Q2 2022 Medallion Financial Corp Earnings Call
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Greetings and welcome to medallion Financial's second quarter 2022 earnings conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question answer session at that time. If you have a question. Please press the one followed by the four on your <unk>.
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As a reminder, today's 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 the Medallion Financial Corp, second quarter earnings call. Joining me today are Andrew Mercy, President and Chief operating Officer, and Andrew controlling 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.
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 second quarter supplement presentation on our website at medallion dot com and clicking on Investor Relations. The presentation is near the top of the page with that let me now turn the call over to Andrew Andrew.
Thank you Ken and good morning, everyone. We are very pleased with our results this quarter the growth in our consumer and commercial lending businesses continued to yield positive results. Our net income for the quarter was up 30% from a year ago to $13 3 million.
Our performance is driven by strong credit quality and robust loan originations.
We had a 45% increase in loan originations in the second quarter compared to last year's quarter with solid volumes from both consumer lending and our commercial businesses.
Loan originations led to a 32% increase in net interest income and we maintained our high net interest margin in the quarter of 9.07%.
Regarding capital allocation, we declared and paid a dividend of <unk> <unk> per share during the quarter.
In addition, we had our first full quarter of purchases under our stock repurchase program, we used $10 million of cash in the quarter to repurchase roughly one 3 million shares of our common stock at an average price of $7 84 per share.
We plan to remain opportunistic can take advantage of buying opportunities if our stock remains undervalued.
All of our growing lending segments had good quarters.
And our our recreation and home improvement lending businesses, we originated $275 million of new loans in the quarter, which was up 40% from the prior year quarter.
This is very healthy volume and is a testament to our team managing the relationships with our contractors and dealers.
Our home improvement lending business continues to be our fastest growing segment.
That loan portfolio grew 43%, while our much larger recreational portfolio grew 24%.
Our commercial lending business originated $19 million of loans in the quarter, which is our highest volume over the last four plus years.
However, please keep in mind that commercial originations typically have larger loan sizes and therefore the growth rate is not as smooth as consumer originations.
That makes comparing growth between them challenging although linear ramp should not be expected.
Now have an overall loan portfolio balance nearing $100 million.
Which was one of our goals for the commercial team at the beginning of the year.
With that I will now turn the call over to Anthony who will provide additional financial highlights of the quarter and the year.
Thank you Andrew good morning, everyone.
Starting at the top net interest income of $38 9 million grew 8% from the prior quarter and 32% from the previous year's quarter.
Increased net interest income is directly attributable to growth in our loan portfolios and the high yields we earn on recreation home improvement and commercial loans.
Total loan originations of $305 million grew 45% from a year ago.
Our net interest margin was 9.07% for the quarter, a decrease of 13 basis points from the first quarter and an increase of 23 basis points from the prior year quarter.
While home improvement continues to be our fastest growing segment. These loans do come with a lower coupon when compared to a rec and commercial loans and put pressure on net interest margins as does the slight Lee higher cost of funds, which we experienced in the second quarter.
As we continue to grow home improvement, our net interest margin should shrink.
As we've said in the past we believe this to be a worthwhile exchange for both increasing our size and decreasing our credit risk exposure.
During the quarter, we began to increase interest rates on new home improvement loans and anticipate increasing rates on new recreation loans.
Our loan loss provision was $7 8 million in the quarter up from $3 2 million in the prior quarter and the benefit of 700000 in the prior year second quarter.
Current quarter, including medallion recoveries of $2 5 million.
Loan losses in our consumer segment have remained relatively stable with the increase provision being more closely associated with growth, particularly in recreation lending then with rising credit losses.
Noninterest income was $7 4 million in the quarter and included a $4 $2 million gain on the exit of an equity investment as.
As well as $2 $7 million of gains associated with the disposition of medallion assets.
Equity investments are an integral part of our commercial lending business, but the exits of such investments and any associated gains is not predictable.
Our noninterest operating cost stayed consistent from the first quarter and included elevated professional fees.
Associated with the cooperation agreement, we announced in May and other litigation.
We expect professional fees to fluctuate over the coming quarters.
Net income attributable to medallion financial shareholders was $13 3 million for the quarter of <unk>.
30% increase from a year ago, and our diluted earnings per share was <unk> 54.
I encourage you to take a look at the investor presentation on our website, which shows the trailing quarters and the progress medallions made and a little over two years.
A quick update on the medallion segment.
During the quarter, we collected $13 1 million of cash related to medallion assets.
These collections helped to further reduce our medallion exposure and generate approximately $5 2 million of income.
Our net medallion exposure now sits at $31 million less than 2% of total assets.
We continue to use the medallion value of 79500 in determining loan loss allowances and in valuing our medallion assets. Despite recent transfer activity at prices, which have exceeded this level from time to time.
That covers our second quarter financial overview.
With that Andrew and I are happy to now take your questions.
Okay.
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One moment please for the first question.
And our first question comes from Keith Schwartzman with B Riley Securities. Please proceed with your question.
Good morning, everybody nice quarter, thanks for taking my questions.
Good morning gates so.
So I think first question right off the bat here and break the risen pretty rapidly here I'm. Just curious how you guys feel about funding costs and the environment and any sort of details you can provide on the liability side.
Yes, so our cost of funds they are increasing.
We saw that a little bit in Q1, we see that a little bit in Q2.
As they increase we're cautiously moving our rates up on our loans.
Hoping to maintain our long term interest margins.
In terms of what were experiencing were seeing new Cds being issued at 350 basis points in Q2.
Which is 250 basis points higher than what we put on at the end of 2021.
But.
We expect that to level off at some point.
Awesome. Thank you I guess, taking the margin a little bit.
Can you talk a little bit about new loan pricing in the recreational and home improvement side have you guys seen any sort of like any spread compression. There just curious in your thoughts.
Yes.
So much spread compression like we said in Q2, we started to raise.
Interest rates on our new home improvement loans.
I think our actual interest in yield.
Increased slightly and home improvement with the coupons were putting out now.
We think we will continue to raise rates throughout the year, depending upon what the fed does likewise on the rack, we anticipate and we havent raised rates yet through Q2, but we anticipate raising them.
Going forward.
Awesome. Thank you and I guess, there's been some reports as well about production has slowed a little bit on the RV side.
Just curious as you guys have the outlook for RV has changed at all in the past three months.
Sure, Yes, so I think.
We've seen a lot of reports that June sales were lower.
And historically I think it's comparing June to the prior year were.
It was record setting so we haven't seen any big slowdown in terms of loan volume.
But we do think.
Originations aren't going to keep up at this pace.
We do think we will still be able to grow the portfolio where.
Where we are now.
Awesome. Thank you so much and I guess.
One more in.
Just curious what are you guys sort of thinking about in terms of expenses in the current environment I'm curious what kind of drivers there on the salaries and professional fees side, you guys seeing any sort of inflationary pressure and just curious about what kind of drivers you guys are seeing.
Yes, so I mean.
The area, where we have most of our employees is in Salt Lake City at Medallion Bank and Salt Lake City is is one of the cities that has been experiencing record low unemployment rates. So there is competition for all.
Across the board for all types of employees, whether it's you know in the accounting of the origination side.
There will be some increases there and obviously as we continue to grow head count is going to go up and we'll.
We will see increased cost there.
Awesome. Thanks, so much I'll step back.
Thank you.
Our next.
Question comes from Bill does open with Titan Capital. Please proceed with your question.
Hi. Thank you first question is would you. Please you had talked about kind of the.
Covered holdings relationship and and maybe put that in context of the overall fintech strategy. Please.
Sure Good morning Bill.
So covers a third strategic partner that we signed up.
We're optimistic on all three the newest one is probably.
The largest and growing the fastest of the three so it's a <unk>.
Good business model for us.
Many people know the way it works is the Fintech companies send us the loans, we book the loans, we're their lender of record and then they buy it back and we're earning a fee for doing that in the float for a couple of days. So there is very little to no credit risk there. So it's a mix.
Streaming high ROE business, we hope to grow that.
Went into it for several years ago, we hired a.
Very good manager, who was the CEO of another bank.
Took this for that bank. So we kind of hit the ground running and the hope is to sign up a fourth partner sometime in the next three to six months and I will just add to that bill.
For the quarter, our originations were $9 8 million for strategic partners partnerships versus just about $5 million in Q1.
So and that growth is specifically related to our new partner.
And do you consider <unk>.
Consider covered to be fully ramped at this point so that that $9 eight is now Inc.
Our steady state run rate or are we still have lots of ramp to go with them.
Yes they.
Started mid quarter. So so I don't think the nine 8% run rate I would expect that to be slightly higher.
Yes.
Would you like to.
Put some numbers around that.
It's hard to do so because it's a third party, giving us projections on how they are willing to do other expecting to do.
Many of them, though are bullish about the market.
Lenders of those types are really very sought after now.
Financial institutions are moving more and more online into more fintech. It's one of the fastest growing segments out there. So.
We're hopeful that they will continue to increase their deal flow in and return our fee income.
I think there is a fair amount of ramp that they still need to get through.
As they as they progress through that we should see originations increase.
Great. Thank you and then relative to the fourth partner that you were hoping to sign up.
How are you viewing.
We're expecting that partner's volume to be say relative to covered because it sounds like covered might be your largest largest volume fintech that you've signed up so far.
Yes.
Hard to tell there's actually several in the hopper, so im not sure, which one we will get to the finish line first to be the <unk>.
Fourth but.
We're starting to move upscale which is nice.
You've kind of put your toe in the water when you're starting a business line at least we do we are very cautiously at the beginning but to make sure. Our controls are in place and everything is working smoothly and then bit by bit as you get larger more attractive partners.
And we're at that stage now, where we're past the growth stage.
Starting to really attract some of the higher volume partners that are out there. So the hope is whoever the fourth partner is will be as high if not higher than the previous three.
And I'm going to ask.
Another question just on this are really from a point of ignorance.
Now that you have the controls compliance et cetera, and all of that in place.
Why not bring on four new partners between now and the end of the year or 14, new partners rather than one.
What are the limiting factors in the practical reality.
Bringing on a new partner.
It's really just to get it right, we do a lot of due diligence on the partners.
Other firms I've heard will sign up a partner as quick as 30 days. After the initial meeting we are usually three to six months. So.
Really want to do our share of due diligence to make sure they're compliant that they or geared to doing well long term also we're not looking for short term partners. So we want to make sure that they have the proper procedures in place that will get them to the next level. So there is nothing to say that we can't get a fifth partner this year.
But the thought is just to keep moving cautiously as we've been doing that effectively yes, and I'll just add that each of these partners is unique in their own way.
So the compliance management systems, we have to put in place have to be tailored to each one specifically so it's not just cookie cutter, we're actually building out a model that works with each one of these partners. So it is a little more on that in the background that people don't generally see.
Great. That's helpful and if you don't mind I'd like to go to one one additional that direction, which is the.
Medallion collections, congratulations on the $13 1 million.
Can you. Please just discuss that holistically and how that fits into the Grand scheme of things I think that might be the largest collection number you've had in many many quarters.
Yes, we won't Pat ourselves on the back.
These are as we've said in the past these collections are lumpy.
Although wed like to replicate that going forward.
I think thats, a hard hurdle to hit.
We've been in constant negotiations and discussions with a lot of delinquent borrowers for for some time now and I think what we're seeing.
<unk>.
Starting in 2021 and through June 30 is those.
Those fruits being born.
The $13 1 million.
In terms of the geography on the balance sheet, we reduced our exposure and that generated some $5 2 million of income on the income statement.
About $2 5 million in the provision and $2 $7 million of other income.
Related to the sale of.
Loans in the process of foreclosure to the disposition of those assets.
Great well congratulations and thank you.
Thanks, Bill Thanks Bill.
Our next question comes from the line of Mike Grondahl with North <unk>.
Securities. Please proceed.
Hey, guys. This is Luke on for Mike.
Hi, Luke.
Hey, congrats on the quarter.
I just wanted to touch here on the on the share repurchase program. So you guys bought back $10 million. This quarter I think it was 784 per share.
Are you guys thinking about the remaining $25 million on the buybacks.
Yes, I think Andy said.
Earlier, we remain optimistic and opportunistic about repurchases.
We think the stock is undervalued at these levels that we've seen especially through the past month.
So wed like to be buying back stock. It's a delicate balance we still want to continue to grow our business. So in order to grow we need capital.
So there's definitely.
A dance that we're going to do between buying back stock and returning cash to shareholders and continuing to grow our business, which ultimately is going to be in the best interest of our shareholders.
Got it thanks, and then forgive.
Forgive me if I missed this earlier, but what was the what was driving the strength in originations on the rack and the home improvement side.
And also yields here.
I think it's just being a leader in that sector. We've been doing it for over 20 years with the management has we got into the business in 2004, and they had been doing it for leucadia prior to that so we've really got a great network of thousands of dealers around the country, who think of us first.
As often as possible.
Give us first looks at many deals we've been loyal to them they've been loyal to us through thick and thin with the recession in 2008, we stayed in the business. Other lenders left so it's really just building up years and years of loyalty and expertise.
Okay awesome well thanks for taking my question guys and congrats again on the strong quarter.
Thank you.
Yeah.
And our next question is a follow up question from Keith Schwartzman with B Riley Securities. Please proceed.
Hey, Thanks for taking the follow up just curious.
How should we approach credit normalization in this environment. Just curious what you guys are sort of thinking in terms of credit costs and reserve levels here moving forward.
Sure.
Our net charge offs remain extremely low.
Typically we see.
Historically, when I say historic I'm not talking about the past 18 to 24 months, but historically we've seen.
Charge offs on the rec portfolio that that hover around 350 basis points.
On the home improvement side around 75 basis points.
We're well below.
Well below that.
So at some point, we do think it normalizes, although we're not seeing at our delinquencies 90, plus day loans.
30 basis points on the portfolio.
It's extremely low.
And.
And at some point, we do expect that to normalize.
And we saw over the last year, we thought it was last year, we thought it was going to be this year, we're just not seeing it yet.
Gotcha, Okay awesome, thanks for the help and yes.
Great quarter, thanks, everybody.
Sure.
And there are no further questions at this time I'll turn the call back to you for closing remarks.
Thank you again, everyone for joining us on the call today I was probably one of our longer calls we have probably the most questions that we've had which we love we love to hear from people and the more you know about us I think the more that youll like so please call us with any follow ups you have.
You can always reach us or 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, everyone and have a great day.
That does conclude the conference call for today, we thank you for your participation and ask you. Please disconnect your lines.
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