Q2 2023 Medallion Financial Corp Earnings Call

Speaker 1: pipeline that should lead to increased originations in the future.

With that, I will now turn the call over to Anthony, who will provide some additional insight into our quarter.

Thank you, Andrew. Good morning, everyone. For the quarter, net interest income grew 20 percent to $47 million from the prior year, the driver of this being growth in our loan portfolio in addition to increasingly higher interest rates on our loans, which have helped to counter the rising cost of funds we continue to experience. Our net interest margin on gross loans was 8.48 percent for the quarter.

Compression in net interest margin has been expected for some time now and although we experienced a 30 basis point reduction from the prior year when compared to the first quarter, our margin increased six basis points.

We have seen for a few quarters the weighted average coupon on our loans increase this increase is reflected in our yield and although our cost of funds continues to track higher we've been able to pass along a portion of that increase.

Specific to originations. We are currently writing at rates of 10% to 11% on home improvement loans and around 16% on recreation loans.

Our provision for credit loss was $8 5 million for the quarter compared to $7 8 million in the prior year quarter the.

The increased provision as a result of the continued normalization of losses in our consumer portfolio as well as the provision taken in connection with growing all of our loan portfolios.

Both of which were offset by $5 3 million of recoveries on taxi medallion loans.

Our operating expenses of $19 million increased 1% from the prior year.

And reflect increases in employee related cost associated with our growing head count at our operating subsidiaries medallion bank and medallion capital.

This increase is offset by lower legal and professional fees.

For the quarter net income attributable to shareholders was $14 2 million and our diluted earnings per share was 62 cents.

That covers our second quarter financial results.

Andrew and I are now happy to take your questions.

Yeah.

Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the camp for participants using speaker equipment. It may be necessary to pick up your handset before pressing.

The Star Keys.

One moment, please while we poll for questions.

Hmm.

Okay.

Yeah.

Thank you. Our first question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Hey, guys. Thanks, Hey, the first question.

Andrew you talked a little bit about competition.

In the consumer space sort of scaling back pulling back.

Similar to 2008 I don't know can you could you just.

Provide maybe some more details there about the competitive environment I mean.

And I think RV sales industry wide were down about 40% like you guys grew you know consumer alone nicely. So just trying to understand that a little bit more sure.

That's really the story of the quarter is that there is less competition out there and we continue to take and grow our market share. We did that even though we tightened credit and raised rates. We just still had very strong loan demand in magazine imagined. It was exactly the same scenario in 2008 nine or so is that.

We've been in this business for so long and the management team has been doing it for 30 years or so they really have a loyal following.

Other lenders come in and leave the dealers know we're in it for the long haul and continue to send US a lot of their business.

Got it got it and then one for Anthony.

Yeah, Anthony the provision was $8 5 million in the quarter.

And you said I.

Thank you said.

That was.

Offset or there was a $5 3 million recovery tied to taxis that offset that.

So do I think of kind of the gross provision as like 13.8 million or could you just clarify there yes. So the $5 three that's the benefit we got.

We recognized.

On.

You know these settlements that you now have led to you know the cash that's come in the door. These past couple of quarters.

But yeah. If you want if you were looking for a provision excluding.

The medallion segment you'd add back that 5.3.

Okay. Okay.

And then Hey, lastly.

Could you talk about I didn't see them in the press release sort of <unk>.

Net charge offs kind of by vertical in sort of dollars and percent.

<unk> 23, as compared to <unk> 22.

Sure. So we're seeing them you know if if we exclude the medallion piece, we're seeing charge offs, you know they've they've ticked up the past couple of quarters.

Net charge offs were $3 8 million and that included $4.9 billion of a net benefit from the medallion space. So if you back that out we had a we had net charge offs of $5 9 million on the Rec side home improvement was 1.9 and commercial was was 900000.

In terms of a percentage on the porch weighted weighted average percentage on the portfolio were probably around 187 basis points.

On the rack and 112 or so on the home improvement current.

Current quarter.

Got it thanks, I'll jump back in the queue.

Thank you. Our next question comes from the line of Matt.

With B Riley Securities. Please proceed with your question.

Good morning, everyone. This is Michael on for Matt I, just want to lead off with the congrats on the great quarter.

So noted.

Noticed that our average interest rates ticked up slightly across the board could you speak to your two Q pricing strategy and if that's changed at all today.

Sure Yeah, so so for a number of quarters now.

With new originations, we've been increasing the rate we charge on these new loans. This started probably you know.

About a year ago as the fed went down the path of raising interest rates. We took you know we didn't jump right in with.

With increasing our rates, but ER, but we did eventually do that pull the trigger and about a year ago.

Given the size of our book of business each slow for that rate increase to trickle through in terms of the yield.

Essentially all of our loans are fixed rate.

So the new ones come on at a higher rate the old ones that are amortizing off are at a lower rate. So it's slow to two so that yield to come up but we have for for two or three quarters now four quarters actually seen modest increases in <unk> and a weighted average coupon of these loans and I think that's what's that's what's flowing through and this is something that we've been saying for.

A couple of quarters now is that even with interest rates and our cost of borrowings increasing we expected there to be compression in our NIM.

But at the same time, we thought we'd be able to grow net interest income because our top lines growing not as fast as our as the cost of funds, but but you know pretty close to it.

Got it okay, and so for you spoke to yield a little bit slower to trickle in.

For home improvement specifically saw that that didn't picked up in the second quarter do you have any commentary there in particular yeah.

Yeah. It is.

In terms of home improvement you know our average coupon is about 921 at the end of the quarter. It was 883.

So there is a there is some improvement.

You know, we're writing new paper.

Just just below 11%.

On new originations.

So again, it's a function of the size of the portfolio and as we write those new loans at higher rates, you know slowly it lifts up the yield and the average you're right.

Got it makes sense.

So second here for overall portfolio growth another great point for the quarter could you speak kind of quarter to date any guidance on where that is.

I think you know what we saw in the first half of the year, particularly the second quarter is that is that return to seasonality. So originations, where we're very strong in Q2.

As you know if if we go back to a pre Covid era. That's that's typical of what we saw and then they come in some we grew a lot in Q2, we don't anticipate growing at that level in Q3.

But you know.

We've taken steps to moderate our growth.

We've increased rates will continue to do that and we've tightened credit.

But I think you know what Q3 historically is it's one of those ones where things start to slow down and then it bumps up a little bit and then it comes down. So it's it's that seasonality that we've we haven't experienced in a couple of years, we think we're back there.

Sure Okay.

And last question here so.

As far as current capital levels go.

Could you give any updates there as well as just some commentary on your general market outlook, then I'll jump back in queue.

Yeah. So so I think for at Medallion Bank you know we ended the quarter with tier one.

Just over 16%.

You know we are we declared a dividend of eight cents a share I think that you know we experienced a lot of growth and in order to maintain that growth we need to retain a fair amount of our capital. So to the extent that you know we have earnings like we do we think our best outlook and the best thing we could do for the for the future is.

Is to reinvest in our businesses and that's our that's what we're taking a significant portion of our earnings putting it back in the business retaining it there and and growing and growing our balance sheet.

Got it much appreciated again, congrats on great quarter.

Okay.

Thank you. Our next question comes from the line of Christopher Nolan with Lundberg Thalmann. Please proceed with your question.

Anthony on the comment you just made on retaining capital to grow the balance sheet, we should imply from that that dividend increase is not in the cards.

Yeah, I wouldn't say, it's a I'm not going to comment you know these are actions that the board has to take.

You know.

When we reestablished the dividend and put it back.

Just a just over a year ago, you know the intent is to pay a good dividend that over time can increase.

You know given the growth that we experienced in Q2, you know we.

We didn't think it prudent to increase that dividend.

As we see how the next couple of quarters unfold that a lot of determining the dividend policy that's taken.

I'd say also Chris.

Chris.

Evidence and buybacks are very important to us both both of those things. So the hope is to do both of them as Anthony correctly pointed out it depends really upon the loan demand if more of our competitors leave the market. We may want to continue to grow market share, but the seasonality comes back into play and we don't have the.

Growth as we expect we won't have the first half of this year, then we start focusing on those two things on the buybacks and the dividends.

And then is it correct to say that the recreational segment was the driver of the incremental loan growth in the quarter.

Yeah, Yeah, that's I mean, that's our crown jewel.

Where a vast amount of our income is generated and that's where a significant you know cigna.

Significant volumes of our originations occur.

Should we read anything in terms of the lower professional fee expenses.

No I think I'm you know for three quarters now we've experienced what we see as normalized professional and legal fees.

Hum.

And that's a good thing.

No.

They will fluctuate from time to time going forward.

But for right now that's I think that's the current run rate.

And last question on the taxi medallion recoveries, you guys had $10 $6 million in Medellin, repays, but only $5 3 million in recoveries I thought that all the medallion loans on non accrual for any repayments you got were treated as a recovery.

Yes, so as the recoveries come in as the cash comes in they reduce the asset.

Don't recognize any income until the assets reduced to zero.

At which point, we started recovering so so we had the $5 3 million that was in the provision there was another million or so dollars that we recognized on our on the disposition of actual foreclosed medallions and then the difference between what we collected in those two numbers that reduced our our total exposure.

Okay. So part of it is already reserved.

Yes.

Okay, and then I guess final question I mean, you guys are sort of in a.

It looks it looks like you know the competitive environment is improving and.

The operating and what's your thinking about in terms of your reserve ratio outlook.

And I'm trying to get a sense as to are you guys in a mode to build reserves or keep it steady or how should we look at that.

We think we've got a fairly healthy reserves right now on.

On the on the Rec side, you know where where over 400 basis points.

And on the on the on the home improvement side were over 200 basis points. That's that's nearly double in both of those what are our charge off experience has been this past quarter.

So as.

You know what's going to determine this you know long term as you know what the economy does.

My Crystal ball isn't working very well right now and it hasn't been for a couple of years, but you know if I. If the economy takes a turn in the consumer out, particularly our consumers start to feel pressure I think those Rachel.

Pick up if.

If we continue at this level I would expect them to stay the same.

Okay. That's it for me thank you.

Yeah.

Thank you. Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Yeah.

Hey, guys, just a follow up on sort of overall loan growth.

I think what you guys are saying is hey, <unk> was really strong seasonal seasonality historically kicked in.

So it was it was like historic trends.

Or are you sort of saying Hey, we expect some natural moderation in the second half.

And then secondly.

We're sort of current C b prices and what's sort of the overall outlook for the net interest margin.

Yeah.

So you would expect growth to slow I mean, we're we've been growing 20% on the RV and marine and 40% on home improvement those are very impressive numbers.

They won't continue for forever, frankly about a year ago, we thought it was slow and it didn't it so it's hard to predict when our competitors leave the market.

As they've been doing and we just are pleasantly surprised and it really is a boost to our earnings our growth. So we think it'll return to seasonality, but again.

You don't really know if this business continues to do tremendously well for us and our hope is we continue to grow it at those rates are but we really plan for a typical growth was less than that in terms of the C. D rates Anthony could address yeah, and the only thing I'll just add to what Andrew said is that even though you know we're seeing you know.

Some competitors leave the market.

We've taken we haven't just picked up all of that excess we've we've stepped up credit.

You know our average FICO has gone up again.

And we've increased the.

The rates that we're charging on new originations. So so we see it as a win.

And you know I don't want to speak about you know what Andrew already said, but I, but you know this is similar to what we experienced you know a number of years back during the great recession as far as CD rates.

I mean, we're seeing you know they've come down some in the past month or so.

Three year Cds were seeing it about 485, all in and a five year, new issuances or around 460 <unk> are.

Our average deposit rate is $2 70 so.

I mean, this isn't a shock to anyone we've been saying this all along we expect our cost of funds to continue to increase.

We were seeing you know five year Cds, you know north of 525, just a few months ago. So they have come down some and you know I guess, we'll see what the fed decides to do in the next couple of next couple of meetings.

But again, we've passed along a significant amount of that so although our NIM.

Has compressed you know year over year, and we do expect you know a little bit more compression. We do think that our topline growth is enough to make sure that our net interest income continues to grow.

You've done it you've done it so far hate two last quick questions was there any stock buyback in the quarter.

And then secondly.

Just.

In the financial statements I think there's.

<unk> 68 million of short term debt now can you just remind us what that is and sort of how youre dealing with that sure. So first question no we didnt buyback any stock in the quarter.

Second question on short term short term debt, there's there's pretty much three components there the largest one being $36 million of private notes that come due in March 2024. So we've got a couple of options. There. We've got we've had discussions with the current holders and we're speaking with new holders. The intent is to roll that credit.

Whether it's with the existing lenders or new lenders that'll be determined and so we've got some options. There in terms of pricing that 36 million has a coupon of eight in a quarter.

It's probably 50 to 50 to 75 basis points below where we think it would reprice today.

So that's something we'll be doing and working through in the next quarter or two.

The other are the other large piece and that we had $28 million of borrowings with the federal reserve through the fed window at medallion Bank.

It just so happened that Atlanta at quarter end and it was just a mechanism to increase cash on hand, and liquidity I think we had an outstanding for three or four days earlier in the quarter. We had taken a bunch of our investment securities and you know taken steps to pledge them with the fed.

So so that borrowing you saw at the end of the quarter. One increased liquidity just for a short amount of time and two we wanted to test it make sure that we operationally understood how it worked and everything and how the.

The mechanics work.

Those borrowings have since been replaced with Cds.

Got it got it and then there's a small piece of SBA debentures and borrowings. That's just ordinary course, those are 10 year debentures.

Upon maturity, we usually get another commitment and and and take down another debenture to take off to repay the maturing ones.

Got it Okay, hey, thank you.

Thank you ladies and gentlemen, this concludes our time allowed for questions I'll turn the floor back to Mr. <unk> for any final comments.

Thank you again for joining us on our earnings call as always if you have any questions. Please feel free to contact our investor relations team. The contact info 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 rest of your day.

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