Q1 2023 Medallion Financial Corp. Earnings Call
Speaker 1: The.
Speaker 2: Good day and welcome.
Speaker 2: To the Medallion Financial First Quarter 2023 Earnings Conference Call. All participants will be in listening mode. If you need assistance, please signal conference specialists by pressing the star key followed by zero. If you need assistance, please signal conference specialists by pressing the star key followed by zero.
Speaker 2: After a presentation, it will be an opportunity to ask questions.
Speaker 3: That's a good question.
Speaker 2: instructions will follow. Please note that this event is being recorded. I now like to turn the conference over. Mr. Ken Cooper, Vesta Relations, please go ahead and start this time.
Speaker 4: Thank you and good morning everyone. Welcome to Medallion Financial Corp's first quarter earnings call. Joining me today are Andrew Merstein, President and Chief Operating Officer and Anthony Catrone, Chief Financial Officer. Certain statements made during the call today constitute forward-looking statements made for Suin-2 and within the meaning of the safe harbor provisions.
Speaker 4: of the Private Security's litigation reform act of 1995 as amended.
Speaker 4: 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 risk and uncertainties are described in our earnings press release issued yesterday and in our filings with the SEC.
Speaker 4: 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 arranged press release, you can find our first 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 Mershteyn.
Speaker 5: President.
Speaker 6: Thank you Ken. Good morning everyone.
Speaker 6: Mediand Financial had a great start to 2023, and one of our strongest quarters in our almost 27 years as a public company. We performed well in all areas of our company, highlighted by the continued growth of our consumer lending businesses, a good quarter in our commercial lending area.
Speaker 6: and a strong quarter of cash collections from our medallion assets. We generated $15.4 million of net income, or $0.67 of earnings per share.
Speaker 6: Our return on equity was a little over 20% and our return on assets was nearly 3%. Those are impressive returns and good indications of another strong quarter.
Speaker 6: Our net income performance included a strong year-over-year growth rate driven by maintaining our consumer businesses and this challenging environment without standing performance from our Mediand Collections team.
Speaker 6: We collected over $13 million in cash in the quarter, which is higher than normal.
Speaker 6: We will have great months, average months, and low months. But the good news is that we have the most experience in this space with significant relationships across the industry. With the growth of our loan portfolio, we increased net interest income 21% year over year to 43.6 million. More importantly, like we were saying would happen since the prospect of rising rates was first introduced last year, our growth in loans has helped offset rising interest rates that raised our funding costs. This has allowed us to maintain our net interest income from the fourth quarter.
Speaker 6: or provision for credible losses has been trending back towards its normalized level. However, with significant recoveries from all medine assets, or provision for the quarter at 4 million was lower than anticipated.
Speaker 6: I'd now like to provide a quick update on our business.
Speaker 6: Home improvement continued to be our fastest growing segment. Originations remain strong and continue to be related primarily to popular projects like roofs, windows, and pools. Our recreational business, which is mainly loans for smaller boats and RVs, had over 100 million in originations, which is below peak levels, but we believe is still strong performance. Our average interest rate has remained at over 14%.
Speaker 6: Finally, our commercial business reached $95 million in loans outstanding, up from $78 million one year ago.
Speaker 6: It also earned just over 1 million for the quarter and has a solid pipeline that should lead to increased originations in the future. A quick update on capital allocation. For the fifth consecutive quarter, we declared a paid dividend of 8 cents per share. We did not we purchase any stock back in the quarter. With the instability the banking sector's experience has passed several months, we felt was prudence to retain our capital to use a portion of that capital to fund growth and to continue to prepare for the future.
Speaker 6: As I look at the overall health of our business, given the recent events within the banking environment, a thought was important to remind you that we remain confident in our business model and our strategy as a specialty finance company.
Speaker 6: One way we are deliberately different than other financial institutions is our long-time use of broker deposits to fund our loan growth. Broker deposits not only help us manage our borrowing costs, they also provide us safety since broker deposits have no right of voluntary withdrawals.
Speaker 6: In addition, we mitigate risk with a relatively small investment portfolio associated with these deposits and limited unrealized gains or losses.
Speaker 6: Ultimately, we believe this leads to our business model being resilient under a wide variety of conditions.
Speaker 6: With that, I will now turn the call over to Anthony, who will provide some additional insight about our quarter.
Speaker 7: Thank you Andrew and good morning everyone.
Speaker 7: For the quarter, net interest income grew 21% to $44 million from the prior year quarter, the driver of this being growth in our loan portfolio, which now stands at just under $2 billion.
Speaker 7: We were able to maintain our net interest income from the fourth quarter, growing our interest income to counteract our rising cost of funds.
Speaker 7: Our net interest margin on gross loans was 8.42% for the quarter as compared to 8.91% in the prior year of quarter.
Speaker 7: As we've said for the past few quarters, this contraction in NIM was expected given the current interest rate environment. Our provision for credit losses, which in the past we've referred to as loan loss provision, the terminology having changed in connection with our adoption of CISO was 4 million for the quarter.
Speaker 7: compared to 3.2 million in the prior year quarter. Current quarter provision included a $7.1 million benefit with respect to recoveries in the medallion segment.
Speaker 7: Excluding this benefit, the increased provision is a result of the continued normalization of losses to historic levels in our consumer portfolio, as well as the higher provisioning which we must take in connection with our adoption of CECL as our loan portfolio grows.
Speaker 7: Our operating expenses of 18.4 million increased 2% from the prior year first quarter.
Speaker 7: which included higher salary and employee benefit costs associated with our growth, as well as lower legal and professional fees.
While we continue to be vigilant in overseeing operating costs, the 2% increase pales in comparison to the 29% growth in interest income and 21% growth in net interest income we experienced over the prior year quarter. Our diluted earnings per share was $0.67.
with 28 cents of that being attributable to medallion asset recoveries. That covers our first quarter results.
With that, Andrew and I are now happy to take your questions. Thank you. I'll begin the question answer session.
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The first question is from Matt Hallock, B. Wallach. Please go on.
Good morning, everyone. This is Michael Schaffer on for Matt. Thanks for taking my question. I see yields declined in the home improvement segment. Can you run through why that is?
Hey Matt, good morning.
So the yields came down from a year ago. There's a lot of things other than the coupon which go into our yield calculation. In the prior year we had some amortization, origination costs get amortized out. You know, we typically look at the coupon rate which, you know, from Q4 and Q1 of last year has increased.
in each period.
Okay, great. And also covering the 500 million or so CDs come and do in 2023. Can you discuss the rates on those? Yes.
Sure, so.
All in at the end of March, our CD rates were about 235. In March, we saw an increase in rates to around 495 for 36 month CDs. That's come in about 50 basis points to the present day.
Assuming no further action, maybe CD rates come down a little bit more. The interesting thing is that when you go out even further, the rates are slightly lower. We do anticipate some net interest margin compression throughout the remainder of the year.
related to that. The good news is that we have over the past year and a half we've been able to increase the rates on our consumer loans and our commercial loans. And although it's slow to turn the ship, we've got to wait till some of the older loans run off and the newer loans become a larger portion of the portfolio. We do expect to see continued growth in our yield and our coupon.
Okay, got it. And so on net interest margin, right? I heard you make some comments on that from there, prepared remarks as well. Could you give some guidance on what the expectations are on where that will bottom out? Okay.
It's tough to say, you know, there's so many factors involved, especially when we think about, you know, the CD rates being tied to, you know, treasuries and what the Fed intends on doing.
I could see some downward pressure through the end of Q4, maybe another 100 basis points plus or minus, but it's still tough to say. Like I said, we do think that even though our cost of borrowings goes up, so will our top line.
Got it. All right, that's it for me. Thanks for taking the questions.
Next question will be from Mike Grandal from Auckland Capital Markets. Please go ahead.
Hi, this is Mike Pachute, channel for Mike Rondell. Thanks for taking our questions.
All right, this is Mike, the true challenge for Mike Rondell. Thanks for taking our questions. May 1st, just on...
REC versus home improvement, you kind of see the rest of the year where it's maybe a little stronger for home improvement, for originations, and maybe just a little softer for REC.
REC versus home improvement, do you kind of see the rest of the year where it's maybe a little stronger for home improvement, for originations, and maybe just a little softer for REC for comparables?
Yeah, I think that's fair, you know.
It's hard, you know, we're actually happy with the origination volume we saw in home improvement in rec. Well we're happy with both but home with rec we're happy with the origination volume we saw in Q1, albeit it down from last year. Last year was an anomaly, you know, coming out of COVID-21 and 22.
We just saw no seasonality in originations and significant volume. That's come back to normal levels and starting in Q3, Q4 of last year, we started to see the seasonality. So volume will be down in terms of originations compared to last year, but we still think at the end of the year we're at a bigger buck than we were at the end of the year.
Got it. I'm going to spend on medallion collections.
Is there anything more to call out there with a lot of that towards the end of the quarter or
See more of that rolling in the second quarter in the rest of the year or I don't stop to forecast.
Yeah, it's definitely, we've always said it's tough to forecast and we weren't anticipating collections at this level in Q1. You know, a lot of this could have been stuff that maybe came in later in the year. We were able to get, you know, larger settlements in in the beginning of the year. The 13.2 million, it's great. Definitely not a run rate.
You know, it's as far as where it ended up on the on the financials, you know
As Andrew mentioned, it is.
in his remarks a little while ago. We earned 28 cents specifically to recoveries. That's $8.7 million that showed up on the income statement.
and the rest reduced our exposure. And does that fall straight through the provision line? When we're thinking about that? Most of it, I think 7.1 million is in the provision, it's a benefit for provision, and the rest is in other income, it's gain on the disposition of assets. Got it.
last year. I think in Q4 we had some benefits we realized with non-legal professional costs.
I think in Q4 we had some benefits we realized with non-legal professional costs.
So I think Q1 is probably normalized. We have a small amount of legal costs related to the SEC action, but right now that's still quite low.
Thanks.
Thank you. Again, if you have a question, please press star then 1.
Next question will be from Christopher Nolan, Landenburg-Thalman. Please go ahead. Hi, the net charge off in the quarter, was that including the recovery of $13.2 million on the medallion?
Mr. Vernone, Landon Berg-Thalman, please go ahead. Hi, the net charge off in the quarter, was that including the recovery of 13.2 million on the medallion loans?
Hey Chris, yes, so the $4 million provision included a $7.1 million benefit related to the medallion collections.
will probably end.
We don't, you know, we definitely think there's a lot more to be collected. You know, it's not going to happen in the next two or three quarters. It sucks.
year-end
We think, will we ended up at the end of?
Q1 should be, and I'll put a caveat on that, should be where we are at the end of the year. That being said, with our adoption of CECL in January 1, any fluctuations in charge-offs that we experience from what we anticipate is going to cause some, you know, some changes
could cause a significant change in our reserve rates. Great, and has the reserve, excuse me, has the capital ratios at the bank increased at all? The tier one at the end of the year, at the end of 2022 was 16.2 million.
Sorry, 16.2% and it ended at 16.4% at the end of March. And most of those recoveries on the medallions, the benefits that ran through the income statement were at Medallion Bank and that helped bolster the tier one level.
So is the plan just to basically keep the tier one ratio sort of in the 16% range and just grow the balance sheet?
That's what we're at now. We've got to maintain 15%, so we don't want to get too close to that, but that's the plan as of now.
You know, that's where we're at now. We've got to maintain 15%, so we don't want to get too close to that, but that's the plan as of now. OK, that's it for me. Thank you.
Thanks, Chris. Thank you. This concludes our question and answer session. I'll turn the call back over to Mr. Andrew Mersch, Dean for closing remarks. Please go ahead.
Thank you. We appreciate you taking the time to join us today. We're very pleased with our performance so far this year and look forward to our next update. As always, if you need anything, please reach out to our regulations team at 212-328-2176.
Thank you and have a great day. Who knows today's presentation. Thank you for attending. You may now disconnect.