Hey, hello everybody, and welcome to Sidoti's March Small Cap Conference. My name is Brendan McCarthy. I'm an analyst here at Sidoti, and I'm pleased to welcome Medallion Financial Corporation. Joining us from the firm will be President and COO Andrew Murstein and CFO Anthony Cutrone. Before I hand it over, a quick reminder that the Q&A tab is located at the bottom of your screen. Feel free to type in any questions throughout the presentation, and we can save time for Q&A at the end. With that said, Andrew, take it away.
Great. Thanks all for joining us today. If we flip on to the next page, we'll just get started. There's the important information, and we'll start with what makes Medallion Financial special. We've been around a very long time, started actually by my grandfather in the 1930s. The basic premise is in niches, there are riches. We try to find these niche businesses where we could be the market leader, kind of fly under the radar of larger competition. We're very good at it. As you can see, the results will show that. My family owns about 20% of the stock. We're very much aligned with our shareholders. We have what I think is the best banking charter in the country. It's a Utah Industrial Loan Bank charter. There's only about 15 of them or so. They're very hard to get.
There's been a moratorium on them in the past for many years. It lets us do everything a bank can do in that we are able to take in low-cost deposits, and we lend them out at very high rates and have great margins, as you'll see. Our main lines of business are RV lending, boat lending, and home improvement lending. Over the last five years, we've grown the portfolio substantially up to about $2.3 billion. The margins are very impressive. They're 800 basis points, more than double what the average bank in the U.S. has. We have very strong return on equity and return on assets.
On top of our core business, we also have a couple of other lines which are icing on the cake, so to speak, and can be very accretive potentially to our bottom line, which is our mezzanine group that does commercial lending, our strategic partnership group, which is FinTech Partnerships, which we'll touch base on. The cash collections from our taxi medallion portfolio, we wrote off about $100 million or so. We're able to go after those borrowers and hopefully collect a meaningful amount. If you flip to the next slide, you'll see why now is a good time to look at Medallion Financial. We've just completed the best four years in our company history. Over the last four years, we've earned roughly $300 million before taxes. The portfolio has been growing the last several years at about 19% per year.
The ROE and ROA are, as you can see, again, very impressive. The stock purchase we started several years ago, we bought back over 10% of the company. We started a dividend a couple of years ago. We're paying a yield of about 5%. The current PE is significantly below others. We're trading only at about 5.8 times earnings. Other companies, for example, no one's an exact comp, but companies like FinWise and other banks are trading at three times that, about 16-20 times earnings. We're trading under book value, which is $16, and also under our tangible book value, which is $10.50 a share. If you flip to the next page, the company overview, as I mentioned at the start, Rec and home improvement loans. The Rec portfolio is $1.5 billion. It's about 62%. We're getting 15% on average rates there.
New business is being written at about 16% and higher than that. Very small loans, again, fly under the radar, kind of roll up our sleeves and do the hard work that's needed to get these above-average returns where we're doing RV, marine, and collector car loans. We've got a very good network of about 3,300 dealers around the country and financial service providers that are feeding all these loan applications into us. Home improvement lending comes through general contractors. It's about 33% of our portfolio there. Average rate on our books today is 10%, but new business is being written at 11%. Really strong credits here with average size loans of $20,000. Typical loans are roofs, pools, windows, etc. Average FICO score on this portfolio is about 760 or so. So they're A, A-plus quality loans. The other businesses, which I mentioned, commercial lending.
We've got a mezzanine group out of Minneapolis that does, on average, about $5 million size loans at 13% rates. They get equity kickers, warrants, or small equity positions in many of the portfolio companies. That boosts the returns even further. While they're getting a 13% coupon, on top of that, it's averaged out about a 15% average return that we've gotten from this group since we bought them in 1998. Just a wonderful long-term track record. The strategic partnership business has been growing substantially. That's where a fintech will send the loan to our bank, we will fund the loan, and the fintech will buy the loan back. They'll take advantage of that wonderful charter that we have, again, the Utah Industrial Loan Bank charter. This business has doubled in the last year, roughly from $100 million- $200 million in volume and grown substantially.
Lastly, the taxi medallion lending. I mentioned before that we wrote off a lot of this. We're collecting it at about $2 million per quarter, have the potential to even do better. All these loans had personal guarantees on them. In addition to the actual medallion, we're able to get other assets when we seek recoveries. If you flip to the next page, you'll see the overview of the loan portfolio. We've really created a wonderful cash flow machine here. We have billions of dollars of loans, $2.5 billion, as you can see on the right, thrown off an average rate of 13% per year. We've got almost $300 million per year coming in from this portfolio. The portfolio is split, as I mentioned before. On the left, you can see the home improvement loans and the REC loans. Combined, that's $2.5 billion of loans.
You can see in 2020, we were less than half of that. We've done a great job growing this. If you flip to the next page, you'll see the economics of our business. We're just trying to simplify it here. You can see on a new incremental $20,000 loan, whether it's a boat loan or an RV loan, the average rate is 16%. You're getting about $3,200 coming in per year. Interest cost is 4%. We've got a brokered CD network, no bricks and mortar for our banks. This is a highly effective business model where we're able to just order CDs online. The average rate today is about 4%. Loan losses are 4.35%. It's kind of a high yield, higher than typical loss scenario for other banks' perspective. Low operating expenses of 2.2%. We're making $1,210.
The bank doesn't have very much leverage either. It's only leveraged 6 to 1, which is one of the reasons we have an A-plus rating from Egan-Jones. It's an investment grade rating with that low leverage. With $3,000 of equity and $17,000 of deposits, you can see that we're making a 40% pre-tax return on equity, substantially higher than most banks in the United States. With that, I'll now turn the presentation over to Anthony.
Thanks, Andrew. Andrew spoke a little bit about our loan book. What drives the growth that we've experienced really is our origination platform. It's those 900 contractors, 3,300 dealers, and FSPs that we source the loans through on the consumer side. That's really the economic engine which allows us to grow originations and essentially grow our balance sheet. That translates into higher originations, translates into a higher book, but more importantly, higher net interest income. You can see that on the right side of the screen. We're not quite, but closer than not to double where we were just four or five years ago. It's pretty remarkable about what we've been able to do in a short amount of time. On the next slide, our net interest margin sits around 8% at the end of 2024.
Obviously, we're funded through broker deposits, which have a slightly higher cost of funds. We think that's a good trade-off given our unique industrial loan charter and that we don't have a network of brick-and-mortar branches. You can see over the past couple of years, interest expense has migrated higher, but so has the interest income. As we've incurred higher costs on our borrowings, we've been able to pass that along on our new originations to new borrowers. Andrew mentioned that we're lending right now around 16% on new originations on the REC portfolio, 11% on home improvement loans. Our average book is about 15% on REC and just under 10%. As the portfolio grows, we're able to increase the average coupon, increase the yield, and we're able to absorb a lot of those interest expense increases we've seen over the past two or three years.
What it does is it translates into an 8% margin, which, as Andrew mentioned, our return on equities is above what you would typically find in a bank, and the 8% interest margin certainly is as well. Just looking at the next slide, we're somewhat unique. We're not a typical bank. We employ double leverage, and it goes back to our founding. Historically, we were an investment company that employed leverage at the parent company. That still exists today. What we've done here is we've shown what our capital looks like if you were to deconsolidate us. We've got equity shown in blue, and you can see that's the piece that keeps growing. The debt that we have at the parent company, that's the gray piece at the bottom. As a percentage of total capital, that's continued to decrease.
It's increased slightly in total dollar numbers, but not nearly to the level that our equities increased. The piece in the middle, that yellow piece, that's our non-controlling interest. That's essentially preferred equity that we issue with our bank subsidiary. We currently have two tranches of preferred equity at Medallion Bank. One is SBLF funds that were issued about 15 years ago through the U.S. Treasury. The other piece is what we refer to as our Series F preferred stock at Medallion Bank. That trades on the NASDAQ under the ticker MBNKP. That allows us to bring in equity at a finite cost of blended. It's just above 8% and leverage it and get the returns that we spoke about previously. Moving on to the next slide. Again, we believe there's a compelling reason that investors should look at our company.
As Andrew mentioned earlier, we are a small company, but we've always played in niche lending spaces, which have proven well for us. In terms of capital allocation, we like to think that we've got a finite amount of capital we generate each year. What we want to do with that is pay the shareholders in terms of a dividend, opportunistic stock buybacks, and redeploying that capital in ourselves in growing our book. That's what we've done for the past couple of years. I think we continue on that trajectory. Looking ahead to growth, we've grown substantially over the past couple of years. As we get bigger, we don't foresee being able to grow at the 20% level that maybe we have in the past. However, we do think that growing in the mid to high single digits is a reasonable amount.
When we think about a 6% or 7% growth rate on a $2.5 billion book of loans, that's still a large number that we're putting on the balance sheet every year. Andrew's family and the insiders here own 20%. We are completely aligned with the shareholder in that regard. I think that's our presentation. I think we'll open it up to questions and turn it back to Brendan.
Fantastic. Thanks very much for the overview. We can now open the floor for Q&A here. As a quick reminder, the Q&A tab is located at the bottom of your screen. Feel free to type in any questions. I guess a great place to start would be the Utah Industrial Bank charter. Maybe you could talk a little bit about what that is, what that entails, and kind of what are the advantages there.
Back in 2001, we started trying to find a low-cost, dependable funding source. We were always reliant upon banks, which was a good and bad thing. There's always something that occurs in an economic cycle where banks get nervous. Back then, it was unfortunately 9/11. We wanted to never be reliant upon a bank again. We went out and we looked at what type of charters exist in the country. We saw Goldman Sachs and Morgan Stanley and Leucadia had this bank charter in Utah. We were curious why they're very smart people. There must be something to it. The more we found out about it, the more we liked it. These charters go back 100 or so years. There's only about 15 of them in the country. We're able to take in FDIC-insured deposits.
We cannot offer checking accounts, but that's not our business model anyway. We're not geared up to offer demand deposits and have ATM machines and bricks and mortar all over the country. It is a really high-return business model without having that bricks and mortar. We are just taking deposits online, brokered CDs. We can order anywhere from 90 days to 10-year CD money, trying to max fund everything perfectly or as perfectly as you can. It is never really perfect. It has been great for us. We get calls constantly from fintechs and others looking to buy the bank and the charter. In the past, there has been a moratorium on them. I think it is going to open up again now, though, with the new administration, who is much more pro ILC charter.
Great. That's helpful. Looking at the strategic partnership business, can you talk a little bit about that business in detail and ultimately how these partnerships come about and maybe the growth outlook for that area, the business?
That is another benefit that we found from this charter. We went into it not thinking about that business, honestly. We just thought about how do we lower our cost of funds, which we have done very well. Fintechs around the country do not have licenses to lend. What they do is they have to go into every state and get licensed, which is a pain for them and very bureaucratic. Every state has a different type of lending law and usury cap. A fintech works with primarily Utah banks. That is kind of their go-to bank. They will send the loans to a Utah bank. The Utah banks like us will fund the loan. The fintech will buy the loan back two days later or so, sometimes more than that. Sometimes you get to hold the paper. We do not hold it very long.
We earn a fee. It could be anywhere from 15 basis points to 65 basis points when a loan is originated. Then we get the flow for a couple of days. It is a no-risk business in that you do not have the credit risk and you are generating a lot of fees. That has grown roughly from $100 million- $200 million. It is really just a numbers game in that we have a foundation in place. We have got a great compliance team. Now every time we add a new fintech partner, a lot of the volume goes to the bottom line. We just signed a very large partner about six months ago. Now finally, we are getting the fruits of that as the production has really ramped up.
Got it. Thanks. That's helpful. Looking at the balance sheet, I think you mentioned 6 to 1 leverage ratio there. I guess what level of leverage makes sense for the business in the long term? Maybe as a follow-up question, how can we kind of think about the company's capital allocation priorities in terms of loan volume growth, shareholder returns, and ultimately debt paydown?
Sure. Yeah. As Andrew mentioned, we're rolling lever at the bank 6 to 1. That is because of the capital maintenance agreement that the bank has with the FDIC, where it has to maintain a tier-one leverage ratio of 15%. At the parent company, what we've tried to steer to is a 50% leverage. We've got capital and common equity of $370 million. We're targeting 50%. That number will ebb and flow based upon what's going on and where we see opportunities. There might be opportunities to expand our lending businesses at any given point. That number might increase some as a ratio of equity. I think that's the target where we see where we want to be and the leverage we deploy.
Great. That's helpful. Looking across the loan portfolio, I guess what areas of the business, be it consumer, home improvement, commercial, what areas do you kind of see the highest net income margins? What areas are you most positive or most, I guess, have the brightest outlook as far as loan growth?
Yeah. I think the highest net interest margin clearly is in our REC portfolio. That comes with risk, and we're aware of that. We think we're compensated appropriately for that. In the presentation, Andrew went through the economics of the consumer lending portfolio. Right now, we're getting 16%. Our cost of funds is 4%, more or less. We've got charge-offs hovering above 4%. When you factor that in, it's still a pretty compelling investment opportunity for us. That business and that consumer is going to be tied to the economy. I think as interest rates come in, we'll start to see improvements in charge-offs. We can't guarantee it, but that's what we've seen historically. I think these high interest rates are hurting all consumers, not just ours. As things improve and rates come down, we'll start to see that.
For 2025, we expect those charge-offs to be slightly elevated around where they are. Again, we're not seeing any indications that we're going to get back to the levels that we experienced during the Great Recession. Just to talk about our other segments for a bit, commercial, the net interest margin is comparable to what we get in the REC. The yields are slightly lower, but we also deploy different leverage there, that being facilitated through an SBIC. On the other consumer product, the home improvement, this is our super prime credit, FICOs, in the high 700s. The net interest margin is going to be lower, but the charge-off experience is lower. The performance of this credit is better than what we see in the REC. I think when we blend that all in, we're comfortable with what we're getting as a whole.
We think that we're positioned well to ride out the cycles.
Got it. That's helpful. It looks like for the past few years, operating costs have declined as a percentage of net interest income. What's been driving that trend? Do you see that trend continuing?
Yeah. I think that's—I don't want to step on Andrew's toes—but that's a function of our being able to grow our book, being able to grow our net interest income. We would expect that to continue. That decrease down might not be to the extent that we've seen over the past couple of years. As we grow, there's definitely additional costs we have to bring in. We are a regulated institution. There will be higher compliance costs associated with being a bank to the extent that we continue to scale our strategic partnership business. As Andrew mentioned, that takes a lot of compliance personnel to make sure that we're doing it right and we don't have any footfalls. Costs will go up, but we don't think they'll go up to the level that we increase our net interest income.
Got it. It looks like there's been headlines around consumers pulling back on discretionary purchases. I guess so far in Q1, have you seen any declines in demand for RV or boat purchases?
Yeah. No, we haven't seen anything that's telling us demand is drying up. Q1, it's a little too early to tell. Q1 is typically—the end of Q1 is typically seasonally when things start ramping up ahead of the second quarter, which when you think of the nice weather seasons, that's when everyone wants to be outside. They want a new trailer. They want a boat. That is historically when we have the most originations on our REC portfolio. We are not seeing any indications that that's not going to be other than what we expect.
Nick, can you talk about loan loss reserves or, I guess, how loan losses have trended in recent years and your outlook there?
Yeah. Again, I think I covered this a bit, but we're slightly elevated from where we are historically. I think the interest rate environment and the economy has some negative factors that are specifically related to that. As those factors settle, I think we'll start to see that charge-off experience come in. We've actually started to see the charge-off experience in our home improvement business improve in 2024 compared to 2023. We would expect it to continue to improve. On the REC side, we'll probably see elevated charge-offs continue for some time. As interest rates settle in over the next 6-12 months, we would expect to see improvements in that.
Yeah. I'll add we do a lot of due diligence before we get into lines of business. The RV and marine portfolio, for example, we formed the bank again in 2003. We bought the portfolio about a year after that, 2004. When we were buying it, we bought it from Lendia. We went back and looked at a 10-year track record and how it performed because everything looks good on an upmarket. In 2004 through 2007, everything looked great. We were always holding our breath a little bit. What happens when you hit a recession? We modeled it out perfectly where the bank management did. In 2008, 2009, losses went up. We still did very well, still made a lot of money. Losses dropped dramatically. We've got a lot of confidence.
It's good to know that in that business alone, for example, we've looked at 30 years of data and feel pretty confident in our future.
Yeah. Absolutely. Maybe we could dive into underwriting a little bit. I guess what you kind of look for at the consumer level across the consumer lending business as well as home improvement and commercial as well.
Sure. We talk a lot about FICO, but FICO is really how we measure the credit. That's actually not one of the inputs we look at when determining the creditworthiness of a borrower. We have an internally developed scorecard that we implemented for both the home improvement and the REC business a number of years back. It looks at a handful of different criteria. We are talking about the average age of the borrower, the debt-to-income levels of the borrower, their average wage, things of that nature in determining whether or not we want to make this loan. What we found is that since we have utilized that scorecard, we are getting a better FICO. The end result is better. We are still getting the rate we want. It has been a wonderful tool for us in terms of strengthening our credit as well as keeping the returns high.
Got it. We have time for a couple more questions here. Can Andrew expand on how buying the bank came about and what the story is behind the ultimate decision there?
We had all of our debt come due September 30, 2001, which was very bad timing. 9/11 hit. Medallion prices dropped. Back then, we were heavy in medallion loans. The banks, rather than comforting us and helping us, said to us, "We want all of our money back." We said, "Gee, let's never be put in this position again." As I mentioned before, we looked around the country, saw Goldman Sachs, Morgan Stanley, and Ladenburg Thalmann have this bank charter. Back then, Mario Cuomo, the former governor of New York, had been on our board of directors. He and I had all these calls with people in Utah, including Brent Hatch at the time, Brent Hatch's son and former senator in Utah. We really did a lot of tire-kicking and got very comfortable with the Utah charter and the regulators there.
It has been just a remarkable long-term relationship with them. Very pro-business in Utah, wonderful people to work with. Employees are great there. It was hard to get. It took two years to get this license, the charter. They did not really want to give it to us because they did not want a lot of these new charters out there. We convinced them on our ability to run a bank and our ability to analyze credit. In retrospect, they made a great decision, and we made a great decision. The bank has been profitable every single year, which is not easy to do when you are starting something from scratch. Every year that we have been in business, every full year since 2003, we have been very profitable. It is, again, throwing off a lot of money for us, thankfully.
The bank's been making about $60 million a year and has ROE and ROA performance data greatly in excess of what the typical bank in the U.S. makes.
Fantastic. Maybe to conclude, I know you mentioned shares are trading under tangible book value and book value per share. I guess what are investors missing here and why is now the right time to take a look at the stock?
Years ago, we used to make a dollar a share, and the stock was at $28. We do not have a great answer for that. I can tell you why I think the stock's trading at such a low multiple. We made a dollar a share. The stock was at $28. Now we're making $1.50 a share or so. The stock's at $8 or $9. We used to really have a great group of analysts and institutional shareholders that were interested. We're seeing that again finally. We should have done perhaps more of these Sidoti conferences, but we're getting really—I think we have 12 meetings between today and tomorrow. We need to get out there more. We need to get our name out there more.
We need to have the misperception here is maybe it's our fault and the name should be changed, but the medallion business is 0.5% or less of our company. Sometimes you hear the name medallion, you think of a taxi medallion. That's the way the business used to be, but we're far from that today. We wrote off the portfolio pretty much in 2020. It's 0.5% of assets, and we've never done better. I think we just have to get our name out there. We have to do more investor conferences. We've got to get more research coverage. I'm sure the stock will trade up to a normal PE over time.
Very well. Andrew and Anthony, we really appreciate the overview. I appreciate your time as well. If there are any questions we did not get to, feel free to contact Medallion directly, or you can reach out to Sidoti. Guys, thanks again. We appreciate it.
Thank you.
Thank you all.
Take care, everybody.