Full Year 2023 Medallion Financial Corp Earnings Call
[music].
Operator: Good morning, and welcome to the Medallion Financial Corporation fourth quarter and full year 2023 earnings conference call. All participants will be in listen-only mode.
Good morning, and welcome to the Medallion Financial Corporation fourth quarter and full year 2023 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then one on a touch-tone phone.
Operator: To withdraw your question, please press star, then two. Please note this event is being recorded. I'd now like to turn the conference over to Ken Cooper of Investor Relations. Please go ahead.
I would now like to turn the conference over to Ken Cooper of Investor Relations. Please go ahead.
Yes.
Ken Cooper: Thank you, and good morning, everyone. Welcome to Medallion Financial Corp.'s fourth quarter and full year earnings call. Joining me today are Andrew Merstein, President and Chief Operating Officer, and Anthony Cattrone, Executive Vice President and 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 forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed.
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 Anthony controlling executive Vice President and Chief Financial Officer certain statements made during the call today constitute forward looking statements made pursuant to and within the meaning of the safe her.
Provisions 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.
Ken Cooper: 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 fourth 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 Merstein, President. Thank you, Ken. Good morning, everyone.
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 visiting medallion dot com and clicking Investor Relations. The presentation is near the top of the page with that I'll turn it over.
Andrew Burstein President.
Thank you Kat and good morning, everyone with a tremendous team effort throughout our entire organization medallion financial had an exceptional year with total earnings and earnings per share the highest in our history.
Andrew Merstein: With a tremendous team effort throughout our entire organization, Medallion Financial had an exceptional year with total earnings and earnings per share the highest in our history. We grew loans within our largest and most established business, the recreational lending segment, by 13% to $1.3 billion. We did this while increasing the average interest rate on the portfolio, which was 51 basis points higher at the end of the year compared to last year and helped to cover some of the costs of funds increases we saw this year. We grew the segment while maintaining tighter credit standards and a sharp focus on the type of assets we lend against, which are generally smaller dollar assets such as towable RVs and small boats. These assets have not had the volatility that catches the headlines like large cruiser RVs on larger scale boats and yachts. The average loan size in our portfolio stayed roughly at just over $19,000.
We grew loans within our largest and most established business the recreational lending segment by 13% to $1 $3 billion.
We did this while increasing the average interest rate on the portfolio, which was 51 basis points higher at the end of the year compared to last year and helped to cover some of the cost of funds increases. We saw this year. We grew this segment, while maintaining tighter credit standards and a sharp focus on the type of.
Since we lend against which are generally smaller dollar assets such as Copel rvs in small boats.
These assets have not had the volatility that catches the headlines like large crews are arby's, our largest scale boats and yachts.
The average loan size in our portfolio stayed roughly just over $19000.
Andrew Merstein: Our home improvement segment continues to be the fastest growing part of our business. As expected, the growth rate slowed in 2023 as we were another year removed from the unprecedented spike in pandemic-driven home remodel activity. However, with growth of 21% for this segment, there continues to be a steady flow of projects, especially for the smaller roofing, windows, or swimming pool projects that we are known for. Like our recreational segment, we maintain tighter credit standards and a consistent average loan size in our portfolio of approximately $20,000. Nearly this entire segment is made up of prime customers with an average FICO score of over 760.
Our home improvement segment continued to be the fastest growing part of our business as expected the growth rate slowed in 'twenty two 'twenty three as we were another year removed from the unprecedented spike in pandemic driven home remodel activity.
However, with growth of 21% for this segment there continues to be a steady flow of projects, especially for the smaller roofing windows with swimming pool projects that we are known for.
Like our recreational segment, we maintained tighter credit standards and a consistent average loan size in our portfolio of approximately $20000.
Nearly this entire segment is made up of prime customers with an average FICO score of over 760.
Andrew Merstein: Our commercial lending segment also had a very strong year. We grew the loan portfolio 24% to $115 million, with our average interest rate up 64 basis points to 12.87%. With a range of typical loan sizes generally around $3 million to $6 million, our goal is to continue to grow this segment prudently over time. The segment generated after-tax earnings of approximately $6.8 million during the year. Finally, our Taxi Medallion segment collected $45 million in cash during the year, $16.2 million of this coming in the fourth quarter.
Our commercial lending segment also had a very strong year.
We grew the loan portfolio of 24% to 115 million, where their average interest rate up 64 basis points at 12.87%.
With a range of typical loan size generally around 3 million to $6 million. Our goal is to continue to grow this segment prudently over time.
This segment generated after tax earnings of approximately $6 8 million during the year.
Finally, our taxi medallion segment collected $45 million of cash during the year $16 2 million of this coming in the fourth quarter.
Andrew Merstein: The majority of the cash generated from taxing Medallion Collections was in Medallion Bank and was reinvested into the consumer lending business. We continue to mention that these settlements are unpredictable, and we expect our collection activity to decrease in 2024. One item to note as a reminder, we adopted CECL at the beginning of the year, which now requires a larger allowance for credit loss to be booked upfront when loans are originated. This increased our provision this year. In addition, our current loss rates are more closely aligned with our historical trends and are consistent with what we have been indicating they would be as we come out of the low credit loss environment experienced during and after the pandemic. Even with the adoption of CECL and normalization of our loss rates, strong execution across our entire company led to $0.60 of diluted earnings per share in the quarter and $2.37 for the year, which was an all-time high for us
The majority of the cash generated from taxi medallion collections with medallion bank and was reinvested into consumer lending businesses.
We continued to mention that these sentiments are unpredictable and we expect our collection activity to decrease in 'twenty 'twenty four.
One item to note as a reminder, we adopted <unk> at the beginning of the year, which now requires a larger allowance for credit loss to be booked upfront and the loans were originated.
This increased our provision this year. In addition, our current loss rates are more closely aligned with our historical trends and are consistent with what we had been indicating they would be as we come out of the low credit loss environment experienced during and after the pandemic.
Even with the adoption of Cecil and normalization of our loss rates are strong execution across our entire company. That's at 60 cents of diluted earnings per share in the quarter and $2 37 for the year, which was an all time high for us.
Andrew Merstein: Our strategy continues to be to grow net interest income. We are doing this with smart loan growth and by offsetting the elevated cost of funds with our own rate increases where possible. We expect that as we proceed through 2024, we will maintain our focus on high credit standards and use pricing to our advantage. We anticipate loan growth to continue to moderate from the levels we saw in 2022 and for us to maintain a conservative approach to credit and growth. Finally, during the fourth quarter, our board authorized a 25% increase in our quarterly dividend from $0.08 to $0.10 per share, which began with our last declared dividend.
Our strategy continues to be growing net interest income.
We were doing this with smart loan growth and by offsetting any elevated cost of funds with our own rate increases where possible.
We expect that as we proceed through 'twenty 'twenty four we will maintain our focus on high credit standards and using pricing to our advantage.
We anticipate loan growth to continue to moderate from the levels. We saw in 2022 and for us to maintain a conservative approach on credit and growth.
Finally during the fourth quarter, our board authorized a 25% increase in our quarterly dividend from <unk> 10 per share, which began with our last declared dividend.
We feel great about what we've accomplished over the past three years and how we are positioned for the future success.
With that I will now turn the call over to Anthony who will provide some additional insight into our quarter.
Andrew Merstein: We feel great about what we have accomplished over the past three years and how we are positioned for future success. 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.
Thank you Andrew Good morning, everyone for the quarter net interest income grew 12% to 49 million from the prior year driven by increased interest rates on new loan originations and the growth in our loan portfolio. During the past 12 months for the year net interest income increased 17% to 100.
Anthony Cattrone: For the quarter, net interest income grew 12% to $49 million from the prior year, driven by increased interest rates on new loan originations and the growth in our loan portfolio during the past 12 months. For the year, net interest income increased 17% to $188.1 million. Our ability to increase our rates on new originations and our overall loan growth has enabled us to counteract some of the rising cost of funds we experienced during the year. Our net interest margin on gross loans was 8.20% for the quarter and 8.38% for the year, compared to 8.59% and 8.73% in the prior year quarter and year. We've spoken about the compression in our NIM for some time now, and it continues to trend as expected.
$88 1 million.
Our ability to increase our rates on new originations and our overall loan growth have enabled us to counteract some of the rising cost of funds we experienced during the year.
Our net interest margin on gross loans was 8.20% for the quarter and 838% for the year compared to 8.59% and 873% in the prior year quarter and year.
Spoken about the compression in our NIM for some time now and it continues to trend as expected.
Rising interest rates on our brokerage Cds have increased our borrowing costs over the prior year.
However, we've taken the opportunity to pass along a portion of those rising costs.
Rising on new originations.
Specific to originations during the year, we wrote home improvement loans at an average rate of 11.02% up from approximately eight and three quarters percent in 2020 two.
Anthony Cattrone: Rising interest rates on our brokered CDs have increased our borrowing costs over the prior year. However, we've taken the opportunity to pass along a portion of those rising costs in our pricing on new originations. Specific to Originations, during the year, we wrote home improvement loans at an average rate of 11.02%, up from approximately 8.75% in 2022, and wrote recreation loans at an average rate of 16.16%, up from approximately 14.25% in 2022. At the end of the year, we were writing home improvement loans at an average rate of 11.65%, and we were writing recreation loans at an average rate of 16.14%. As of the end of the year, our average coupon on recreation loans was up 51 basis points to 14.79% from a year ago, and on home improvement loans was up 86 basis points to 9.51%.
And wrote recreation loans at an average rate of 16.16% up from approximately 14.25% in 2022.
At the end of the year, we were writing home improvement loans at an average rate of 11.65% and recreation loans at an average rate of $16 one 4%.
As of the end of the year, our average coupon on recreation loans were up 51 basis points to 14.79% from a year ago and on home improvement loans were up 86 basis points to 951%.
In addition to passing the long interest rate increases we have continued with our tightened credit criteria non prime loans was 38% of our recreation portfolio and continued to be only 1% of the home improvement portfolio at the end of the year.
But this isn't just some comparative context regarding how we've tightened credit over the past few years at the end of 2019 non prime loans was 61% of the recreation portfolio.
Our provision for credit loss was $10 8 million for the quarter compared to 9.0 million in the prior year quarter.
For the year the provision for credit loss was $37 8 million and $30 1 million in 2022.
Anthony Cattrone: In addition to passing along interest rate increases, we have continued with our tightened credit criteria. Non-prime loans were 38% of the recreation portfolio and continue to be only 1% of the home improvement portfolio at the end of the year. To put this into some comparative context regarding how we've tightened credit over the past few years, at the end of 2019, nonprime loans were 61% of the recreation portfolio.
The provision included a net benefit of $12 1 million in the current quarter and the net benefit of $26 3 million for the full year related to taxi medallion loan recoveries compared to benefits of one 6 million and $6 2 million in the prior year periods.
Excluding taxi medallion related recoveries the increased provision as a result of the continued migration of loss experience to levels more comparable with pre can make historical norms. The growth penalty, we incur by growing our portfolio as well as the variability in our provisioning as a result of the adoption of six of this year.
Anthony Cattrone: Our provision for credit loss was $10.8 million for the quarter, compared to $9.0 million in the prior year quarter. For the year, the provision for credit loss was $37.8 million and $30.1 million in 2022. The provision included a net benefit of $12.1 million in the current quarter and a net benefit of $26.3 million for the full year related to tax and medallion loan recoveries compared to benefits of $1.6 million and $6.2 million in the prior year period, excluding taxi medallion related recoveries, the increased provision as a result of the continued migration of loss experience to levels more comparable with pre-pandemic historical norms, growth penalty we incur by growing our portfolio, as well as the variability in our provisioning as a result of the adoption of CESA this year.
On a full year basis, we incurred approximately $8 5 million of additional provisions connected to the growth in our consumer loan portfolio and approximately $3 4 million of additional provisions associated with the hydro allowance coverage rates tied to see so a majority of which were incurred in the fourth quarter.
At the end of the year, our allowance for credit losses, as a percentage of loans or $4 31 per cent for recreation loans and $2 76 per cent for home improvement loans up from 3.55% and 1.81% a year ago, and compared to 4.39% and 2.0% to 5%.
I did beginning of the year post our adoption of Cecil.
Operating expenses were $19 1 million during the quarter, which were in line sequentially from the third quarter for the year operating expenses were $75 6 million compared to $72 1 million a year ago. The growth is mostly related to scaling our lending operations offset by lower legal and professional costs.
Anthony Cattrone: On a full-year basis, we incurred approximately $8.5 million of additional provisions connected to the growth in our consumer loan portfolio and approximately $3.4 million of additional provisions associated with the higher allowance coverage rates tied to CISO, a majority of which were incurred in the fourth quarter. At the end of the year, our allowance for credit losses as a percentage of loans was 4.31% for recreation loans and 2.76% for home improvement loans, up from 3.55% and 1.81% a year ago and compared to 4.39% and 2.05% at the beginning of the year, following our adoption of FESA. Operating expenses were $19.1 million during the quarter, which was in line sequentially from the third quarter. For the year, operating expenses were $75.6 million, compared to $72.1 million a year ago.
For the quarter net income attributable to our shareholders was $14 3 million or 60 cents per.
Our diluted share for the year net income attributable to shareholders was $55 1 million or $2.37 per diluted share.
That covers our fourth quarter and full year financial results, Andrew and I are now happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you'd like to withdraw. Your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
And our first question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead.
Anthony what do you think the medallion recoveries contributed to EPS in the quarter.
I think yeah. It was we.
Put in the press release, the recoveries were I think about 33 cents a share you know based upon.
What we brought in a large portion of that was one or one specific large relationship that came in in October we had spoken about it last quarter. When we were growing up of Q3.
And a few other not as large but significant.
Operator: The growth is mostly related to scaling the lending operations, offset by lower legal and professional costs. For the quarter, net income attributable to our shareholders was $14.3 million, or $0.60 per diluted share. For the year, net income attributable to our shareholders was $55.1 million, or $2.37 per diluted share. That covers our fourth quarter and full year financial results. Andrew and I are now happy to take your questions. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone.
Significant items.
Second question is the reserve allowance, where do you think he goes as a percentage of loans going forward shall we see continues to step up through 2024.
I think and when we look year over year, we adopted six of this year and what that adoption, we were up 21% on on the rack allowance and an over 50% on home improvement.
You know it's a.
Oh, I see so model as a function of his.
Historical losses, we try and project that out as to expected losses over the life of the entire portfolio.
We take into account you know various economic circumstances.
Yeah. So I think what we saw is that provision stepped up.
Our allowance coverage stepped up in.
In Q4.
It was actually something we were expecting to see throughout the entire year that didnt happen for the first nine months and we sort of step up in Q4. Some of it has to do with the seasonality of our portfolio charge offs are typically higher in December and.
Anthony Cattrone: If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you'd like to withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our questions, and our first question comes from Christopher Nolan from Lattenberg-Fowlman. Please go ahead. Anthony, what do you think the Medallion of Recovery has contributed to EPS in the quarter? As we put in the press release, the recoveries were about 33 cents a share, based on what we brought in. A large portion of that was one specific large relationship that came in in October. We spoke about it last quarter when we were going over Q3, and a few others not as large but significant, http://TheBusinessProfessor.com. Second question is the reserve allowance. Where do you think it goes as a percentage of loans going forward? Should we see it continue to step up through 2024? I think when we look year over year, we adopted CECL this year, and with that adoption, we were up 21% on the REC allowance and over 50% on home improvement. You know, it's a, our CISO model is a function of.
In January and then settle back down towards the end of Q1.
The weather starts getting nicer.
You know I think you know, it's gonna be a function of the economy, we get a nice soft landing like some are suggesting I think I think we should be okay. If things are a little bit bumpier, we might see a little a little bit higher provisioning.
Okay, and then I guess a final question is.
Given the.
Regional banks are sort of.
Everyone's waiting for the shoe to drop on commercial real estate are do you anticipate that F. D. I C could require a higher.
Capital ratio for the bank.
You know, we've got a pretty high capital ratios. So I don't think it would be specific to us.
You know, we've got a capital maintenance agreement.
Our tier one leverage ratio was 15%.
North of 16% now I would imagine if there was something to come out it wouldn't be specific to our institution that would be across the board I mean I.
I think that we'd probably be comfortable where we are now.
Great and one we expect.
Please go ahead Sir.
With that.
I confirm that I mean ours is extremely high as you know well capitalized I think it's about 6% of them were at 15% or so so and today as Anthony said, we're about above 16%. So the commercial real estate issues of others.
Anthony Cattrone: We try and project that out as to expected losses over the life of the entire portfolio, and we take into account various economic circumstances. So I think what we saw is that provisioning stepped up, and our allowance coverage stepped up in Q4. It was actually something we were expecting to see throughout the entire year.
<unk> could have a positive effect in that several of them could be leaving some of our business lines. You know we've stuck to our knitting, we really focus on what we do best and I'm not strayed and in times like this banks that have issues with the commercial portfolios in real estate tend to get out of home improvement RV and marine lending and that's when historically, we picked up market share.
Anthony Cattrone: That didn't happen for the first nine months, and we saw it step up in Q4. Some of it has to do with the seasonality of our portfolio, because charge-offs are typically higher in December.
Sure.
Great and final question when should we expect the K to be released.
And probably another week and a half.
That's it for me thank you.
Thanks, Chris.
Our next question comes from Mike Grondahl from Northland Securities. Please go ahead.
Anthony Cattrone: January and then settle back down towards the end of Q1, you know, the weather starts getting nicer. I think, you know, it's going to be a function of the economy. We get a nice soft landing like some are suggesting. I think I think we should be okay. Things are a little bit bumpier. We might see a little higher profit. Okay, and then I guess the final question is... Um, given that regional banks are sort of Everyone's waiting for the shoe to drop on commercial real estate, do you anticipate that the FDIC could require a higher Capital Ratio for them? We've got a pretty high capital ratio, so I don't think it would be specific to us. You know, we've got a capital maintenance agreement where our Tier 1 leverage ratio is 15%. But, you know, we're north of 16% now. I would imagine that if there was something to come out, it wouldn't be specific to our institution. It would be across the board.
Hey, Thanks, guys can you talk a little bit about.
Kind of your origination outlook is and how that might translate into sort of growth in in the various loan books.
Sure I think.
I think it's a good question, Mike and it's something that we think about it on a regular basis, you know coming out of the pandemic 'twenty.
2021 2022 we saw a record gross and even 2023 was larger than I think a traditional year I think you know what what we're targeting you know what we're targeting you know long term as you know annual growth, you know plus or minus 10%.
Over the long term I think 'twenty 'twenty four will probably be in the high single digits.
A portion of that is one you know you know there's still a lot of uncertainty with the economy you.
How does that affect demand.
We'll see.
The other is that you know, we've we've taken a pretty.
Strong stance on credit.
We've stepped up you know are our criteria and we've never been ones to chase volume, even though we've grown so much and what we're not going to chase originations, but but I think you know if we're just looking at 'twenty 'twenty four you know high single digits somewhere in that you know, 6% to 9% range Thats, probably where we ended up across the.
Anthony Cattrone: And I think that we'd probably be comfortable where we are now. Great, and when do we expect the cash flow to increase? Chris, yeah, I was going to say, I'd confirm that.
Sure.
Okay. Thanks.
Was there a one time gain related to equity investments or any other noise to call out with the 60 cent E. P. S. Other other than the taxi cab cool I wouldn't.
Andrew Merstein: I mean, ours is extremely high, as you know, well-capitalized, I think it's about 6%, and we're at 15% or so, and today, as Anthony said, we're above 16%. So the commercial real estate issues of others, I think, could have a positive effect in that several of them could be leaving some of our business lines. We've stuck to our knitting.
We did have some equity gains.
We don't we don't view them as one time.
Essentially all of our equity portfolio, it's about $11 million at the end of the year, it's tied to I imagine any lending business. That's operated out of the medallion capital. So when we make an investment there.
Andrew Merstein: We really focus on what we do best and have not strayed, and in times like this, banks that have issues with their commercial portfolios and real estate tend to get out of home improvement, RV, and marine lending, and that's when, historically, we've picked up market share. Great. And final question, when should we expect decay to be released? Probably another week and a half.
Now up to 10% of the investment goes into some sort of equity security there. So we've got a.
100, plus million dollar book of loans and then we've got you know 10 or $11 million above you know equity securities. We did have a net gains of about $3 million in the quarter, but again. These are you know.
These aren't one time items, we've had those in the past.
Operator: Great, that's it for me, thank you. Thanks, Chris. Our next question comes from Mike Grondal from Northland Securities. Please go ahead.
Did that book, it's tied to the commercial book, Iraq, Yes, and.
Brandon as point, Mike as you know, we bought that company and 1998, So who's got 26 years of our history there of a great success.
Operator: Hey, thanks, guys. Could you talk a little bit about kind of your origination outlook and how that might translate into sort of growth in the various loans? Sure, I think...
Hopefully it continues but it's hard to estimate when we're going to have those pops from time to time, but it does have a nice steady steady income stream is lending money at 13% plus rates and then you have these kickers that kick in from time to time and those cause like I said those kicked goes you know book value was $11 million at the end of the year.
Anthony Cattrone: I think it's a good question, Mike, and it's something that we think about on a regular basis, you know, coming out of the pandemic. 2021, 2022, we saw record growth, and even 2023 was larger than, I think, a traditional year. I think, you know, what we're targeting, you know, long-term is, you know, annual growth, plus or minus 10% over the long term. I think 2024 will probably be in the high single digits.
It's across some 34 portfolio companies that we've invested in.
Cool I didn't know if it was tied to the commercial book or sometimes you guys in the past they've made some one off investments and whatnot. So I just wanted some clarity there.
Any comment.
Kind of for 24 on that the net margin was like 850, I know some kind of sometimes you guys talk about gross margin but.
Is that margin pressure largely done or do we see kind of a tail end of it in 'twenty four.
I wouldn't say, it's done well.
Anthony Cattrone: A portion of that is, one, you know, there's still a lot of uncertainty in the economy. How does that affect demand? We'll see. And the other is that, you know, we've taken a pretty strong stance on credit. We've stepped up, you know, our criteria. And we've never been ones to chase volume, even though we've grown so much. We're not going to chase originations.
Think that there's still a little compression to come.
We saw our cost of funds increase in 'twenty three but we also saw our our topline our yield go up and that's part of it is the slow to churn ship when we talk about new originations at a higher level what are the $2 billion book It takes a while for that to trickle through to the income statement and show up in the yield, but we're starting to see that.
We think we still can see that the yields rise in 'twenty for cost of funds will also come up there's a little bit more compression, but I think we're still comfortable thinking that it bottoms out around 8% plus or minus a few basis points sometime towards the second half of the year.
Anthony Cattrone: But I think, you know, we're just looking at 2024, you know, high single digits somewhere in that, you know, 6 to 9% range. That's probably where we end up across the board. Okay, thanks.
Got it and then.
Yeah.
On the provision of Anthony.
If I take.
Your actual provision expense in the quarter, the $10 8 million.
And if I add in.
Back to the $12 1 million benefit from the taxi cab collections.
Anthony Cattrone: Was there a one-time gain related to equity investments or any other noise to call out with the 60-cent EPS other than the taxicab collection? We did have some equity gains, but we don't view them as one-time.
Am I thinking about it right, saying, hey that provision was really 'twenty 2.9 million.
And you had said hey, it's stepped up in <unk> is that about the right level to think about on a quarterly basis now.
Andrew Merstein: Essentially, all of our equity portfolio is about $11 million at the end of the year. It's tied to our mezzanine lending business that's operated out of Medallion Capital. So when we make an investment there, up to 10% of the investment goes into some sort of equity security there. So we've got a, you have, Yes, and for Anthony's point, Mike, as you know, we bought that company in 1998. So we've got 26 years of history there of great success, so hopefully it will continue, but it's hard to estimate when we're going to have those pops from time to time. But it does have a nice steady income stream.
I I think.
Q4 is always you know art.
Our worst performing quarter.
From a delinquency and charge off if you think about you know in the coastal areas, where we do a lot of our business you know selling boats and outdoor activity rvs.
You know people are outside more when the weather is nice. So you know the end of November December January things are worse, you know people aren't as concerned about making the payments on their their boat right, but one some once the warm weather starts coming around those delinquencies typically drop. So this is the seasonality we've seen.
Over the 20 year period, we didn't experience it for the year our juice. Following Covid, we started to see it a little bit last year and we think it's back now you know time will tell if the delinquencies and charge offs that we experienced in Q4 or just seasonality or if there's something bigger in the economy and that's something.
Andrew Merstein: It's lending money at 13% plus rates, and then you have these kickers that kick in from time to time. And those, like I said, those kickers, have a book value of $11 million at the end of the year. And it's across some 34 portfolio companies that we've invested in. Cool.
We're tuned to it and that goes back to you, though that the credit standards, we have and really try to change the composition of our book.
Got it got it Okay, and then hey have you collected anything in January or February so far are tied to the taxi cab medallions.
Operator: I didn't know if it was tied to the commercial book or sometimes you guys in the past have made some one-off investments and whatnot, so I just wanted some clarification there. Any comment, kind of on 24 on that, the net margin was like $8.50. I know sometimes you guys talk about gross margin, but is that margin pressure largely done, or do we see kind of a tail end of it in 24? I wouldn't say it's done.
[laughter], everyone wants a a homerun two years in a row.
You know we have collections coming in every day.
Unfortunately, we don't expect them to be anywhere near the level that they were in 2023.
We always knew and Andrew has spoken about this for a long time is that there was going to be a significant amount of recoveries, we expected that over a long period of time or you know what.
Longer period of time, what we've found is a lot of that showed up in 2023. So at the end of 'twenty. Three we still have a few larger relationships that have the potential for work for some you know meaningful recoveries.
Anthony Cattrone: We think that there's still a little compression to come. We saw our cost of funds increase in 2003, but we also saw our top line, our yield, go up. And that's part of it. It's the slow to turn ship when we talk about new originations at a higher level.
A lot of them are you know.
Our actually.
Anthony Cattrone: With a $2 billion book, it takes a while for that to trickle through to the income statement and show up in the yield, but we're starting to see that. We think we can still see that yields will rise in 2004, and cost of funds will also come up. There's a little bit more compression, but I think we're still comfortable thinking that it bottoms out around 8%, plus or minus a few basis points, sometime towards the second half of the year. Got it, and then, um... On the provision, If I take your actual provision expense in the quarter, $10.8 million, and if I add in the $12.1 million benefit from the taxicab collection. Am I thinking about it right, saying, hey, that provision was really $22.9 million? And you had said, hey, it stepped up in 4Q.
We've got structured settlements with them and they're actually meeting those settlements. So we don't expect any windfalls you know.
As of now for 2024.
And to add to that Mike the there's a little bit of a wait and see in the medallion industry in New York City now.
Dressed in pricing as opposed to kick in in a couple of months the whole of the medallion industry is that that's going to be very positive for them.
Concept behind that is to keep consumer cars out of Midtown and that was that worse than you would think more people take not only more medallion rise yellow cannibalize, but also uber and lyft rides, but that whole sector should do better. If this is done and implemented the right way so hopefully there could be collect.
The second half of the year, if more taxi usage increases, which is what we think will happen.
Fair Fair and Anthony we got 16 inches of ice on our lakes in northern Minnesota, So I understand that seasonality a little bit.
[laughter].
Thanks, guys.
Thanks, Mike Thanks, Mike.
The last question comes from Matthew Howlett from B Riley. Please go ahead.
Anthony Cattrone: Is that about the right level to think about on a quarterly basis now? I think Q4 is always, you know, our worst performing quarter from a delinquency in charge of. If you think about in the coastal areas where we do a lot of our business, selling boats and outdoor activities, RVs, people are outside more when the weather is nice. So at the end of November, December, and January, things are worse. People aren't as concerned about making the payments on their boat, but once the warm weather starts coming around, those delinquencies typically drop.
Hey, Thanks, everybody good morning, and another strong quarter.
The first question is just on your your capital strength in Europe, probably one of the highest ROE regenerating banks out there you got to hear an incredibly efficient into 40% you look at your capital ratios.
Look like they're just gonna here build as you slow down portfolio growth I think you said what mid to high single digits.
You're being cautious and one asks about the seasonal reserve in a second but.
You know as you go as the Catholic and as it continues to build.
Anthony and Andrew do you feel like you know when you look at you've just raised the dividend do you look at more buybacks shops, you've talked about looking at other platforms you in an envious position as the capital can you just continues to grow and it looks like it's just going to continue to increase through 'twenty four.
Anthony Cattrone: So this is the seasonality we've seen over the 20-year period, but we didn't experience it for the year or two following COVID. We started to see it a little bit last year, and we think it's back. Now, time will tell if the delinquencies and the charge-offs that we experienced in Q4 are just seasonality or if there's something bigger in the economy, and that's something we're tuned to, and that goes back to the credit standards we have and really trying to change the composition of our book. Have you collected anything in January or February so far tied to the Taxi Cab Medallion? Everyone wants a home run two years in a row.
Here when you look at more speeding up loan growth just curious you know what the thoughts are initially.
Yeah, I think you know with the with the loan growth that we're looking at for 2024 like we just spoke about.
We do need a fair amount of capital with the 15% maintenance requirements are actually you know to retain them. So they can take that coupled in with the dividend that we've got in place to our shareholders. We think are we think we're deploying that capital and that you know the the.
The generation of that capital appropriately.
Obviously, we're always opportunistic if the opportunity that you know are raised preferred debt or preferred equity at at the bank like we've done in the past we'd look to that Hum.
Anthony Cattrone: You know, we have collections coming in every day. Unfortunately, we don't expect them to be anywhere near the level that they were in 2023. We always knew, and Andrew's spoken about this for a long time, that there was going to be a significant amount of recoveries. We expected that over a long period of time or, you know, a longer period of time. What we found is that a lot of that showed up in 2023. So at the end of 2023, we still have, you know, a few larger relationships that have the potential for some, you know, meaningful recoveries. A lot of them are actually, we've got structured settlements with them, and they're actually meeting those settlements, so we don't expect any windfalls, as of now, for 2024.
But I think I think for now you know there's nothing on the horizon in terms of you know.
You know what could happen.
You know buybacks, we still have 20 million available we're going to remain opportunistic with that you know we could you know it if something were to happen and it's accretive to shareholders that could be in the market, we're going to do that growing our business. The way we have and the way. We continue to do we think that's the best thing long term for our shareholders.
Yes, as you know Matt you know these are good problems to have right. If you look at our balance sheet. We've got a lot of cash on hand, now so there's a lot of options that we have available to us.
And like you said, we just stay with that cash on hand, you know that the consolidated balance sheet a lot of that is liquidity at medallion bank and you know they they keep a fair amount of cash on hand, and that you know that that could move based upon originations. You know are you know pretty rapidly.
Yeah.
Right, Let's say you have a great track record of returning capital I mean, you did that with the buybacks you've raised the dividend.
You know clearly you want to keep it over that fit that cushion to 15%, but it'd be interesting to see you know you guys are always opportunistic with capital and certainly that buybacks are a long way. So we'll look forward to that and then getting back to the seasonal you know MTN, Andrew I mean is it.
Andrew Merstein: And to add to that, Mike, there's a little bit of a wait and see in the medallion industry in New York City now. Congestion pricing is supposed to kick in in a couple of months. The hope of the medallion industry is that that's going to be very positive for them. The concept behind that is to keep consumer cars out of Midtown.
Is there a way to quantify I mean lucky was it just weighed down your results throughout 'twenty three particularly in the fourth quarter I mean, I get the frontloading of it and they could you know and everyone has to do with it it seems like it's more on the rest of you guys and everybody else I know you talked about whether it's I don't want to be cautious of the salt Lake soccer, a hard landing, but is there any way to sort of set.
Andrew Merstein: And if that works, then you would think more people will take not only more medallion rides, yellow cab rides, but also Uber and Lyft rides. But that whole sector should do better if this is done the right way. So hopefully, there could be a collection in the second half of the year if more taxi usage increases, which is what we think will happen. Fair, fair. And Anthony, we got 16 inches of ice on our lakes in northern Minnesota, so I understand that seasonality a little bit.
Yeah tell us quantify here, what what really does see some reserve could be 24, it seems like with the slower loan growth versus 'twenty three and then the movement up in credit you clearly don't have as much subprime as you did.
Several years ago.
Could we see sort of a more normalization in that line. So it doesn't throw off.
The earnings and the ROE, you're already generating 70%, but I'm, assuming it's going be a lot higher if we get a normalization in that provision line.
Mike Grondal: Thanks, guys. Thanks Mike. Thanks Mike. The last question comes from Matthew Howlett from B. Reilly. Please go ahead. Hey, thanks, everybody. Good morning.
Yeah. So you know it's up.
It's a fairly complex analytical model that we've designed.
And essentially what it does is it tries to predict you know what is the probable default weighted model that tries to predict what our future losses are going to be so anytime there's a change in outside economic variables inflation changes you know prime rate changes things unemployment changes things of that nature. It's gonna have in effect. Additionally, you know it looks at.
Matthew Philip Howlett: Another strong quarter. I guess the first question is just on your capital strength. I mean, you're probably one of the highest ROE generating banks out there. You're incredibly efficient, 40%.
Historical losses, so if we see an uptick like we did in Q4, it's going to affect our provisioning as.
Matthew Philip Howlett: You look at your capital ratios. They look like they're just going to build as you slow down portfolio growth. I think you said, "what? mid to high single digits.
As well.
We expect that you know as we get through you know the first half of the year and you know charge offs you know assuming that seasonality is what we expect it to date charge offs come down. Some after you know maybe January February.
Anthony Cattrone: I know you're being cautious, and I want to ask about the Cecil Reserve in a second. As the capital continues to build, Anthony and Andrew, do you feel like when you look at – you just raised it? When you look at more buybacks, obviously, you talked about looking at other platforms. You're in an envious position as the capital continues to grow, and it looks like it's just going to continue to increase through 2024. I just want to hear, would you look at speeding up loan growth more? I'm just curious what the thoughts are initially.
We should see you know what maybe a reduction in some of that but it's it's so closely tied to economic variables that it's it really is hard to predict. It's you know it's I think it's one of the things we were concerned about and frankly, it's something that this this unpredictability or there's variability that we saw in Q4 as what we were expecting the full year.
It's just that the first nine months of it didn't show.
Right now look at it it definitely had it certainly looked like it was over overly punitive here in the fourth quarter, but we look forward to more of a normalization of that and it would be interesting, but you can run.
Anthony Cattrone: Yeah, I think, you know, with the loan growth that we're looking at for 2024, like we just spoke about, we do need a fair amount of capital with the 15% maintenance requirement to actually retain. So take that coupled in with, you know, the dividend that we've got in place for our shareholders. You know, we think we're deploying that capital and that, you know, the generation of that capital appropriately. You know, obviously, we're always opportunistic. If the opportunity to, you know, raise, you know, preferred debt or preferred equity at the bank, like we've done in the past, we'd look to that. And, you know, but, you know, I think, I think for now, you know, there's nothing on the horizon in terms of, you know, what could happen?
So I used to do it had hardly any sort of look this year versus a twist.
Wishes and you see Philadelphia, but well, we'll take a look at that and I guess the last question just on you've done a great job pricing I think you said your rates now or over 16% on the rack at close to 12 on the home improvement I mean it yet.
Terrific.
Are you bumping into anybody I mean can you just increased.
Where are you pricing it seems like it's going to level off or you know you're running an antibody competition and he said ended the banks tend to back out at these persons cycle I mean, just give us a little sense on competition and who are you bumping into.
Yeah, I think you know as you know obviously you know the edge as we raise pricing you know that that's going to have an effect on our origination. So there's definitely you know there's a there's a there's a fairway we want to operate it and we're not looking to price ourselves out of the market.
Anthony Cattrone: You know, buybacks. We still have $20 million available. We're going to remain opportunistic with that. You know, we could, you know, if something were to happen and it's a creative-to-shareholder list that could be in the market, we're going to do that. Growing our business the way we have and the way we, you know, continue to do, we think that's the best thing long-term for our shareholders. Yes, as you know Matt, these are good problems to have, right?
We definitely want to say you know what.
We're not as concerned with being competitive as we are with generating the type of returns that we would typically see.
So I wouldn't expect to see you know any you know.
Meaningful decrease from these levels that said you know we're you know if the fed comes in with some rate cuts down. The line you know we're going to factor that into our pricing again, you know what we don't want to price ourselves out of the market, but we're also not going to drop rates just to chase volume.
Andrew Merstein: If you look at our balance sheets, we've got a lot of cash on hand now, so there are a lot of options that we have available to us. Yeah, and I would just say with that cash on hand, you know, the consolidated balance sheet, a lot of that is liquidity at Medallion Bank, and they keep a fair amount of cash, you know, on hand, and that could move based upon originations, you know, pretty rapidly. Right, look, you have a great track record of returning capital, and you did that with a buyback. You raised a dividend. You know, clearly, you want to keep that cushion to 15%, but it'll be interesting to see, you know, you guys are always opportunistic with capital, and certainly, the buybacks went a long way, so we'll look forward to that.
Is that that could be certainly I think it could be.
Certainly a big Boon for you guys really appreciate it thanks a lot.
It's not that.
We have a follow up question from Mike Grondahl from Northland Securities. Please go ahead.
Yeah, Hey, Anthony.
Operating expenses were like 75, and a half million in 2023.
Really only up a couple million.
2022.
75, and a half million like the right base level for 24 do you see you know like a couple of million growth throughout the year, how should we think about operating expenses in 'twenty four.
Yeah, it's it's about their.
And inflation you know isn't just a factor in terms of you know what it does to our borrowers you know we've got you know what.
Over 100 employees and like.
Andrew Merstein: And then, you know, getting back to the CECL, Anthony and Andrew, I mean, is there a way to quantify it? I mean, like it just weighed down your results throughout 23, particularly in the fourth quarter. I mean, I get the front-loading of it, and, you know, everyone has to do it, but it seems like it's more onerous for you guys than everybody else.
So we give them standard of living increases so that they can keep up. So you know salaries will go up some you know because of our because of our earnings you know compensation was higher this year than it was maybe in past years.
That might come down a little bit, but I think.
I don't know that there's any extraordinary items in operating expenses that would you know cause it to fluctuate when we look at 2023, obviously you know you know professional fees could very down the line but.
Anthony Cattrone: I know you talked about whether you want to be cautious of the stop or hard landing, but is there any way to sort of tell us, quantify here what the CECL reserve could really be? 24? It seems like with the slower loan growth versus 23 and then the movement up in credit, you clearly don't have as much subprime as you did, you know, several years ago. I mean, could we see sort of a normalization in that line so it doesn't throw off the earnings and the ROE? You're already generating a 70% ROE, but I'm assuming it's going to be a lot higher if we get a normalization in that provision. Yeah, so, it's a fairly complex analytical model that we designed, and essentially, what it does is it tries to predict, you know, it's the probable default weighted model that tries to predict what our future losses are going to be.
I think in terms of you know a normalized run rate I think this was looks you know about where we should be that said you know if you. If you look two years ago were significantly higher but over the course of three years, we've more than doubled our loan book. So you know as we scale theres going to be additional costs that we incur.
And you know that's that's just part of the business for it.
Fair enough okay. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Andrew <unk> for any closing remarks.
Thank you again for joining us. This morning, we had a great year and we're proud of everything that we accomplished not only in 2023, but over the last several years.
We're 'twenty 'twenty four and beyond we are positioned well with a strong balance sheet prudent reserve levels and most importantly, an incredible team.
Anthony Cattrone: So anytime there's a change in outside economic variables, inflation changes, you know, prime rate changes, things of that nature, unemployment changes, things of that nature, it's going to have an effect. Additionally, you know, it looks at historical losses. So if we see an uptick like we did in Q4, it's going to affect, you know, the provisioning as well. You know, we expect that, you know, as we get through, you know, the first half of the year, and, you know, charge-offs, assuming that seasonality is what we expect it to be, charge-offs come down some after, you know, maybe January or February. You know, we should see, you know, maybe a reduction in some of that, but it's so closely tied to economic variables that it's, it really is hard to predict.
Do you believe this will continue to deliver significant shareholder value.
As always if you have any questions. Please free feel to call our investor Relations team. The contact info is on the last page of our earnings supplement.
Well as the IR section of our website. Thank you again, everyone and have a great rest of your day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].
Anthony Cattrone: It's, you know, it's one of the things we were concerned about. And frankly, it's something that this unpredictability or this variability that we saw in Q4 is what we were expecting for the full year. It's just that in the first nine months, it didn't show. Right. No, look, it definitely had, it certainly looked like it was overly punitive here in the fourth quarter.
Matthew Philip Howlett: But we look forward to more of a normalization of that. I mean, it'd be interesting if you could run, you know, sort of how X CSO used to do it, how the earnings would have looked this year versus, you know, versus the new CSO adoption. But we'll take a look at that. I guess in the last question, just on, you did a great job pricing. I think you said your rates now are over 16% on the REC and close to 12 on the home improvement. I mean, I mean, it's been terrific. You're bumping into anybody?
Anthony Cattrone: I mean, can you just increase the price? I mean, where are you pricing it? It seems like it's going to level off or, you know, you're running into anybody. Competition, as you said, Andrew, the banks tend to back out at these parts of the cycle. I mean, just give us a little sense of competition and who you're bumping into.
Anthony Cattrone: I think, you know, obviously, as we raise pricing, that's going to have an effect on our origination, so there's definitely, you know, there's a fair way we want to operate it, and we're not looking to price ourselves out of the market, but we definitely want to stay, you know, but we're not as concerned with being competitive as we are with generating the type of returns that we typically see. So I wouldn't expect to see, you know, any meaningful decrease from these levels. That said, you know, we're, you know, if the Fed comes in with some rate cuts down the line, we're going to factor that into our pricing. Again, you know, we don't want to price ourselves out of the market, but we're also not going to drop rates just to, you know, chase volume. Exactly like that.
Yeah.
[music].
Matthew Philip Howlett: It could certainly be a big boon for you guys. I really appreciate it. Thanks a lot.
Mike Grondal: We have a follow-up question from Mike Gronthal from Northland Securities. Please go ahead. Yeah, hey, Anthony, operating expenses were like $75.5 million in 2020. You know, really only up a couple million on 2022. Is that 75 and a half million like the right base level for 24?
Anthony Cattrone: Do you see, you know, like a couple million growth throughout the year? How should we think about operating expenses in twenty? It's about their, you know, we, you know. It isn't just a factor in terms of what it does to our borrowers.
Anthony Cattrone: We've got over 100 employees, and so we give them standard of living increases so they can keep up. Salaries will go up some. Because of our earnings, compensation was higher this year than it was in previous years. That might come down a little bit. I don't know that there's any extraordinary items in operating expenses that would, you know, cause it to fluctuate when we look at 2023.
Okay.
Yeah.
Anthony Cattrone: Obviously, you know, professional fees could vary down the line, but, you know, I think in terms of, you know, a normalized run rate, I think this looks, you know, about where we should be. That said, you know, if you look two years ago, we're significantly higher, but over the course of three years, we've more than doubled our loan book. So, you know, as we scale, there's going to be additional costs that we incur, and, you know, that's just part of the business we're in. Fair enough.
[music].
Operator: Okay. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Andrew Merstein for any closing remarks. Thank you again for joining us this morning. We had a great year, and we're proud of everything that we accomplished, not only in 2023, but over the last several years and beyond. We were positioned well with a strong balance sheet, prudent reserve levels, and, most importantly, an incredible team.
Yeah.
[music].
Andrew Merstein: We believe this will continue to deliver significant shareholder value. As always, if you have any questions, please feel free to call our investor relations team. The contact info is on the last page of our earnings supplement, as well as on the IR section of our website. Thank you again, everyone, and have a great rest of your day.
Yeah.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now, BF-WATCH TV 2021 BF-WATCH TV 2021 BF-WATCH TV 2021 BF-WATCH TV 2021, TheBusinessProfessor.com www.thevenusproject.com www.youtube.com or the link in the description below, www.thevenusproject.com, Copyright 2019 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent, www. TheBusinessProfessor.com Thanks for watching! BF-WATCH TV 2021, The BusinessProfessor.com
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