MFIN - NASDAQ

Good day, and welcome to the Medallion Financial First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I'd now like to turn the conference over to Mr. Ken Cooper, Investor Relations. Please go ahead, sir, at this time.

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, 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.

Thank you, Ken. Good morning, everyone. Medallion Financial had a great start to 2023 and one of our strongest quarters in our almost 27 years as a public company. We performed well in all areas of our company, highlighted by the continued growth of our consumer lending businesses, a good quarter in our commercial lending area and a strong quarter of cash collections from our Medallion assets. We generated $15.4 million of net income or $0.67 of earnings per share. Our return on equity was a little over 20% and our return on assets was nearly 3%. Those are impressive returns and good indications of another strong quarter. Our net income performance included a strong year-over-year growth rate, driven by maintaining our consumer businesses in this challenging environment with outstanding performance from our Medallion collections team. We collected over $13 million in cash in the quarter, which is higher than normal. There was not one single driver for this. It was a team effort. As we have said all along, we believe a portion of our Medallion assets will be paid back and payment patterns will vary over time. We will have great months, average months and low months. But the good news is that we have the most experience in this space with significant relationships across the industry. With the growth of our loan portfolio, we increased net interest income 21% year-over-year to $43.6 million. More importantly, like we were saying what happened since the prospect of rising rates was first introduced last year, our growth in loans has helped offset rising interest rates that raised our funding costs. This has allowed us to maintain our net interest income from the fourth quarter. Our provision for credit losses has been trending back towards its normalized level. However, with significant recoveries from our Medallion assets, our provision for the quarter at $4 million was lower than anticipated. I'd now like to provide a quick update on our business. Home Improvement continued to be our fastest-growing segment. Originations remain strong and continue to be related primarily to popular projects like roofs, windows and pools. Our recreational business, which is mainly loans for smaller boats and RVs, had over $100 million in originations, which is below peak levels, but we believe is still strong performance. Our average interest rate has remained at over 14%. Finally, our commercial business reached $95 million in loans outstanding, up from $78 million one year ago. It also earned just over $1 million for the quarter and has a solid pipeline that should lead to an increased originations in the future. A quick update on capital allocation. For the fifth consecutive quarter, we declared and paid a dividend of $0.08 per share. We did not repurchase any stock back in the quarter. With the instability of the banking sector has experienced these past several months, we felt it was prudent to retain our capital to use a portion of that capital to fund growth and to continue to prepare for the future. As I look at the overall health of our business, given the recent events within the banking environment, I thought it was important to remind you that we remain confident in our business model and our strategy as a specialty finance company. One way we are deliberately different than other financial institutions is our long time use of broker deposits to fund our loan growth. Broker deposits not only help us manage our borrowing costs, they also provide a safety since broker deposits have no right of voluntary withdrawals. In addition, we mitigate risk with a relatively small investment portfolio associated with these deposits and limited unrealized gains or losses. Ultimately, we believe this leads to our business model being resilient under a wide variety of conditions. With that, I will now turn the call over to Anthony who will provide some additional insight about our quarter.

Thank you, Andrew, and good morning, everyone. For the quarter, net interest income grew 21% to $44 million in the prior year quarter. The driver of this being growth in our loan portfolio, which now stands at just under $2 billion. We were able to maintain our net interest income from the fourth quarter, growing our interest income to counteract our rising cost of funds. Our net interest margin on gross loans was 8.42% for the quarter as compared to 8.91% in the prior year quarter. As we've said for the past few quarters, this contraction in NIM was expected given the current interest rate environment. Our provision for credit losses, which in the past, we've referred to as loan loss provision, the terminology having changed in connection with our adoption of CECL, was $4 million for the quarter compared to $3.2 million in the prior year quarter. Current quarter provision included a $7.1 million benefit with respect to recoveries in the Medallion segment Excluding this benefit, the increased provision is a result of the continued normalization of losses to historic levels in our consumer portfolio as well as the higher provisioning, which we must take in connection with our adoption of CECL as our loan portfolio grows. Our operating expenses of $18.4 million increased 2% from the prior year first quarter, which included higher salary and employee benefit costs associated with our growth as well as lower legal and professional fees. While we continue to be vigilant in overseeing operating costs, the 2% increase pales in comparison to the 29% growth in interest income and 21% growth in net interest income we experienced over the prior year quarter. Our diluted earnings per share was $0.67, with $0.28 of that being attributable to Medallion asset recoveries. That covers our first results. With that, Andrew and I are now happy to take your questions.

[Operator Instructions] First question is from Mat Howlett from B. Riley. Please go ahead.

Good morning, everyone. This is Michael Schafer on for Matt. Thanks for taking my question. I see yields declined in the Home Improvement segment. Can you run through why that is?

Matt. Good morning. So the yields came down from a year ago. There's a lot of things other than the coupon, which go into our yield calculation. In the prior year, we had some amortization, origination costs get amortized out. We typically look at the coupon rate, which from Q4 and Q1 of last year has increased in each period.

Okay. Great. And also covering the $500 million or so CDs coming due in 2023, can you discuss the rates on those?

Sure. So all-in at the end of March, our CD cost of -- our CD rates were about 2.35%. In March, we saw an increase in rates to around 4.95% for a 36-month CDs. That's come in about 50 basis points to the present day. So assuming no further action, maybe CD rates come down a little bit longer -- come down a little bit more. The interesting is that when you go out even further, the rates are slightly lower. So we do anticipate some net interest margin compression throughout the remainder of the year related to that. The good news is that we have over the past 1.5 years, we've been able to increase the rates on our consumer loans and our commercial loans. And although it's slow to turn the ship, we've got to wait until some of the older loans run off and the newer loans become a larger portion of the portfolio, we do expect to see continued growth in our yield and our coupon.

Okay. Got it. And so on net interest margin, right, I heard you make some comments on that -- from your prepared remarks as well. Could you give some guidance on what the expectations are and where that will bottom out?

It's tough to say. There's so many factors involved, especially when we think about the CD rates being tied to treasuries and what the Fed intends on doing. I could see some downward pressure through the end of Q4, maybe another 100 basis points, plus or minus, but it's still tough to say. Like I said, we do think that even though our cost of borrowings goes up, so will our top line.

Got it. That's it for me. Thanks for taking the questions.

Thanks.

Next question will be from Mike Grondahl from Northland Capital Markets. Please go ahead.

This is Mike Pochucha on for Mike Grondahl. Thanks for taking our questions. Maybe first, just on rec versus Home Improvement. You kind of see the rest of the year where it's maybe a little stronger for Home Improvement for originations and the just a little softer for rec on comparables?

Yes, I think that's fair. It's hard -- we're actually happy with the origination volume we saw in Home Improvement -- in rec. We're happy with both. But with rec, we're happy with the origination volume we saw in Q1, albeit down from last year. Last year was an anomaly coming out of COVID '21 and '22. We just saw no seasonality in originations and significant volume that's come back to normal levels. And we -- starting in Q3, Q4 of last year, we started to see the seasonality. So volume will be down in terms of originations compared to last year, but we still think at the end of the year, we're at a bigger book than we were at the end of last year. And Home Improvement, yes, there's plenty of growth there. There's a lot of opportunity. That's a much bigger pool in terms of the overall Home Improvement space. So we've used the opportunity to step up interest rates on new originations as well as get a better credit.

Got it. And then on Medallion collections, anything more to call out there with a lot of that towards the end of the quarter? Or you can see more of that rolling into the second quarter and the rest of the year? Or I know it's tough to forecast, but -

Yes, it's definitely -- we've always said it's tough to forecast and we weren't anticipating collections at this level in Q1. A lot of this could have been stuff that maybe came in later in the year. We were able to get larger settlements in the beginning of the year. The $13.2 million, it's great. That's definitely not a run rate. As far as where it ended up on the financials, as Andrew mentioned in his remarks a little while ago, we earned $0.28 specifically to recoveries. That's $8.7 million that showed up on the income statement and the best -- and the rest reduced our exposure.

And does that fall straight through the provision line when we're thinking about that?

Most of it -- I think $7.1 million is in the provision, it's a benefit provision, and the rest is in other income, it's gain on the disposition of assets.

Got it. And maybe just on expense base. Is this kind of a good quarter to kind of think about for the rest of the year? Is there anything to call out higher or lower there?

Not really. Our professional fees were higher than Q4, but lower than Q1 of last year. I think in Q4, we had some benefits. We realized with nonlegal professional costs. So I think Q1 is probably normalized. We had a small amount of legal costs related to the SEC action, but that -- right now, that's still quite low.

Thanks.

Thank you. [Operator Instructions] Next question will be from Christopher Nolan, Ladenburg Thalmann. Please go ahead.

Hi. The net charge-offs in the quarter, was that including the recovery of $13.2 million on the Medallion loans?

Chris, yes, so the $4 million provision included a $7.1 million benefit related to the Medallion collections.

And do you guys have a run rate in terms of when you expect all the Medallion loan recoveries will probably end? Do you -

We don't -- we definitely think there's a lot more to be collected. It's not going to happen in the next two or three quarters. It's one, two, three years out.

And do you have a target reserve ratio for year-end?

We think where we ended up at the end of Q1 is -- should be and I'll put a caveat on that. It should be where we are at the end of the year. That being said, with our adoption of CECL in January 1, any fluctuations in charge-offs that we experienced from what we anticipate is going to cause some -- could cause a significant change in our reserve rates.

Great. And has the reserve -- excuse me, has the capital ratios at the bank increased at all?

The Tier 1 at the end of the year -- at the end of 2022 was $16.2 million -- sorry, 16.2%, and it ended at 16.4% at the end of March. And most of those recoveries on the Medallions -- the benefits that ran through the income statement were at Medallion Bank and that helped bolster the Tier 1 level.

So is the plan just to basically keep the Tier 1 ratio sort of in the 16% range and just grow the balance sheet?

That's where we're at now. We've got to maintain 15%. So we don't want to get too close to that. But that's the plan as of now.

Okay. That's it for me. Thank you.

Thanks Chris.

Thank you. This concludes our question-and-answer session. I'll turn the call back over to Mr. Andrew Murstein for closing remarks. Please go ahead.

Thank you. We appreciate you taking the time to join us today. We're very pleased with our performance so far this year and look forward to our next update. As always, if you need anything, please reach out to our Investor Relations team at (212) 328-2176. Thank you, and have a great day.