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Medallion Financial Corp. (NASDAQ:MFIN) Q4 2023 Earnings Call Transcript

Medallion Financial Corp. (NASDAQ:MFIN) Q4 2023 Earnings Call Transcript February 21, 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 morning, and welcome to the Medallion Financial Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ken Cooper of Investor Relations. Please go ahead.

Ken Cooper: Thank you, and good morning, everyone. Welcome to Medallion Financial Corp.'s Fourth Quarter and Full Year 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 fourth 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. With the tremendous team effort throughout our entire organization, Medallion Financial had an exceptional year with total earnings and earnings per share, the highest in our history. We grew loans within our largest and most established business, the recreational lending segment by 13% to $1.3 billion. We did this while increasing the average interest rate on the portfolio, which was 51 basis points higher at the end of the year, compared to last year and helped to cover some of the cost of funds increases we saw this year. We grew this segment while maintaining tighter credit standards and a sharp focus on the type of assets we lend against which are generally smaller dollar assets, such as towable RVs and small boats.

These assets have not had the volatility that catches the headlines like large cruise or RVs and larger scale boats and yachts. The average loan size in our portfolio stayed roughly at just over $19,000. Our Home Improvement segment continued to be the fastest-growing part of our business. As expected, the growth rate slowed in 2023 as we were another year removed from the unprecedented spike in pandemic-driven home remodel activity. However, with growth of 21% for this segment, there continues to be a steady flow of projects, especially for the smaller roofing windows or swimming pool projects that we are known for. Like our Recreational segment, we maintained tighter credit standards and a consistent average loan size in our portfolio of approximately $20,000.

Nearly this entire segment is made up of prime customers with an average FICO score of over 760. Our Commercial Lending segment also had a very strong year. We grew the loan portfolio of 24% to $115 million, with our average interest rate up 64 basis points to 12.87%. With the range of typical loan size generally around $3 million to $6 million, our goal is to continue to grow this segment prudently over time. The segment generated after-tax earnings of approximately $6.8 million during the year. Finally, our Taxi Medallion segment collected $45 million of cash during the year $16.2 million of this coming in the fourth quarter. The majority of the cash generated from Taxi Medallion collections was a Medallion Bank and was reinvested into Consumer Lending businesses.

We continue to mention that these settlements are unpredictable, and we expect our collection activity to decrease in 2024. One item to note, as a reminder, we adopted CECL at the beginning of the year, which now requires a larger allowance for credit loss to be booked upfront when loans are originated. This increased our provision this year. In addition, our current loss rates are more closely aligned with our historical trends and are consistent with what we have been indicating they would be as we come out of the low credit loss environment experienced during and after the pandemic. Even with the adoption of CECL and normalization of our loss rates, our strong execution across our entire company led to $0.60 of diluted earnings per share in the quarter and $2.37 for the year, which was an all-time high for us.

A construction worker building a new home with new flooring, and the homeowner discussing financing options.
A construction worker building a new home with new flooring, and the homeowner discussing financing options.

Our strategy continues to be growing net interest income. We are doing this with smart loan growth and by offsetting elevated cost of funds with our own rate increases where possible. We expect that as we proceed through 2024, we will maintain our focus on high credit standards and using pricing to our advantage. We anticipate loan growth to continue to moderate from the levels we saw in 2022 and for us to maintain a conservative approach on credit and growth. Finally, during the fourth quarter, our Board authorized a 25% increase in our quarterly dividend from $0.08 to $0.10 per share, which began with our last declared dividend. We feel great about what we have accomplished over the past three years and how we are positioned for the future success.

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 12% to $49 million from the prior year, driven by increased interest rates on new loan originations and the growth in our loan portfolio during the past 12 months. For the year, net interest income increased 17% to $188.1 million, our ability to increase our rates on new originations and our overall loan growth have enabled us to counteract some of the rising cost of funds we experienced during the year. Our net interest margin on gross loans was 8.20% for the quarter and 8.38% for the year compared to 8.59% and 8.73% in the prior year quarter and year. We've spoken about the compression in our NIM for some time now, and it continues to trend as expected.

Rising interest rates on our brokered CDs have increased our borrowing costs over the prior year. However, we've taken the opportunity to pass along a portion of those rising costs in our pricing on new originations. Specific to originations. During the year, we wrote home improvement loans at an average rate of 11.02%, up from approximately 8.75% in 2022 and wrote recreation loans at an average rate of 16.16% up from approximately 14.25% in 2022. At the end of the year, we were writing home improvement loans at an average rate of 11.65% and recreation loans at an average rate of 16.14%. As of the end of the year, our average coupon on recreation loans were up 51 basis points to 14.79% from a year ago. And on home improvement loans were up 86 basis points to 9.51%.

In addition to passing along interest rate increases, we have continued with our tightened credit criteria. Nonprime loans were 38% of the recreation portfolio and continue to be only 1% of the home improvement portfolio at the end of the year. Put this into some comparative context regarding how we've tightened credit over the past few years, at the end of 2019, nonprime loans were 61% of the recreation portfolio. Our provision for credit loss was $10.8 million for the quarter compared to $9.0 million in the prior year quarter. For the year, the provision for credit loss was $37.8 million and $30.1 million in 2022. The provision included a net benefit of $12.1 million in the current quarter and the net benefit of $26.3 million for the full year related to taxi medallion loan recoveries compared to benefits of $1.6 million and $6.2 million in the prior year periods.

Excluding taxi medallion-related recoveries, the increased provision is a result of the continued migration of loss experience to levels more comparable with pre-pandemic historical norms. The growth penalty we incur by growing our portfolio as well as the variability in our provisioning as a result of the adoption of CECL this year. On a full year basis, we incurred approximately $8.5 million of additional provisions connected to the growth in our consumer loan portfolio and approximately $3.4 million of additional provisions associated with the higher allowance coverage rates tied to CECL, a majority of which were incurred in the fourth quarter. At the end of the year, our allowance for credit losses as a percentage of loans were 4.31% for recreation loans and 2.76% for home improvement loans, up from 3.55% and 1.81% a year ago and compared to 4.39% and 2.05% at the beginning of the year post our adoption of CECL.

Operating expenses were $19.1 million during the quarter, which were in line sequentially from the third quarter. For the year, operating expenses were $75.6 million compared to $72.1 million a year ago. The growth is mostly related to scaling our lending operations, offset by lower legal and professional costs. For the quarter, net income attributable to our shareholders was $14.3 million or $0.60 per diluted share. For the year, net income attributable to our shareholders was $55.1 million or $2.37 per diluted share. That covers our fourth quarter and full year financial results. Andrew and I are now happy to take your questions.

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