P&I payments that are coming in you know day in day out.

And just like we've always said for the past you know quarters and probably the past years you know some of these settlements they're lumpy it's hard to project out what they are you know we've got a couple that we're working on we don't want to say what those numbers are.

But you know we.

We could see you know collections being at that level, but we can't be certain so we we think there's a especially given where the prices are now you know in the market with the TLC showing these transfers that we think theres a lot of potential for for some nice recoveries.

And then maybe just lastly, how are you.

Are you thinking about loan loss reserves overall.

Sure you know on the consumer side I think.

We're as you know on a percentage of the loan balance where we are around Q4, a slight change I think Rick is down slightly and that's just because of that.

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 the cash collections. So to the extent that we collect cash on alone it's reducing the reserves.

The commercial side, we had an exit of one of our mezzanine loans in Q1.

Which which had a reserve.

So what's so that came down slightly.

Yeah.

Got it okay I appreciate it guys. Thanks, Thanks, Mike.

Yeah.

We have reached that had never a 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.

Yes.

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

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Yeah.

Okay.

Yes.

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