Medallion Financial Corp. (NASDAQ:MFIN) Q3 2023 Earnings Call Transcript

Medallion Financial Corp. (NASDAQ:MFIN) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Ladies and gentlemen, good morning and welcome to the Medallion Financial Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ken Cooper. Please go ahead.

Ken Cooper: Thank you and good morning, everyone. Welcome to Medallion Financial Corp’s third quarter earnings call. Joining me today are Andrew Murstein, President and Chief Operating Officer; and Anthony Cutrone, 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.

A client signing off on a loan agreement for secured lending.

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 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 will turn it over to Andrew Murstein, President.

Andrew Murstein: Thank you, Ken. Good morning, everyone. Medallion Financial had a strong third quarter that culminated with our best earnings for the 9 months ended September 30 in any year since our IPO over 27 years ago. In the third quarter, we generated $11.2 million of net income and $0.48 of earnings per share. Year-to-date, we are at $40.8 million of net income and $1.77 of earnings per share. These results have again been driven by higher than normal originations in our consumer lending, solid results from our commercial lending, continued success in cash collections from our taxi medallion loans, and a successful effort to leverage our operating costs. We have been clear for some time now that our strategy is to grow net interest income by offsetting rising cost to borrow with continued growth in loan originations.

We have done that for another quarter, even as origination activity has started to normalize back to historical levels. As we look to the future, we will continue to take proactive steps to raise our credit standards and increased pricing. With total assets at over $2.5 billion, we anticipate loan growth to moderate from the levels we have seen over the past 2 years, which should enhance earnings with reduced credit allowances needed at origination. This provides more flexibility and options for us to consider around capital allocation, such as the 25% increase in the dividend of board authorized starting next month, which enhances shareholder returns. Moving to the update for each of our segments. Our Consumer Lending business had another quarter of heightened activity of originations.

We believe this robust origination activity is due to our target customer, still being active in purchasing towable RVs, small boats and single project home improvements. These all have active markets today as compared to the higher end cruiser RVs, yachts, a multi-project or whole house remodels which has significantly higher cost and maybe more susceptible to a slowdown. As a reminder, our average loan at origination is around a very manageable $25,000, with a prime or near prime borrower more focused on the payment levels than the rates. In addition, we continue to see some industry players scale back or exit these business lines, which helps us. The dealers and contractors who we work with know that we have great service levels and will be here long term, which helps them refer business to us.

Our Commercial business originated $9 million of loans in the quarter and ended the quarter with $100 million of loans outstanding. The segment generated after-tax earnings of $2 million during the quarter, which included net after-tax gains related to equity investments of $1.6 million. Our bottom line benefited again from another good quarter of cash collections on taxi medallion assets. This quarter, we collected $5.7 million, which translated into $0.10 of earnings per share. Also of note, shortly after the quarter ended, we executed a structured settlement with one of our larger taxi medallion borrowers and collected an additional $9.4 million, which will result in a pre-tax gain of approximately $8 million in the fourth quarter. We continue to be delighted with our taxi medallion collection performance, but I again stress that payment patterns are expected to fluctuate.

Finally, as I mentioned earlier, our Board has authorized a 25% increase in our quarterly dividend from $0.08 to $0.10 per share per quarter. 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 16% to $48.8 million from the prior year, driven by increased interest rates on new originations, coupled with the loan growth we’ve experienced since the prior year. These two factors have been able to counteract the rising cost of funds we continue to experience. Our net interest margin on gross loans was 8.35% for the quarter, as compared to 8.48% in the second quarter and 8.63% in the prior year quarter. The compression in net interest margin is related to two things. First, home improvement lending has been the fastest-growing component of our consumer lending business. With these fund credits having a much lower interest rate than compared to our much larger recreation portfolio.

The second is the rising cost of funds we are experiencing in tandem with the current interest rate environment. Although we have been successful in increasing our own rates, it is not on a one-to-one basis. Specific to originations, we are currently writing at an average rate of 11.75% on home improvement loans, up from approximately 9% a year ago at an average rate of approximately 16.25% on recreation loans, up from 14.75% a year ago. In addition to passing along interest rate increases, we continue to take proactive measures to tighten credit in our consumer lending. At the end of 2018, sub-prime loans were 66% of the recreation portfolio. Today, some prime loans are 38% of that portfolio. Our provision for credit loss was $14.5 million for the quarter, compared to $10 million in the prior year quarter.

The increased provision is primarily a result of one, the continued normalization of loss experience in our consumer portfolio up from the unprecedented lows experienced during the pandemic and two, the growth of our overall portfolio. The provision is inclusive of a $1.8 million benefit related to recoveries on taxi medallion loans during the quarter. Operating expenses were $19.1 million during the quarter, down from $19.4 million in the prior year quarter. The drop was primarily the result of lower legal and professional fees in the current period, offset by higher salary and benefit costs and higher servicing costs associated with a larger book of loans. For the quarter, net income attributable to our shareholders was $11.2 million and our diluted earnings per share was $0.48.

Just a quick final comment on the balance sheet. On September 29, we closed a $39 million private placement of 9.25% notes, a large portion of which has been used to settle $33 million of the 8.25% notes, which mature in March 2024, with the remaining $3 million of those notes anticipated to be repaid at maturity. It’s important to note that this new issuance priced at a rate 75 basis points above prime, as compared to our previous notes issuance in 2021, which priced at 400 basis points above prime. Our ability to price the instruments at a lower spread to prime from just a few years ago speaks to our underlying business as a whole and the progress that we’ve made in transforming the company. At the end of the quarter, the company had $160 million of debt at the parent company, which continues to fund the investments in our operating subsidiaries with debt being less than 50% of our equity.

That covers our third quarter financial results. Andrew and I are now happy to take your questions.

See also 30 Most Barbaric Countries in the World and 25 Best Countries for Human Rights and Rule of Law.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Mike Grondahl with Northland Securities. Please go ahead.

Mike Grondahl: Hey, guys. Thanks a lot. Two questions maybe to start off with. Could you kind of give us a sense of your margin outlook going forward? And then, Anthony, I think we typically get net charge-offs kind of by-category in dollars and percent. Could you also provide those?

Anthony Cutrone: Sure. So with regards to the margin, we still believe, as we’ve said for a couple of quarters that there is going to continue to be compression. But we think we bottom out at around 8% net interest margin. We still have a ways to go in terms of our cost of funds rising. But I think what’s important to note is, that we’ve passed along, especially in the most recent year, a large number of increased rates on new originations. So we think as we get closer to the top of the credit cycle, there’ll be a little bit more compression. But then as we’ve increased the rates on – and our book matures in terms of a higher average interest rate, that should help us long-term.

Mike Grondahl: Got it. Got it. So a couple of more quarters of compression until you hit about 8%. Is that the – did I hear that right?

Anthony Cutrone: Yes, I think that’s fair. And obviously, what the Fed decides to do is going to be a catalyst for a lot of things, but that’s how we’re seeing it. And to your other question about charge-offs for the quarter, charge-offs in rec and home improvement were $9 million and $3 million. Commercial was 0, and we had $1.7 million of recoveries on taxis.

Mike Grondahl: Got it. And then on your CDs, what was the average rate you’re paying at the end of 3Q, kind of compared to market?

Anthony Cutrone: We’re probably about 150 to 175 basis points below, what a current 3-year CD would be? So we think we creep up. And again, that goes back to what we were just talking about. We – our cost of funds is going to increase towards that $475 ish $500 level over the next several quarters. But again, our top line is going to continue to increase as we’ve seen it do for the past several quarters now.

Mike Grondahl: Yes. You’ve done a good job of raising yield. That’s for sure. And then Andy, two questions for you. One, how are you thinking about the $160 million of debt at the holding company, as you get these taxicab medallion collections? And then secondly, how are you thinking about 2024?

Andrew Murstein: So let me just also touch on the net interest margin. The net interest income, we expect, of course, to increase, just to be clear there. So the margin is, Anthony has been saying accurately for several quarters now, it should go down to about that 8%. But as the portfolio grows, the margins continue to shrink, but the net interest income continues to increase. Because of the volume of the portfolio, the originations. The debt amount, we think is conservative at that level. We’re not really leveraged too much. We’ve always operated, as you know, Mike, you’ve known us for many, many years. So for about 30 years, we were a regulated investment company, BDC, so we were limited to about 1:1 debt-to-equity.

So we’ve always kind of operated at a low leverage ratio. So we refinanced that debt, as you know, that was nice to put behind us. We have debt coming due in March 2024, which we refinanced as we announced on September 30. So we don’t anticipate adding significant new debt, if any debt at all for the next year or so. In terms of the outlook for 2024, I’d say, overall, we’re pretty optimistic as the numbers continue to show and the results continue to show. We’ve had strong loan demand in RV, Marine, Home Improvement. Mezzanine continues to be very strong, too. This is probably one of the highest deal flow we’ve seen from that division in the 25 years that we’ve owned them. So across the board, continued growth, hopefully, more collections from the Medallion portfolio.

We’ve done a great job collecting on a lot of loans there. We still owe about $200 million, and we will do whatever we can to collect as much of that. You have congestion pricing hitting New York City soon. So that could be a boost for Medallion prices when they try to keep consumer cars out of the city, more people ideally will be taking taxis as well as Ubers. And we increased the dividend. So as everybody can kind of sit back and watch the growth in 2024, they’ll be able to receive a $0.40 per share dividend. So overall, I’d say we’re bullish on the year ahead.

Mike Grondahl: Great. Hey, thanks, again.

Andrew Murstein: Thank you.

Operator: Thank you. Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan: Hi. Andrew, did I hear you say that there was $200 million in Medallions outstanding?

Andrew Murstein: That’s where we’re owed, correct. As you know, they are written down to a much lower number. It’s less than 1% of our assets today, but that’s how much legally we’re owed. The collections can come through by either for closing on the Medallions, which are worth about $150 million or so now in New York City. We’re carrying them, as you know, at a lower number. But all these – and we’ve been saying this for many, many years, all the loans have personal guarantees attached to them. So thankfully, we’re seeing a lot of settlements this year. I don’t know if the borrowers are bullish on the congestion pricing plan. we’re just business in general, but they are coming in and settling with us. So hopefully, that continues.

Christopher Nolan: Got it. For the $9.4 million medallion recovery in the fourth quarter, why is that a gain? Shouldn’t that be a recovery?

Anthony Cutrone: So yes, I know it is a recovery. It’s going to be a benefit in our provision. So this – these assets had been written down to a book value of $1.4 million. So it’s the difference between the cash collected and the asset that goes away, that’s the $8 million.

Christopher Nolan: Okay. So that’s simply just – we could potentially have a lower loan loss provision than normal, right?

Anthony Cutrone: Right. Yes. So that $8 million should all flow through as a benefit in the loan loss provision. That’s correct.

Christopher Nolan: And then where are you thinking of taking the reserve ratio?