Q3 2024 Medallion Financial Corp Earnings Call
Speaker Change: thank
Speaker Change: Good day and welcome to the Medallion Financial Group, third quarter earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation there will be an opportunity to ask questions. To ask a question you may press star than one on your touchdown phone. To withdraw your question please press star than two.
Speaker Change: Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Ken Cooper Investor Relations, please go ahead.
Ken Cooper: Thank you and good morning everyone. Welcome to Medallion Financial Corpse 3rd Quarter earnings call. Joining me today are Andrew Murstein, President and Chief Operating Officer and Anthony Cutrone, Executive Vice President and Chief Financial Officer.
Ken Cooper: Certain statements made during the call today constitute forward-looking statements made pursuant to and with the meaning of the safe harbor provisions of the private securities litigation reform act of 1995 as amended.
Ken Cooper: 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.
Ken Cooper: Those risks and uncertainties are described in our earnings press release issue yesterday and in our findings with the SEC. The forward-looking statements made today are as a date of this call and we do not undertake any obligation to update these forward-looking statements.
Ken Cooper: In addition to our earnings press release, you can find our third 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.
Andrew Murstein: Thank you, Ken, and good morning. We executed well again in the third quarter. We delivered $8.6 million of net income and $0.37 of earnings per share for our shareholders.
Andrew Murstein: This was driven by good loan origination activity, stability in our loan portfolio metrics, and continued strengthening of the credit quality of our borrowers.
Andrew Murstein: Year-to-date, we have delivered over $25 million of net income and $1.09 per share of earnings.
Andrew Murstein: We are extremely pleased with these results.
Andrew Murstein: The hard work we have done over the past few years is helping drive our performance.
Andrew Murstein: This centers around targeting an enhanced borrower base with continued small movements to improve credit quality.
Andrew Murstein: We believe this lowers our risk profile and results in better financial performance since payment patterns stay more predictable and stable.
Andrew Murstein: Our current loan portfolio skews more prime to super prime borrowers while we have been decreasing the level of subprime credit in the portfolio.
Andrew Murstein: In addition, we were pleased to see the Fed's initial move of dropping its rate.
Andrew Murstein: We believe that with this drop, we could be at the beginning of a longer term declining rate trend over time. This is good for Medallion as our business reacts well in a declining rate environment.
Andrew Murstein: We believe our cost of funds will eventually drop from current levels, which would further enhance our already strong net interest margin.
Andrew Murstein: Moving to our segments, REC Lending and another strong quarter, which included $139 million of new loan originations.
Andrew Murstein: Originations were up 50% from the third quarter of last year and down sequentially from the second quarter as expected
Andrew Murstein: The second quarter is typically the most active quarter for RV and boat sales as it is the beginning of the season.
Andrew Murstein: This dips down in the third quarter as there are still two months of summer in the quarter but past peak selling season.
Andrew Murstein: Thank you.
Andrew Murstein: Importantly, most of these loans have high but competitive interest rates. Our average interest rate as of September 30th was 14.92%, up 19 basis points from a year ago and 12 basis points from just one quarter ago.
Andrew Murstein: Our home improvement lending segment grew 8% over the prior year quarter and now sits at $814 million.
Speaker Change: Our current average rate of 9.76% is 38 basis points higher than a year ago and 5 basis points above the most recent prior quarter.
Speaker Change: Our commercial lending segment was stable, with the loan portfolio staying the same as the second quarter at $110 million and delivering a comparable average interest rate of nearly 13%.
Speaker Change: We like this segment since repayment history is strong and we have a long track record of over 25 years of realizing gains on the equity investments we typically receive as part of these transactions.
Speaker Change: As a reminder, this entire portfolio has virtually zero exposure to commercial real estate.
Speaker Change: Finally, I'd like to touch on capital allocation.
Speaker Change: We continue to be intensely focused on deploying capital for shareholders with the goal of maximizing overall returns.
Speaker Change: During the quarter, we repurchased $1 million of our common stock at an average share price of $7.89 and still have over $15 million remaining on our current authorized $40 million share buyback plan.
Speaker Change: In addition, we are pleased to announce that our board has increased our quarterly dividend 10% to 11 cents, beginning with the dividend payable in November.
Speaker Change: As has always been the case with our dividends, and particularly since it was reinstated in the first quarter of 2022, our goal continues to be providing a tangible return to our shareholders that is sustainable long-term.
Speaker Change: We have now increased our dividend for a second time since its reinstatement, which underscores our confidence in the company's future and commitment to shareholder value.
Speaker Change: With that, I will now turn the call over to Anthony, who will provide some additional insight into our quarter.
Anthony Cutrone: Thank you, Andrew. Good morning, everyone.
Anthony Cutrone: for the quarter.
Anthony Cutrone: Net interest income grew 8% to $52.7 million from a year ago and grew 6% from the prior quarter as our interest income earned on a growing loan portfolio outpaced the growth in our cost of funds, with interest income benefiting from both a larger loan portfolio and an increased yield on new originations.
Anthony Cutrone: Our net interest margin on gross loans was 8.11% for the quarter, down one basis point from the prior quarter, and down 24 basis points from a year ago.
Anthony Cutrone: During the quarter, we originated recreation loans at an average rate of 16.33% and home improvement loans at an average rate of 10.75%.
Anthony Cutrone: We continue to originate both consumer loan products at rates above the current weighted average coupons of these portfolios.
Anthony Cutrone: We anticipate that our average coupon-to-yield will continue to increase well after our cost-of-funds plateaus.
Anthony Cutrone: The average interest rate on our deposits was 3.68% as of the end of September.
Anthony Cutrone: During the quarter, we originated over $275 million of loans, including $139 million of recreation loans, $97 million of home improvement loans, and $40 million of strategic partnership loans.
Anthony Cutrone: Total loans outstanding were $2.5 billion, increasing 13% from a year ago and 4% from the prior quarter, with our corresponding yield increasing 47 basis points from a year ago to 11.75%.
Anthony Cutrone: Consumer loans more than 90 days past due were $9 million or 0.39% of the total consumer loans as compared to $6.9 million or 0.34% a year ago.
Anthony Cutrone: Our provision for credit loss was $20.2 million for the quarter, an increase from both the $18.6 million in the second quarter and the $14.5 million in the prior year quarter.
Anthony Cutrone: The current quarter included a $2.5 million net benefit related to taxi medallion loans, which compared to a $1.8 million benefit in the prior year quarter.
Anthony Cutrone: $2.2 million of the current year quarter's provision specifically related to consumer loan growth.
Anthony Cutrone: Net charge-offs during the quarter were $13.4 million, or 2.18% of our average portfolio, compared to $10.4 million, or 1.88% of average portfolio in the prior year.
Anthony Cutrone: Operating expenses were $19 million during the quarter, down from $20 million experienced in the prior quarter and $19.1 million incurred in the prior year quarter.
Anthony Cutrone: with the decrease from the prior quarter overwhelmingly attributable to elevated costs experienced in that quarter associated with the contested proxy.
Anthony Cutrone: For the quarter, net income attributable to our shareholders was $8.6 million or $0.37 per share.
Anthony Cutrone: which included approximately $0.07 per share related to additional credit allowances tied to consumer loan growth.
Anthony Cutrone: Our net book value as of September 30th was $15.70 per share, up from $15.25 in the prior quarter and $14.06 a year ago.
Anthony Cutrone: That covers our third quarter results. Andrew and I are now happy to take your questions.
Speaker Change: Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touch-tone phone. To withdraw your question, please press star, then 2. At this time, we will just pause momentarily to assemble our roster.
Speaker Change: And the first question will come from Christopher Nolan from Ladenburg-Foundman. Please go ahead. Hey, guys.
Speaker Change: Hey Chris, good morning. No, it was it was fairly clean. You know, our taxi medallion recoveries were a little elevated than what we typically see. 4.1 million of cash collected.
Speaker Change: We tend to hover around two and a half to three on a normal quarter, so that increased EPS slightly, but nothing, you know.
Speaker Change: Significant other than that.
Speaker Change: And then, I guess, in general, turning to reserves,
Speaker Change: Is it fair to say that your reserve ratio is really a function of
Speaker Change: Also, it's a sort of a calculation. Is that a fair assessment? Yeah. You cut out there for a second, Chris. Could you just repeat that?
Speaker Change: Yes, so big picture, we look at our historic losses to determine what the projected loss experience will be going forward.
Speaker Change: and you know, come up with an appropriate allowance.
Speaker Change: I think, you know...
Speaker Change: We would expect that, you know, our allowance ratio be a function of, you know, delinquencies and historical loss experience, not so much, you know, Fed easing.
Speaker Change: Moving forward.
Speaker Change: Great. And I...
Speaker Change: The ethical qualities hang in there.
Speaker Change: You guys are
Courtney: I'm Courtney
Speaker Change: Should we expect lower loan yields because you're going for a higher quality client?
Speaker Change: You know, I think that...
Speaker Change: Particularly in REC, you know, we've continued with, you know, 16-ish on new originations.
Speaker Change: That's not necessarily credit related, it's more about the mix and the type of loans that we're writing in Q3. We focused a lot on pool loans rather than traditional home improvement loans when you think of
Speaker Change: Andrew Murstein, Anthony Cutrone
Speaker Change: credit response in terms of charge-offs down the line. So we've gotten slightly less yield on those new originations, still more than what our book sits at, but we believe that it's going to perform better long term. Okay, that's it for me. Thank you, Cooper. Thanks, Chris.
Speaker Change: Again, if you would like to ask a question, please press star then 1. The next question is from Mike Grondahl from Northland Securities. Please go ahead.
Mike Grondahl: Hey guys, congrats on the quarter. Originations, especially rec, was...
Mike Grondahl: pretty strong, um, what do you...
Mike Grondahl: Why, and kind of what's your outlook for originations?
Speaker Change: Hey Mike, how you doing?
Speaker Change: Yeah, we had a good we had a good Q3 and you know again, we've said this in the past, you know, typically, you know Q2 and Q3 is what we see, you know big amounts of reginations particularly in rec
Speaker Change: and that comes in then in Q4, so we wouldn't expect Q3 to be indicative of what we see in Q4.
Speaker Change: The portfolio will probably stay flat, maybe a little bit of contraction similar to what we saw in Q4 of last year. The portfolio may have shrunk by about 1% before it starts to ramp up again in Q1 of next year.
Speaker Change: got it and then you know going back to the 4.1 million a taxicab collections
Speaker Change: What was the EPS benefit associated with that? I know some of it's running through the provision, but what would you call out in the 37 cents?
Speaker Change: So the 4.1 translates into about $2.8 million of credits on the income statement that benefit the bottom line. So if you just quantify that $2.8 million, it's $0.08 a share.
Speaker Change: But again collections were high, you know, I think last quarter was more indicative of what we expect to see quarter in quarter out
Speaker Change: which was about two and a half million dollars and that generates about four cents. So, you know, there was a couple of pennies added to EPS because of the collections.
Speaker Change: There was one larger collection. We probably brought in about a million dollars on a settlement that all hit the income statement. Typically, with a normal quarter of two and a half million dollars of collections,
Speaker Change: 50% of every dollar collected is going to hit the income statement. In this quarter, it was more like two-thirds.
Speaker Change: got it got it okay that's helpful and then
Speaker Change: With the provision, you know, let's call it $20 million,
Speaker Change: you know
Speaker Change: clearly there was the benefit of two and a half million from the collections but also the you called out the 2.2 million going the other way kind of for growth
Speaker Change: Is $20 million the right way to think about your core provision now, or is it more like $22 million?
Speaker Change: Thank you.
Speaker Change: You know, there's still a fair amount of uncertainty with, you know, where the economy goes.
Speaker Change: It could be closer to the 22 than 20. We'll continue to have medallion recoveries, even if we collect our normal run rate. So I think it's somewhere in between there. Again, we go into our slower quarters in Q4.
Speaker Change: in Q1 with seasonality. We might see delinquencies like we saw last year tick up. That's gonna cause us to have to bolster our allowance. Growth should be slower so we won't have the growth penalty that we experienced there.
Speaker Change: You know, we're not seeing any indications that we're out of the woods in this economy yet. We're also not seeing any, you know, warning signs that, you know, something, you know, drastic is going to happen.
Speaker Change: Fair, fair. And then, hey, just two more. One...
Speaker Change: The overall margin was only down one BIP sequentially. Are we getting closer to a bottom than what you anticipated?
Speaker Change: I mean, I don't know that you can call a bottom yet, but kind of how are you feeling about the margin?
Speaker Change: Yeah, I think, I think we're getting, we're almost there, you know, I think we've been looking at eight-ish, you know, maybe, you know, slightly below that, but not meaningfully below that as what we think the bottom to be.
Speaker Change: I think, you know, in Q2, the NIM increased slightly. You know, we dropped the basis point this quarter. I think we're almost there. You know, our cost of funds, it's interesting, you know, with CD costs.
Speaker Change: You know, leading up into the, you know, the Fed cut in September, we saw three and five-year CEDs, you know, run down in terms of the cost.
Speaker Change: Since that rate cut, I guess everyone was baking in, you know, the possibility of three rate cuts by the end of the year.
Speaker Change: Lastly, congrats on the FinTech volume, the $40 million in 3Q, up from $24 million. Can you remind us of the economics on that $40 million?
Speaker Change: So, the way that works is a FinTech will send a loan to us, we'll fund it.
Speaker Change: and then they'll buy it back typically a few days later. So if done properly, there's no credit risk here. We're not really holding the paper and they provide guarantees in case there's anything happening to them, which is extremely rare, of course, within that 48 hour period or so. But it ranges, but let's just use an example of 50 bips.
Speaker Change: So we'll take a fee of 50 basis points of the loan and we'll get the float for a couple of days as well.
Speaker Change: got it so on that 40 million
Speaker Change: I guess 1% would be 400 grand. I don't know, you made about 200 grand. Is that the right way to think about it in the quarter?
Speaker Change: The goal here is, you know, it's nice that it's a growing business, it's nice that it's breaking even or making a little bit of money. Our hope is to really accelerate this business. I think we're going to have a very strong fourth quarter.
Speaker Change: So we were a little late to the game here. We kind of watched others go into the field just out of precaution.
Speaker Change: We weren't sure how the business would work and how the regulators would look at it and got comfortable with it So we're gaining some steam now though. We've got a good group that we took a CEO of another bank That's very active in this space. We hired him a couple of years ago, and finally it's starting to pay off for us
Speaker Change: Great. And lastly, just as a follow-up to that, what line on the P&L does that come through?
Speaker Change: So the interest we earn on the three or four days that we hold the loans, that's up in interest income.
Speaker Change: And the fee, in Andrew's example, the 50 basis points, that's in other income. In other, okay. Hey, thanks guys.
Speaker Change: Thank you. Thanks, Mike.
Speaker Change: And the next question will be from Matthew Howlett from B. Riley. Please go ahead.
Matthew Howlett: Hi, good morning. Hi, Andrew. Hi, Anthony. Hi, Matt. Good morning.
Matthew Howlett: Hey, look, congrats on the dividend bump and the continued share repurchases. I just want to ask you, what can we expect sort of going forward? Do you want to bump the dividend?
Matthew Howlett: Andrew Murstein, how are you thinking about capital return, what are you leaning towards? You want to just continue to do both? Sure. Yeah, I mean, I think, you know, we've always said that, you know, we're committed to shareholder return, you know.
Matthew Howlett: I don't think we want to commit to a 10% dividend increase annually, but you know, long term, I think our intent and the board's intent is to, you know, reward the shareholders, you know, for their ownership. So I, you know,
Matthew Howlett: We don't want to get ahead of ourselves, but I don't think it's out of the question. But, you know, we're just happy that we're at 11 cents right now.
Speaker Change: And to add, the goal is definitely to increase it. It's hard, as Anthony said, to pick a percentage. But the goal should be to opportunistically look at
Speaker Change: What is in front of us, so the last couple of quarters, this is an extremely strong quarter with the growth rates that we had of four and five percent from the prior quarter.
Speaker Change: So the stock buyback was small was only about a million dollars that'll eventually slow And then that'll give us an opportunity to review Jumping back into the market for buying stock So between those three things buying stock paying a dividend and growing
Speaker Change: We look at all three and I think we've effectively accomplished success in all three recently.
Speaker Change: Yeah, look, I mean, we were surprised by the dividend increase and it's a...
Speaker Change: What was tangible at the end of the quarter? Sure.
Speaker Change: We do believe that book value is the best measure for assessing the value of our company. But we understand that tangible book is something everyone likes to look at, you know. So we don't actually think tangible book is a good...
Speaker Change: indication of value, but adjusted tangible book is, so it's essentially the same calculation. We just adjust for $43 million deferred tax liability that sits on our
Speaker Change: on our balance sheet that relates specifically to the goodwill and intangible assets. So when you factor that in, adjusted tangible book comes out to $10.17.
Speaker Change: Wow, that was what, was 975 last quarter or something? Yeah, so as, you know, it increases the same as book value each quarter slightly more because it gets the benefit of backing out that amortization.
Speaker Change: And that makes the stock web.
Speaker Change: It's been growing a lot. Off the top of my head, you know, years ago it was probably $5 or so a share. So the last three years and nine months, our pre-tax earnings have probably been, I don't know, about over a quarter of a billion dollars. So it's starting to add up.
Speaker Change: You're probably one of the only banks trading at a discount, not only the Gap book, but the Even Tangible book. So those share repurchases make a lot of sense, and they're great to see for shareholders.
Speaker Change: Thank you.
Speaker Change: Moving towards the margin, I want to just drill down a little bit. Anthony, you said that the new CD rates are at 4-ish and currently available at 3.7%-ish CD rates at the end of the quarter? Yes, so at the end of September, $3.68 is our weighted cost on the CDs.
Speaker Change: And we're seeing, you know, new issuances, you know, recently, you know, ranging anywhere from 395 to 415. So it's in that four-ish range. So, you know, we're probably about 30 basis points away from the current market.
Speaker Change: Yeah, look, I mean, it's incredible because you're continuing to push up coupons on your consumer lending businesses, and what I wanted to ask is that the REC, what's the average
Speaker Change: Loan term I mean because you're what it's 492 and you're putting things on above 16% So you're getting runoff from these lower legacy yielding REC loans right that you're replacing with yeah, I mean when we write these loans we write them up to you know the terms up to 15 years
Speaker Change: realistically, overwhelmingly, they stay on our books for about, you know, 36 to 42 months.
Speaker Change: Okay, wow. Okay, I was thinking more like seven years. Okay, so they're rolling off pretty fast. You're getting several hundred millions of just amortization, right?
Speaker Change: on the REC.
Speaker Change: Yes. So, having, I mean, when you think about the margin, I don't want to, you know, give you, you know, put, have you give guidance, but, I mean, we could be back to 9% if we, if we, you know, in a couple of years, if not earlier, if the, you know, rates...
Speaker Change: You'll stay here or start to go lower
Speaker Change: Yeah, I was going to say that we were at those levels and Anthony's done a, is being modest He's been done a very good job predicting where the bottom would be and he's been saying publicly on these calls and elsewhere That he thought it would get down to 8% and that kind of bounce around there and then start going back up again So that would be our goal is to get it back up
Speaker Change: It's not going to happen overnight, but to get it back up to those levels.
Speaker Change: Yeah, well, you know once once we you know our cost of funds does hit that terminal level it plateaus It's not going to rise anymore. You know for at least a
Speaker Change: you know, an extended amount of time, we should start to see that NIM expand.
Speaker Change: You know.
Speaker Change: is going to continue to have the coupon it has, you know, 14.92% currently. New originations are higher, so we should still see growth in that yield.
Speaker Change: We're comfortable seeing what we're seeing right now and you know with the prospects of more cuts We think you know that's going to have a good
Speaker Change: a good effect on us.
Speaker Change: Well, the way you're growing the portfolio and the potential margin to expand, and you're buying back shares, it just has a powerful impact on EPS.
Speaker Change: We can all do the math on what that implies.
Speaker Change: congrats on managing that through this cycle. And I guess just the last one on those FinTech partnerships, so you have one...
Speaker Change: Andrew and Anthony with Solar. You've got this personal loan line. I mean, how many, I mean, are you going to do a few deals a year? I mean, what do you think? Because it's obviously…
Speaker Change: to kind of, you know, morph into the FinTech space could really be interesting, you know, for you guys long term.
Speaker Change: I think the goal is probably to add one every six months or so.
Andrew Murstein: we can add more if we wanted to but the trick in this business is not to get ahead of yourselves and over your skis and make mistakes it's very compliance driven and we've got such a strong relationship with our regulators we want to keep it that way so you know slow and steady wins the race we'll keep adding partners one or two every six months to a year or so we've been very selective with those partners we're getting a lot of applicants a lot of our competitors have stumbled over the last year or so so we're getting a lot of their looks now so to speak so hopefully we'll continue to add on new partners
Speaker Change: Great. Well, congrats on the dividend lift. Great quarter. Thanks guys.
Speaker Change: Thank you, Matt.
Speaker Change: Ladies and gentlemen, this concludes today's question and answer session. I would like to turn the conference back to Andrew Murstein for any closing remarks.
Andrew Murstein: Thank you again for joining us this morning. We continue to be pleased with our performance and results, and look forward to closing a great year on a strong note. We remain focused on delivering shareholder value, efficiently deploying our capital, and driving each of our businesses with excellence.
Andrew Murstein: As always, if you have any questions, please feel free to contact our investor relations team. The contact information is on the last page of our earnings supplement, as well as the IR section of our website. Have a great rest of your day.
Speaker Change: The conference has concluded. Thank you for attending today's presentation. You may now disconnect.
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