Medallion Financial Corp. (MFIN) Q1 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to Medallion Financial's First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Ken Cooper of Investor Relations. Thank you. You may begin.

Thank you, and good morning, everyone. Welcome to Medallion Financial Corp.'s first quarter earnings call. During our call, we will refer to our earnings supplement slides. This presentation is available on our website at medallion.com by clicking Investor Relations. The presentation is near the top of the page. 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. With that, let me turn the call over to Andrew. Andrew?

Thank you, Ken. Good morning, everyone. Before Anthony takes you through our presentation, I would like to just touch upon a few general comments about our business and our quarter. As you saw, we started the year off well. Our net income for the quarter was $9.8 million, up 17% from a year ago. Our net interest income was up 25% to $35.9 million, and our net interest margin was a strong 9.2%. Our success over the past 6 quarters has positioned us well from a capital perspective. This allowed us to declare and pay a dividend of $0.08 per share and resume purchases under our stock repurchase program. Our growth lending segments are both consumer and commercial. Our consumer lending segments account for 94% of our loans. We continue to grow both our recreational and home improvement lending businesses. We originated $204.2 million of new loans in the quarter, which was up 44% from the prior year quarter. Our home improvement continues to be our fastest-growing segment, and we continue to work hard to build our consumer business by increasing the contractors and dealers we partner with. Our commercial lending business is our other growth segment. We originated $4.4 million of loans in the quarter, which helped our overall loan balance grow from $76.7 million at the end of the fourth quarter to $77.9 million at the end of the first quarter. Like our consumer loans, we have a strong interest rate for our commercial portfolio, which was at 12.41% for the first quarter. Moving to a few business highlights. During the quarter, we had approximately $10 million less noninterest income than we did in the fourth quarter of 2021. This is due to no sales or exits of investments in the quarter. As a reminder, we make small investments in fintech companies through our early looks of diligence for our strategic partnership program and through our commercial business. The timing and return on these exits are not predictable. However, when we do execute exits, we have been successful and hope to continue such success in the future. And finally, I hope you saw our announcement yesterday regarding our most recent Board and corporate governance enhancements. The Board will add 2 independent directors and has created a lead independent director position on the Board. Brent Hatch has been appointed to the Board and has assumed a lead independent director role, effective immediately. Our Board will engage a third-party executive search firm to assist in the search process for the additional independent director. These are further examples of our long-standing commitment to strong corporate governance. With that, I will now turn the call over to Anthony, who will provide additional financial highlights on the quarter and the year.

Thank you, Andrew. Good morning, everyone. As you could see on Slide 3, we have a focused business plan. As we have continued to see in the trailing quarters, the growth in our consumer and commercial segments has resulted in bottom line success and accretion to shareholder value. As shown on Slide 4, we had several financial highlights in the first quarter. We earned net income of $9.8 million and earned diluted EPS of $0.39. We continue to have success with loan originations, which grew 44% over the prior year quarter, almost entirely in our recreation and home improvement loan portfolios. As shown on Slide 5, 99% of our nearly $1.6 billion of loans are consumer and commercial loans. Our business plan is clear: grow our consumer and commercial portfolios. Home improvement lending is our fastest-growing segment, growing 158% since 2018 while recreation lending, far and away, remains our largest segment. We are very pleased with the mix and performance of our overall loan portfolio. Net interest income continued to grow, as reflected on Slide 6. This continues to be driven by our loan growth in the consumer lending segments. As we anticipate the effects of rising interest rates throughout the remainder of 2022 and beyond, while we could see some compression in our margins, we still believe that the growth in our consumer segments should help mitigate that compression and have a positive effect on our bottom line. Slide 7 does a good job of showing a key competitive advantage for us over nonbank competitors: our high net interest margin, which we maintained in the first quarter. Our home improvement portfolio is our fastest-growing segment, but has a lower net interest margin than our recreational segment. Continued success in growing those segments at similar rates could put pressure on overall net interest margins. However, this is a worthwhile exchange in our minds for increasing our size and decreasing our credit risk exposure, all with the goal of increasing earnings as the portfolio grows. Looking at our noninterest operating costs. As shown on Slide 8, we continue to expect to grow our top line at a faster rate than our costs. During the quarter, we had higher incremental professional fees than a typical quarter. These costs were primarily associated with the cooperation agreement we announced yesterday and other litigation. We expect professional fees to fluctuate over the coming quarters. Lastly, Slide 9 provides a summary income statement with some key financial ratios for the quarter, and Slide 10 provides our summary March 31 balance sheet with some key metrics. A few other financial items to note. During the quarter, we paid a dividend of $0.08 per share and purchased just over 67,000 shares of our common stock as we resumed purchases under our stock repurchase plan. As announced yesterday, we have a new and increased stock repurchase plan, and we declared a quarterly dividend of $0.08 payable in May. Lastly, a quick update on our medallion segment. During the quarter, we had $5.2 million of cash collections related to medallion assets. These collections have helped further reduce our net medallion exposure, which now stands at $37 million and represents less than 2% of our total assets. The recent activity in the taxi medallion industry, including Uber's recent announcement that it is partnering with New York City taxis and the general recovery of taxi use continues to be favorable for this business segment. That covers our first quarter financial overview. With that, Andrew and I are happy to now take your questions.

[Operator Instructions] Our first question is from Steve Moss with B. Riley Securities.

Maybe just starting, Andrew, with a little more color in terms of your thoughts on loan pricing and kind of where -- how you think loan growth could shake out as we progress here into a Fed-tightening cycle.

Sure. I think Q1, we saw a 44% growth over Q1 of last year. There still continues to be a lot of demand for our products, and our origination experience shows that as far as pricing, we're about where we were at the end of Q4. The rec portfolio, our weighted average yield is -- weighted average interest rate on these loans is 4.5% at Q4. It's about 14.36% at Q1, and home improvement was flat at 8.47%.

Okay. That's helpful. And then just thinking about funding costs, if I heard you on the margin pressure here. Just kind of curious as to -- as we think about where CDs are pricing here, I'm kind of curious as to how you're thinking about funding over the next 12 months.

Sure. Yes. We haven't seen a big impact in Q1. We're about 124 basis points average rate on our CDs. At Q4, we were 120 basis points. The issuances we did in Q1 were probably 149 basis points blended compared to lower than that in Q4. What we -- the interest rates of -- in the CD market, we're seeing anywhere from 100 to 140 basis point increase with 36-month CDs in Q1, and that's changing daily. We think the market's priced in a couple of Fed hikes, not just one. Looking to our maturities over the next 2 years and the blended rate of our maturities through balance of 2022 was 152 basis points, and in '23, it's 163 basis points.

Okay. That's helpful. And then in terms of just maybe just going a little further into the settlement here with the activist. Maybe just a little bit of color, if you guys could, around the decision and the rationale to settle here. Just kind of curious as to any thoughts or insight you could give.

Sure. First, we've already been very receptive to shareholders' concerns. We've engaged with, in this particular case, with this group for many years. We have an open door policy, and we've been having a healthy dialogue throughout the years and throughout this process. Secondly, we strive to always be best-in-class in corporate governance. So we've added -- when this is done, it will be our sixth new independent director in the past 5 years. And third, we've successfully repositioned the business, and he's noted that and has been pleased, I believe, with it. And we're continuing to enhance shareholder value through, among other things, this enhanced governance, the dividends that we announced and the increased buyback that we announced yesterday.

Our next question is from Mike Grondahl with Northland Securities.

Could you give us an update on where delinquency stood for kind of the RVs, the boat loans and maybe home improvement as of March 31.

Sure. Yes, they continue to be low. 90-plus delinquencies for the RV portfolio, at March, was about $3.8 million. It's almost identical to where it was at year-end. In the 60- to 90-day buckets, we're at $6.1 million versus $6.6 million at the end of Q4. And home improvement also continues to be near historic lows.

Got it. And in terms of the yields you're getting on those, do you think you have any pricing power as rates rise?

Yes, I think we do. We've been hesitant just -- we want to see what the overall market in this space does before we pull the trigger on raising rates to our borrowers. We don't want to price ourselves out of the market. But we do think over the next couple of quarters, there will be rate increases.

Got it. And then I think you guys mentioned you're working to expand contractors and dealers. Can you give us an update on those counts at the end of March?

It think they're slightly above where they were at the end of Q4. That's an ongoing process. We're always looking to expand where we stand with our relationships. A significant amount of our business is generated from a -- if we've got 5,000 dealers that we work with, there's a lot of business that comes from a couple of dozen. So it's not -- it's confined to that portion, and we've got really good relationships with those groups.

Got it. Got it. Where were you carrying the New York medallions at March 31? Have those been written up at all? Or are they still about $80,000?

This is a -- this seems to be a question we get a lot. So we're continuing to carry those medallions at $79,500. Although as recently as April, I think New York City has published some information on their transfer prices. We've seen -- and we're seeing values anywhere from $120,000 up to $180,000 for the transfers of New York City medallions. Our accounting, just to go over it real quick, the 2 buckets of assets we have for medallions are our loans and our loans in the process of foreclosure. Our loans in the process of foreclosure is a majority of our assets. These assets are held for sale and GAAP accounting requires that they're held at net realizable value, which is the lower of cost to market. So we don't have the ability to write these medallions up. So once we've written them down to $79,500, they continue to stay there. And so even though we might be able to sell them for $140,000 when we dispose of them, we don't recognize that gain until the asset's disposed of. On the loan side, we're continuing to reserve down to that $79,500 level. And the reason that we haven't changed our reserve policy with that is because still, we look at this portfolio was impaired. A fair amount of these loans are still on some sort of modified deferral where they're not paying full payments of P&I. And until something substantial changes there, we don't see there being any reason to change our reserve levels.

Got it. And maybe 2 more questions on the medallions. One is if you have a rough utilization for your portfolio? You gave that out a couple of years ago, I think. And then secondly, you've now collected about $5 million in previously kind of charged off taxi collections. Are you feeling comfortable? How much more is there to collect out there? Kind of what's your outlook for collections?

We think there's a fair amount more to collect. Of that -- the $5.2 million we collected, about $3.5 million of it went to reduce our assets. And you can see that in our exposure going from $40.5 million to $37.1 million or so. And the other half actually ended up on the P&L. So you see that, it's in the other income line. There's a fair amount of that other income, which is just around $2 million on the income statement. That's gains on previously written off medallions.

Got it. Got it. And hey, is your outlook -- can you collect another $20 million the rest of this year? What is the total pie you're kind of going after? And what do you think you can get the rest of this year?

A portion of that is traditional P&I payments that are coming in day in, day out. And just like we've always said for the past quarters and probably the past years, some of these settlements, they're lumpy. It's hard to project out what they are. We've got a couple that we're working on. We don't want to say what those numbers are. But we could see collections being at that level. But we can't be certain. So we think there's -- especially given where the prices are now in the market, where the TLC is showing these transfers at, we think there's a lot of potential for some nice recoveries.

And then maybe just lastly, how are you thinking about loan loss reserves overall?

Sure. On the consumer side, I think we're at, on a percentage of the loan balance where we were around Q4, a slight change. I think rec is down slightly, and that's just because of the loss experience we have been seeing over the past 12 months. Home improvement is up slightly a couple of basis points. On the medallion and the commercial segments, one, the medallion reserves are slightly lower, and that's because of cash collections. So to the extent that we collect cash on a loan, it's reducing the reserve. And on the commercial side, we had an exit of one of our mezzanine loans in Q1, which had a reserve. So that came down slightly.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Andrew for closing comments.

Thank you again for joining us on the call today. 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. Thank you again, and have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.