Medallion Financial Corp.

Good day, and welcome to the Medallion Financial fourth quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. And if you'd like to withdraw your question, press star, then two. Please also note this event is being recorded. And I would now like to turn the conference over to Ken Cooper of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Medallion Financial's fourth 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 Merstein, President and Chief Operating Officer, and Anthony Catrone, 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 the date of this call, and we do not undertake any obligation to update these forward-looking statements. With that, let me now turn the call over to Andrew. Andrew?

Thank you, Ken. Good morning, everyone. We are doing things a little differently this earnings call. During our remarks, Anthony and I will walk through a short slide deck to further illustrate our business drivers and trends. This is the first time we have used the slide deck We believe this will help our investor community fully appreciate and visualize the power of our strategy and model. We executed well all year. This was clearly shown as we increased our earnings each quarter. We have now had sequential improvement for five consecutive quarters, and this resulted in a record-breaking year for earnings, as we reported $54.1 million in net income and $2.17 in per share for 2021. The most important component of our strategy and the driver for our performance in 2021 has been our consumer lending segments, which now account for 94% of our loans. We experienced growth in both consumer lending segments all year, and this has continued so far in 2022. Recreation, which is predominantly loans for towable RVs and boats and home improvement, which include loans for home projects like replacement roofs, swimming pools, and windows, both continue to do well. Our commercial lending business is another important part of our strategy and also had a very good year. After 18 months of slow loan origination activity caused primarily by COVID, we started to ramp up our origination volume in 2021. This led to a 17.5% increase year-over-year increase in our loan balances. Because of rigorous underwriting standards, our ability to take equity stakes in some of these early stage companies, and the strong net interest margin of the loans, commercial lending is an attractive business for us. We have a wonderful team managing it. Moving to a few business highlights, one of our focus areas is loan originations, and our consolidated loan origination volume was strong all year. We had a 50.3% increase in loan originations this year, which totaled $747 million. This is a testament to our teams and technology. We have a diligent process of working with qualified contractors and dealers and quickly assessing the credit profile of their customers to determine borrower creditworthiness. We are still operating below our historical averages for loan loss provisions. We continue to work hard to maintain good credit quality while adhering to our defined controls to keep losses at a minimum. Our capital allocation philosophy is to be prudent. First, we look for how we can invest back in our business. With our consumer lending and commercial lending segments well capitalized, our board of directors evaluated how to give capital back to shareholders. As you saw in our earnings release, our board approved the reinstatement of our quarterly dividend, which was suspended in 2016. We are now in a position to resume a quarterly dividend starting in March at $0.08 per share. We are pleased to be able to pay a dividend and potentially expand our shareholder base with dividend-seeking investors. Before turning the call over to Anthony, there are a few other items that do not directly impact our operational performance but are deserving of mention. First, we have litigation with the SEC related to certain alleged actions from late 2014 to 2017. As we said in our statement on December 29th, 2021, we intend to vigorously defend against the SEC's unfounded charges and are confident we will be completely vindicated. Our next step in the process is to file a response to the SEC, which we will do before March 22nd. Since this is an open legal case, we cannot speak further on this matter. Second, we completed the exit of non-core assets in 2021. In December, we divested our RPAC investment, which was a legacy investment from our days as a business development company. With that, I will now turn the call over to Anthony, who will provide additional financial highlights on the quarter and year.

Thank you, Andrew. Good morning, everyone. My comments start on slide four. In the fourth quarter, we attained near-record net income of $19.5 million and earned $0.78 per diluted share. Our return on equity grew to 28%. For the full year, we earned $54.1 million, or $2.17 per diluted share. We grew our recreational loan portfolio by 21% and grew our home improvement loan portfolio by more than 30%. As shown on slide five, in just three years, we've grown our consumer and commercial portfolio significantly while reducing our medallion loans to just 1% of total loans. Home improvement lending is the fastest growing segment at 138% since 2018, and we have sustained strong growth in our recreational loans as well, increasing that portfolio by 64%, again, all in the last three years. The results we are seeing today are a stark comparison to a little more than a year ago, and on slide six, you can see where we are today compared to the early days of the COVID-19 pandemic in 2020. As we progressed through the past two years, we took the pain associated with the deterioration in the taxing medallion markets, substantially reduced our exposure, and have now booked our fifth sequential quarter of positive earnings. Everything starts with net interest income, and as you can see on slide 7 and 8, both net interest income and net interest margins grew last year. The growth in net interest income is comprised of a few parts. The changing mix of our loan portfolio, primarily the increase in higher-yielding consumer segments, the overall growth in the loan portfolio, and a continued decrease in our overall cost of funds, driven down significantly by the low cost of our brokered CDs. Our net interest margins for the 2021 year was 9.25%, a 60 basis point increase when compared to 8.65% in 2020. Looking at our non-interest operating costs and excluding the impact of RPAC, as shown on slide 9, you can see that we are gaining efficiencies, growing our top line much more than our costs. As we continue to scale and grow, we do expect our costs to increase, but at a lower rate. When looking at operating costs, again excluding the impact of RPAC, as a percentage of our net interest margin, there is a nice trend from 2019 through 2021. We started 2021 with 187 employees, 138 of which were at Medallion Bank, RPAC, and Medallion Capital. We finished the year with 136 employees, 102 of which were at Medallion Bank and Medallion Capital. Decline is related to exit of RPAC and a 30% reduction in headcount at the parent company, offset by hiring at Medallion Bank. Slide 10 gives an overview of the performance within our commercial segment. With $15.5 million of originations in the fourth quarter, and we have a robust origination pipeline. In 2022, we look to grow this segment. Slides 11 and 12 are summary financial tables we've included for your convenience. A few other items to note. During the quarter, we had $5.4 million gain on an additional sale of shares in a FinTech investment. For the year, we sold 80% of this investment for gains of $11.3 million. Salaries and benefits for the quarter were up sequentially from the third and up year over year. primarily due to accruing compensation considerations with regard to our record year, as well as hiring at Medallion Bank. Lastly, a quick update on the medallion segment. During the quarter, we collected $8.4 million of cash related to medallions and $24.9 million for the full year. Medallion exposure continues to decline, ending at $40.5 million at year end. representing less than 3% of our total assets. As I hope you can see, we had a great year and look forward to 2022.

With that, Andrew and I are now happy to take your questions.

Okay, we will now begin the question and answer session. I think if you'd like to join the question queue, press star, then 1. And to remove yourself from the question queue, press star, then 2. If you're using a speakerphone, please pick up your hands up before pressing any of the keys. The first question comes from Steve Moss with B. Riley FBR. Please go ahead.

Good morning.

Good morning, Steve.

Maybe just... Morning, Andrew. Maybe just starting with the loan growth here. You know, we had a good quarter here on both the, you know, recreation side and the home improvement. My sense on the recreation side in particular is that remains strong in a what's more typically seasonally weak. So just kind of curious as to, you know, what you guys are seeing there and if you could expand a little bit as to how you're thinking about the commercial loan growth in the pipeline there and what the potential is for 2022.

I'll start, Anthony. So we're seeing the same trends continue into 2022. All the business lines look very solid. Nothing has really changed. In the consumer side, Mez continues to be a nice growth area for us. We got into that business back in 1998, so we have a seasoned team there that's really done a great job through the years for us. And they also have one of the strongest pipelines that they've had in years. It was a great year for them in 2021, and their trends are continuing into 2022.

Yeah, I think the only thing that, you know, just to reaffirm what Andrew said, you know, especially on the rec and home improvement side, you know, demand is still strong there. We don't anticipate and foresee any dramatic changes in origination volumes in 2022, but But we do expect year-over-year growth. Okay.

Got it. And then in terms of maybe just on funding loan growth here, you know, heading into a Fed tightening cycle, you know, interesting to see how that will play out in terms of how many hikes. Just kind of curious, are you guys making any adjustments to your funding strategy? Or, you know, should we expect more of the same in terms of, you know, staggered growth? duration on the CD portfolio.

Yeah, I think that's accurate. You know, we don't have any plans on changing our funding strategy. You know, we've been successful with the brokerage CD model. You know, I think looking, you know, to the first half of 2022, you know, the CDs that will be rolling off that we'll be replacing are higher rates than current rates. So, you know, we'll see an impact, but it'll be the latter part of the year.

Right. Okay, and then in terms of just on the capital deployment front here, nice to see the dividend declared here. Just kind of curious how you guys are thinking about the dividend payout ratio and the potential for any share repurchases.

So I think that the idea, you know, has always been to reward shareholders. You know, the past five years have been difficult as we've navigated through the tax and medallion process. deterioration, we like to think that we're on the other side of that now. So it's the right time to reinstate the dividend. And I think that's the clearest way to provide a return to shareholders. Buybacks are nice. There's a lot of macro items that could occur that impact volatility and stock prices that we can't control. So by giving the shareholders cash, they can make their own decisions.

All right. Great. Thank you very much. Thanks, Steve.

The next question comes from Mike Rondell with Northwind Securities. Please go ahead.

Hey, guys. Thank you, and congrats on the progress. Hey, first off, Andy, on the MES side, you know, 15.5 million of new loans, you know, that That's a huge improvement. What sort of drove that? Did you guys just say, hey, post-COVID, was it capital from, you know, selling Richard Petty Racing? And then maybe just average loan size, if you have it. Just be curious about that a little bit.

That business has always been a little choppy for us through the years. You know, the Mezc, areas, you know, sometimes you have big gains and therefore you get payoffs. Other times it's kind of flat for a while and you have to wait. So it's really been almost a perfect storm for them. The economy is doing well. They're experiencing gains. They're taking their option warrant profits. They've got more capital to grow when they get paid off on loans like that. We have more capital now to put into them. So it's really all of those factors has led them to really excel the way that they have been doing. In terms of average loan size, historically it's been about $3 million per loan. So we try to fly under the radar. There's a lot of MES players that have much larger-sized deals than that. But these guys have developed a great niche through the years since the 1990s or so. Average loan size is probably ticking up a little bit now, probably only from about $3 million to $3.5 to $4 million. Got it. Got it.

And the P&L has, I think, $10 million of gains from equity investments. I think you guys call about $5.4 million in the quarter from selling a piece of the fintech investment. And then NASCAR sale was $0.7. What's the remaining to get up to that $10 million?

It all relates to that. that additional $10 million or so that's our equity portfolio. Most of which is, um, is related to the commercial and mezzanine. So these are the equity kickers, if you will, that we, uh, we get when we make these loans. Uh, we had a few successful exits, uh, in the quarter and throughout the year.

Got it. Got it. Okay. Um, and then maybe, um, In the third quarter 10Q, you guys mentioned strategic alternatives that you were looking at for the bank. Any updates there?

You know, I think the company and the board, our desire is to, you know, increase shareholder value, however that might be. You know, so we're always looking at options with all of our segments. How do we, you know, return value to the shareholders? As of right now, there's nothing on the table, but that changes with markets and things of that nature. But I think that's a statement just to address the concerns that we are cognizant of shareholder value, and that's something we're looking at if something were to arise.

Got it. And then maybe lastly, can you remind us where the medallion values are On your books, I think you last told us it was like $79,000 or $80,000 per medallion and kind of where the market is today.

Right. So our medallion exposure, we've got loans, and we keep those reserved down. They're all on non-accrual. They're reserved down to collateral value, which in New York is net of collection costs. We come up with a number of $79,500. That's the same for Newark. Chicago's $6,000. Our loans in the process of foreclosure, we account for that at the lower of cost or market at net realizable value. So most of those are held below the $79,000 value. Got it. And then I guess just one more, I'm sorry.

Related to that, the $8.4 million of collections you had previously, related to the medallions that were, I believe, previously charged off. Is that one or two? Is it a bunch of small ones? How would you characterize that, and what's your outlook there?

Yeah, it's all the above. Historically, and I think we've said this before, and, you know, if you go back years, our medallion exposure, our medallion loans have been weighted more towards fleet operators, larger borrowers. So the bailout-type plans that you see New York City presenting, some other lenders are utilizing, they don't work for those borrowers because they own too many medallions. So for a number of years, we've been spending real dollars on collection efforts, and I think what you're seeing in 2021 is all of those efforts come to fruition. I think going forward, I would hope that that would continue. These collections will continue to be lumpy, You know, we can't really project that. But, you know, I think all of our efforts over the years are starting to pay off.

Got it. Okay. Hey, thank you. This concludes our question and answer session.

I'll turn the conference back over to Andrew Merstein for closing comments.

Thank you. As you can tell, we had a great year. I'm looking forward to building on this momentum into 2022. We're focused and our team is talented. We're very confident in our strategy and our ability to execute. We appreciate everyone taking the time today to participate and of your interest in Medallion. If you have any additional questions, feel free to contact our IR team. They can be reached at 212-328-2176 or at InvestorRelations at Medallion.com.

Thank you again, everyone, and have a great day. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.