Q4 2022 Medallion Financial Corp Earnings Call

Greetings and welcome the medallion financial fourth quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the problem with presentation. If anyone should require operator assistance during the conference. Please press star zero.

On your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Ken Cooper Investor Relations. Thank you. Mr. Cooper you may begin.

Thank you and good morning, everyone welcome to medallion financial Corp's fourth quarter and full year earnings call. Joining me today are Andrew Burstein, President and Chief operating Officer and S. T control 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.

<unk> of the private Securities Litigation Reform Act of 1995 as amended.

Forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

These risks and uncertainties are described in our earnings press release issued yesterday and in our filings with the SEC.

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 Disney in the medallion Dot com and clicking Investor relations.

Presentation is near the top of the page with that I'll turn it over to Andrew Burstein President.

Thank you Ken good morning, everyone.

Medallion financial had a great year highlighted by the continued growth of our consumer lending businesses or.

Our people have done an exceptional job growing our assets with our long term success in mind.

Also noteworthy is that after more than five years, we were able to reinstate our quarterly dividend in 2022, we were able to purchase over $20 million of our common stock during the year and we were able to get back to what we had done best for so long to provide a cash return to shareholders.

We generated $43 8 million of net income in 2022 as compared to $54 1 million in 2021.

I'd like to unpack that for you. So you can appreciate how strong both years worked for us.

In 2022 with the growth of our loan portfolio. We saw an increase of $32 6 million and our net interest income despite rising interest rates that raised our funding costs.

Our loan loss provision trended back towards this normalized level as reflected in our provision for the year of $30 1 million, which was $25 5 million greater than last year's historically low provision of $4 6 million.

Additionally, last year, we had $16 3 million of the gains which were not repeated this year.

Yeah.

This included sales of investments that resulted in the combined gain of $11 million gain on extinguishment of debt of $4 6 million on the sale of a noncore asset for $700000 game.

Taking all of these items into consideration our 2022 performance was excellent across the board.

2022 home improvement continues to be our fastest growing segment with 43% loan growth.

$626 million.

We also saw growth in our marine and RV business, which had 23% loan growth to $1 2 billion of loans in our commercial segment at 21% loan growth to $93 million.

Over the past year, we continued to enhance our business.

Maintaining our rigorous credit standards and expanded our sales teams as well as the number of dealers contractors financial service providers, who helped us originate loans.

And finally during times of increasing interest rates one of the levers we use to protect our bottom line is to raise our own loan rates, we've done that to a degree of the past year, which has helped us deliver our results.

On capital allocation during the quarter, we declared and paid a dividend of <unk> <unk> per share and we used $1 8 million of cash to repurchase over 257000 shares of our common stock.

For the year, we had 32 per share of dividends and we repurchased over $2 6 million shares of stock with $26 million.

We had $20 million remaining under our current share repurchase plan as of December 31, 2022.

<unk> shareholder value remains one of our top priorities.

In addition for 2023, we plan to stay focused on prudently growing our loan portfolio.

We will continue to focus on quality assets and not chase volume.

It's the same thing we did in our last recessionary environment in 2008 2009, when we came out of that period stronger.

With that I will now turn the call over to Anthony who will provide some additional insights about our quarter and year.

Thank you Andrew good morning, everyone.

As Andrew mentioned, we had a great fourth quarter, which capped off a great year.

For the quarter net interest income grew 22% to $44 million from the prior year quarter and grew 26% to $160 million for the year.

The driver of this being growth in our loan portfolio, which now stands at $1 9 billion and reflects a 29% increase from a year ago.

Our net interest margin for the quarter was $8 eight 6% and was nine 5% for the year.

During the year, we saw a compression in our net interest margin. The result attributable to two factors. The continued growth in our home improvement segment, the prime loans of which carry a lower coupon than our other lending segments as well as and to a lesser extent an increase in our average cost of funds.

For the quarter, our average cost of funds was 249%.

With certificates of deposits, our largest source of borrowing having an average rate of 191% at the end of the year.

As we've said for some time now we expect our cost of funds to increase throughout 2023, as we issue new certificates at current market rates to both fund our continued growth and to replace those maturing.

The increase in our cost of borrowings will continue to impact our net interest margin, but despite this we do expect that the continued growth in our loan portfolio will counteract this compression and allow us to grow our net interest income.

Our loan loss provision continue to gravitate back to historical levels in the fourth quarter.

The loan loss provision was $9 million for the quarter up from $3 million in the 2021 fourth quarter.

For the year, our provision for loan loss was $30 million, increasing $25 million from a year ago. The.

The increase over last year as a result of higher net charge offs as we get back to a more normal level of charge off experience.

An increase in our loan loss allowance rates for the consumer loans, and 18 basis point increase for recreation loans, and a 13 basis point increase for home improvement loans as.

As well as the need for increased allowances specific to new loans as we grow our portfolios.

Our operating costs decreased to $16 million from the prior quarter, primarily due to lower salary and benefit costs and lower professional fees we.

We were pleased with this reduction in cost during the quarter, but do expect volatility in our professional fees to continue over the near term.

Net income attributable to medallion financial shareholders was $13 1 million for the quarter and $43 8 million for the year.

Our diluted earnings per share was 57 cents for the quarter and was $1 83 for the year.

That covers our fourth quarter and full year financial overview with that Andrew and I are now happy to take your questions.

Okay.

Okay.

Okay.

Okay.

Thank you.

We will now be conducting a question and answer session.

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Our first question comes from Matthew Howlett with bigger Brian Securities.

Okay.

Hey, guys. Good morning, Thanks for taking my question good morning, excellent putting that.

Okay excellent performance here and I want to touch on a few things first on on the ability to pass through the higher funding costs I recognize the mix shift here in the quarter with the lower home improvement to higher Prime home improvement growing, but what's the sort of outlook and ability to just continue to raise pricing occurred some mixed things from some of the.

Banks in the auto space Love to hear what you guys are seeing in your segment.

Okay.

Okay.

Yes.

We can go into that so we have throughout 2022, we have been able to raise rates on both sides, both consumer products the wreck in the home improvement.

At the end of the year, we're probably about 300 basis points higher on new loans than we were at the end of 2021 for direct loans.

Home improvement about 150 basis points higher.

It hasnt quite translated and shown up in the income statement, yet and a yield just because.

These are the new loans going on and the ones coming off.

We'll probably written three years ago more or less so the rates are somewhat comparable we do expect over time to that that will show up.

To $301 50 that is that did.

I hear you correctly, yes year over year.

Let me just incredible okay, well it sounds like you can really to continue to originate net and raise pricing. So I guess my next question is on.

The consumer and obviously.

One talks about are we know what pullbacks coming at some point or a slowdown.

Hi.

Obviously, the credit is holding up here, it's been resilient and what can you <unk>.

Your segments I mean, it's much higher quality than we've seen in the past potentially with the prime home improvement.

Can you just tell us about the pullback in demand <unk> some normalization in losses, if any can you give us a cadence. This year is yet not really seen it yet so far just any anything on that I missed the topic Du jour obviously.

Yes home improvement demand continues to be strong we haven't seen any significant pullback.

We think in terms of going into 2023, we think originations.

We will be strong.

We don't know that we'll be able to grow we don't think we'll be able to grow originations at the at the levels. We have over the past two years, but we do think overall that portfolio will continue to grow.

Throughout the year.

Similarly in Rec, we doing expect to grow that portfolio in 2023.

Although.

Somewhat somewhat nice to see in 2022, we saw a return to normalized activity in terms of volume.

The seasonality associated with the <unk> portfolio, which we did not experience in 2021, we did see that started in Q3, and we did see that in Q4 and the rack, we think demand drops on the rec side.

But even with the drop I think we get back to more normalized levels of demand.

With our increased rates the drop.

We still think we're able to grow that book.

Got you.

The record just remind me again, the second and third quarter are the strongest seasonality wise.

Volume yes.

It follows the seasons right. So so Q4 is the slow Q1 slow and then it starts to pick up weather gets nice.

People want to be outdoors.

Got you.

Okay and then just the last question look we get excited when they see these expense management I know the I think you said professional CS lines, it's going to be lumpy, obviously, but I mean can you just tell us anything on that operating expense, how you take a lot of cost out.

I'd love to see the professional fee line.

And steady from here, but any any sort of what's the volatility we can expand on the operating expense line in 'twenty three.

Professional fees.

Like I stated earlier, we expect that to fluctuate some.

In the near term as far as other operating costs.

We will see those.

We're trying to grow this business, we're trying to grow our balance sheet, we're trying to grow our bank.

As that happens, we're going to have to increase costs.

But obviously those increased costs should correlate at all at a lower rate than that.

And the increased on the on the assets and the increase on our topline.

Great I'll get back in the queue. Thanks.

Thanks, Matt.

Yes.

Thank you. Our next question comes from Mike Grondahl with Northland Securities.

Hey, guys. Thank you.

My first question is Anthony would you say that the 300 basis point increase on the rec pricing in the 150.

At this point.

On the home improvement.

Do you think that's going to offset the higher CD pricing like how do those two balance out.

Yes.

It does it offset it it's not dollar for dollar.

When we were dealing with higher higher priced loans then.

Than a traditional bank.

So for every 100 basis points of cost of funds, we can push through that 100 basis points.

But.

But thats just that.

That's just part of it when you've got a high yield portfolio you can't always push through every cost.

But.

We've probably seen I mean.

We know what interest rates have gone up over the past year, so being able to push through 300 on our rec portfolio.

We like those numbers and on the prime lending in the home improvement being able to push through a 150.

Still think thats good.

Yeah, no just unfortunately, it's not going to be dollar for dollar.

Got it and then the $5 2 million of medallion collections.

Nice to see again.

Did that flow through the P&L, yes sure.

So about $2 million flow through the P&L in terms of recoveries in Q4.

Both on it.

Loans and on the medallion assets, and then $3 million or so was the reduction in our medallion exposure.

From a from the end of Q3.

Got it got it.

With Cecil.

The press release talks about.

I think it was $13 8 million more added to reserves.

For adopting that.

What is pro forma tier one capital usually you guys have.

It.

We disclose that in the past, but we're as tier one capital pro forma for Cecil deal.

The 11 million doesn't have a significant impact.

Where are we where we think it is going to end and we've got the ability on that 11.

It's $13 8 million in consolidation.

$11 million is specifically at medallion bank related to consumer products.

So that 11 million is not going to have a huge impact on our tier one and we've got the ability over three years to phase that impact in the tier one calculation. So we don't see that being.

Big burden for Us, where we where we will see it is on the on the origination side as we continue to grow our provisioning is going to be higher than what it was up until the adoption of <unk>. So.

And thats going to run through our income statement, it's going to reduce our income.

And thats going to be where we've got some constraints in terms of capital.

Got it.

Can you tell us how.

How to think about or at a high level, how we should model that.

Sure, obviously, I think youre, saying your provisions are going to be a little bit higher because you need to recognize those at the time of origination.

I don't know what is a normal origination environment and <unk> 23, what does provision look like.

So.

So on new loans home improvement.

Segment.

Our initial reserve is about 181 basis points.

So we're going to be around 205.

Yes.

You've got about a 24% to 25% basis point increase in the initial reserve.

And then when we moved to rack, we're at $3 55.

Up until the end of 2022 that goes to $4 47.

With day one transition.

When you do the math, that's how the $11 million on the consumer.

The initial reserve impact that's how it comes about comes to play.

With <unk>, we're going to looking at future expected losses from a 12 month as opposed to looking at a 12 month period.

So to the extent that you know.

Losses increase.

Charge offs increase.

So we're going to see some volatility in our our reserving our allowance. Our initial allowance is going to have to go up so there could be some swings but.

But that's just that's just part of gap that we have to live with now going forward.

Got it and so.

Theres nothing constraining on your growth from a capital standpoint like tier one.

I remember at the bank you need in 15.

Because of seasonal.

You don't have any governor on growth or anything like that you have ample capital to keep growing.

I think that's fair so at the end of the year.

The bank's tier one was 16 point too so.

The seasonal impact that day, one seasonal impact doesn't have.

It doesn't really affect that number because we are able to pull it in <unk> and.

And adjusted over three years.

I said before it's.

To the extent that the provisioning is higher because of CSL with our growth.

That's going to that.

Going to trickle down to the bottom line and that increase in equity.

Isn't going to allow for <unk>.

Excessive growth.

And growth at the levels that we've seen you know the past couple of years, but we're also expecting growth to come in so we don't necessarily think it's going to hurt us all that much.

Got it and then just lastly.

Credit quality is normalizing from a very low level.

Seasonal kind of catches that up even a little bit more how are you guys feeling about charge offs over the course of 'twenty three.

Yeah.

We think home improvement is actually back to the historical levels.

What we've seen.

<unk> is still low.

We think we get normalized.

Normalized.

Charge offs are in the high twos.

We haven't gotten there yet so we do expect that to tick up a little bit.

But.

We've been surprised for the past two years about.

How low charge offs have been so we'll see what happens.

And Ken Ken I'll add on that point is a good slide on our website that we just put up showing loan losses and rec in home improvement for many years over 15 or so years. So.

It shows how we did through recession and how we manage so I'd recommend people look at that we feel comfortable in that.

Last big recession or sell in 2008 nine.

The losses went up but never really to a level that alarm does and then they went significantly down after that and our portfolio is in a lot better shape today than it was back in 2008 and nine we've raised our FICO scores and the rig through the years at home improvement we don't even have back then we only <unk>.

Part of that in 2012, and Thats 760, FICO scores a quality paper. So we're even in better shape today than we were in the last recession.

Yes, no I saw the chart, it's helpful and just speaks to the long track record.

Good credit quality.

Hey, Thanks, guys I appreciate that.

Yeah.

Yeah.

Thank you.

There are no further questions at this time I would like to turn the floor back over to Andrew <unk> for closing comments.

Thank you again for joining us to hear our business update one item to note. We just added several slides as I just mentioned to our earnings supplement presentation, which can be found on our homepage I encourage you to review this deck that gives a nice snapshot as to our strategy and performance.

Appreciate your interest in our company our entire team is working hard to deliver shareholder value. We have accomplished a lot over the years and believe we have a very bright future.

As always if you have any questions. Please reach out the contact information for our Investor Relations team then the last piece of our earnings supplement as well as within the IR section of our website medallion dot com.

Thank you and have a great rest of your day.

Yes.

Okay.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

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