Medallion Financial Corp. (NASDAQ:MFIN) Q1 2024 Earnings Call Transcript

Medallion Financial Corp. (NASDAQ:MFIN) Q1 2024 Earnings Call Transcript May 1, 2024

Medallion Financial Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Medallion Financial Corporation First Quarter Earnings Conference Call. [Operator Instructions] Please note that today’s event is being recorded. I would now like to turn the conference over to Ken Cooper with Investor Relations. Please go ahead, sir.

Ken Cooper: Thank you, and good morning, everyone. Welcome to Medallion Financial Corp.’s first quarter earnings call. Joining me today are Andrew Murstein, President and Chief Operating Officer; and Anthony Cutrone, 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 such statements. 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 first quarter supplement presentation on our website by visiting Medallion.com and clicking Investor Relations. The presentation is near the top of the page. With that, I’ll turn it over to Andrew Murstein, President.

Andrew Murstein: Thank you, Ken. Good morning, everyone. Coming off a record-breaking 2023, we had a nice start to 2024. This included growing our loan portfolio on strong bottom-line performance. Our Recreational Lending segment had a standout quarter and is now at $1.4 billion. Originations were up 4% versus the prior year quarter. We continue to originate new loans at elevated interest rates as compared to prior years, and the segment’s average interest rate was up 38 basis points to 14.80% at quarter end. The average loan size in our portfolio stayed at roughly $20,000. Our allowance for credit loss level of 4.40% was up from 4.12% a year ago. Our other major consumer lending business, the Home Improvement Lending segment, grew approximately 12% over the prior year quarter to $752 million.

This growth rate came down from the last year or so as origination activity slowed due to credit tightening. This segment continues to be focused on super prime borrowers with credit scores in the mid- to upper 700s, which keeps our delinquency and loss levels low. Our average interest rate for the Home Improvement Lending segment was 9.60% at quarter end with a 77 basis points of increase from a year ago, reflecting our ability to pass on some of the Fed rate increases to our borrowers, just like we have done in the Rec Lending segment. Our allowance for credit loss level of 2.38% was up slightly from the 2.19% a year ago. Our Commercial Lending segment had a strong quarter and included an equity investment exit, which resulted in a $4.2 million net gain.

The loan portfolio was up 12% to $106 million with our average interest rate of 58 basis points to 13.0%. Our goal is to grow this segment prudently over time. And although excess can be unpredictable, there are key elements of the return on the business. The segment generated after-tax earnings of $3.6 million during the quarter. Finally, our Taxi Medallion segment collected $3.1 million in the first quarter. As we indicated on our call last quarter, we expect a sizable slowdown in cash collections related to taxi medallion assets on our first quarter unfolded as expected. During the quarter, cash collections translated into $1.6 million of net benefits to the income statement. And the segment continued to be profitable, generating after-tax net income of approximately $600,000.

Our strategy continues to be to increase net interest income through smart loan growth with pricing that is optimal given the markets and competitive pressures we face. We expect to maintain high credit standards and use pricing to our advantage. We anticipate loan growth to continue to moderate similar to 2023 from the levels we saw in 2022. Finally, during the first quarter, we used some of our excess cash to buy back $2.1 million of our common stock. Our authorized share buyback plan has $17.9 million remaining of the $40 million approved. And going forward, you should expect us to use it opportunistically rather than on any regular cadence. Our share buyback activity together with our $0.10 per quarter dividend and net income performance continues to deliver positive results for our shareholders.

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. For the quarter, net interest income grew 10% to $47.9 million from the prior year, driven by increased interest rates on new loan originations and growth in our loan portfolio during the past 12 months. Our net interest margin on gross loans was 8.1% for the quarter, down 32 basis points from the first quarter last year and down 2 basis points from the fourth quarter of 2023. Compression in our NIM continues to be attributable to the higher interest rate environment with our average cost of funds increasing 100 basis points from last year, offset by a 56-basis-point increase in our yield as we continue to pass along a portion of these higher rates on new originations.

During the quarter, we originated recreation loans at an average rate of 15.31%, and home improvement loans at an average rate of 12.05%, both in excess of the current weighted average coupons on those portfolios at 14.8% and 9.6%. As we’ve said in the past and which still holds true today, given the fixed rate nature of our loans, increasing the average couponing yield is a slow process, slower than the rise of cost of funds. That said, we do anticipate that our average couponing yield will continue to increase well after our cost of funds plateaus, at which point the compression we’ve seen in our margin should reverse and begin to expand. Although we do still expect additional compression over the next several quarters, we believe that we are closer to the bottom than not.

And despite further compression anticipated, we do believe that our level of NIM positions us well above industry norms. During the quarter, we originated $173 million of loans with total loans outstanding increasing 12% to $2.2 billion from a year ago, and we saw our yield increase to 11.34% from 10.78% over the same period. We maintain tighter credit criteria, which is consistent with our view of ongoing uncertainty in the economy. Non-prime recreation loans were 36% of the portfolio. And nonprime originations during the quarter were 30%, down from the 34% and 35% levels originated during the full 2023 and 2022 years. Our home improvement portfolio continues to be overwhelmingly prime and super prime credits with only 1% of loans being nonprime.

Our provision for credit loss was $17.2 million for the quarter compared to $4.0 million in the prior year quarter. The provision included a net benefit related to taxi medallion loan recoveries of $900,000 in the current quarter compared to a net benefit of $7.1 million in the prior year quarter. Higher charge-off activity in both consumer products, partly attributable to seasonality, the lower taxi medallion recoveries and benefits, along with increases in credit loss allowance related to growth in the recreation portfolio, were the key drivers related to our change in provision from a year ago. Operating expense was $18.2 million during the quarter, which was down sequentially from $19.1 million in the fourth quarter and down slightly from $18.4 million in the first quarter of 2023.

Our quarterly supplement on our website shows how over the past several years and continuing into the current quarter how operating expense as a function of net interest income has migrated lower. Quarter-to-quarter, this may fluctuate. But you could see that over time, the growth in our net interest income has well outpaced any growth in operating costs as we continue to grow and scale our lending businesses. For the quarter, net income attributable to Medallion Financial shareholders was $10 million, $0.42 per diluted share. That covers our first quarter results. Andrew and I are now happy to take your questions.

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Q&A Session

Operator: [Operator Instructions] And today’s first question comes from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: Let’s see. Anthony, have you guys — do you know what the nonperforming loan volumes were in the quarter?

Anthony Cutrone: Seasonally, those numbers are higher throughout the first quarter as we come out of our slow period and work down. But if we look at the end of the — you’re looking for delinquencies?

Christopher Nolan: Yes, 90-day-plus delinquencies.

Anthony Cutrone: Yes. We’re just pulling it up. On the rec, it’s $6.4 million, $1.4 million in home improvement.

Christopher Nolan: Got it. Okay. So it’s down quarter-over-quarter. Last quarter was $13.8 million. So is that a fair assessment?

Anthony Cutrone: Yes. And it’s typical what we see. Seasonally is November, December, January, things are slower, especially in the rec side of the business. People aren’t towing their trailers, and they’re not getting on their boats. But that starts to improve when the weather starts to improve.

Christopher Nolan: All right. And then have you guys sort of heard any flexibility from regulators in terms of reserving. In the past, regulators sort of come down in terms of not having the reserves or would be like an earnings piggy bank, and see whether or not there’s more flexibility for financial services companies like yours to boost reserves more than —

Anthony Cutrone: So our reserving and our allowance model isn’t predicated upon necessarily what the regulators want. It’s the models that we’ve put together, particularly with the implementation of CSIL. So we look at historic losses, we look at economic factors, but there’s really no flexibility there as it pertains to the regulators’ desires.

Christopher Nolan: Okay. And then on that note, given that you don’t have flexibility on the reserving, any plans to boost capital ratios at all? Or are you going to continue to run at the similar capital ratios?

Anthony Cutrone: Yes. I mean at the end of the quarter, we’re at 16.4%, so we need to maintain at least a 15% based upon our capital maintenance requirement at Medallion Bank. So we’re comfortable that we stay above that number.

Christopher Nolan: All right. Final question, tax rate. It went up in the quarter. Should we expect a higher tax rate in 2024? Or is it just sort of a seasonal thing?

Anthony Cutrone: Yes, it’s seasonal, non-deductible expenses. Different aspects of the code get picked up in the first quarter. That should smooth out to a lower rate as we go through the year.

Operator: The next question comes from Mike Grondahl with Northland Capital Markets.

Luke Horton : This is Luke on for Mike. Just looking at the P&L. So this was the first quarter in a while where net interest income dropped sequentially, I think down just over $1 million from 4Q. So wondering if you guys could just talk a little bit about what drove this and then how you’re sort of thinking about this line item as we progress into 2Q and into the back half of the year.

Anthony Cutrone: I’m sorry, could you just rephrase that question real quick?

Luke Horton : The net interest income dropping sequentially by a little over $1 million. Just wondering about what drove that in the quarter since it’s sequentially gone up for the past several quarters.

Anthony Cutrone: Yes. So we — it’s a function of our volume. So as our home improvement book stayed pretty stagnant from December, we did grow our rec portfolio a little bit. But total loans only grew about 0.5% in the 3 months, so that’s going to drive it. We’ve seen an increase in our cost of funds. We’ve been transparent about that. We’ve seen that. I think looking ahead, we don’t anticipate that to be a trend that continues. April, our volumes were quite strong. We originated about $100 million in loans, 80% of those in rec. And just given where those rates are right now, we expect net interest income to start increasing beginning with Q2.

Luke Horton : Got it. That’s helpful. And then just looking at the EPS, the $0.42 and then if you back out the $0.04 Medallion collection benefit, and then as far as that $4.2 million equity gain in the quarter, if we kind of back that out, should more of a core EPS number for the quarter be like a $0.25?

Anthony Cutrone: Yes. We don’t — regarding that $4.2 million game, that’s tied to our commercial lending business. So we don’t view that as a noncore item. It’s not a one-off investment. That’s part and parcel with that business and what we do there. The equity investments are probably 10% of the overall commercial assets. So we wouldn’t back that out. That’s — unfortunately, those don’t model out well. They’re equity investments in PE and sponsor-backed companies. So we never know when these things do exit. But they do, and we’ve shown a track record of them doing it. But yes, we wouldn’t back that out. The $0.04, we quantify that because that’s what we’ve done all through 2023, just given the sizable amount of recoveries we had.

We wanted to make sure that the readers and the shareholders understood what was going on. We collected $3 million of cash. We’ve got $10 million of exposure. On a run rate, we think that we collect anywhere between 1.5 and 2 quarter going forward based upon where our portfolio is positioned. It’s going to generate bottom line quarter in, quarter out. As Andrew said, after tax, we did about $600,000 in that segment. So again, you can back it out, but I don’t necessarily — we wouldn’t.

Luke Horton : Okay. Yes. No, that makes sense. And then just lastly here, can you guys just touch on the month of April as far as originations and credit? And any sort of trends you saw in the month of April?

Anthony Cutrone: Yes. So the volumes were good. I think we just said we originated — I think when we closed the month yesterday, we originated about $100 million in loans, $80 million of them are in rec. And just to give you an idea, in Q1, the rates we were getting on these originations averaged just over 12% in home improvement, 15.3% in rec, and that’s consistent with what we saw in April. So we’re happy with that volume. We think those trends continue through Q2.

Andrew Murstein: And just as a point of reference, the $100 million is probably compared to about $80 million or so in April 2023. So it’s up about 25%.

Luke Horton : Okay. Got it. Congrats on the quarter.

Operator: The next question is from Matthew Howlett with Nomura.