Medallion Bank

Ladies and gentlemen, greetings and welcome to the Medallion Financial Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the conference over to Ken Cooper with Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Medallion Financial Corp's third quarter earnings call. 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. 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 third quarter presentation on our website by visiting medallion.com and clicking investor relations. The presentation is near the top of the page. With that, let me now turn the call over to Andrew. Andrew?

Thank you, Ken. Good morning, everyone. We are very pleased with our results this quarter. We had another quarter of strong loan originations, which drove growth in our net interest income. This comes in a quarter where we continue to see rising interest rates. The growth in our consumer and commercial lending businesses continues to yield positive results. We earned $7.6 million for the quarter and $30.8 million for the year-to-date period. For our total company, the $274 million of loan originations was up 40% over last year's quarter and resulted in solid loan growth for us. Each of our consumer lending segments had a good quarter. Home improvement continued to be our fastest growing segment with 44% loan growth, our marine and RV business with 25% growth, and our commercial segment with 30% loan growth. The loan origination activity was the key driver of a 23% increase in net interest income. It is also important to note that we did start to see some benefit from recent pricing actions we put in place on new loans originated. During times of increasing rates, one of the levers we can use to protect our bottom line is to raise our loan rates. We typically are a fast follower rather than a leader in this, and this period of rising rates is no different. Regarding capital allocation, we declared and paid a dividend of $0.08 per share during the quarter. In addition, we used 8.2 million of cash in the quarter to repurchase roughly 1.1 million shares of our common stock. We recently increased the total available under the plan from 35 million to 40 million, and we ended the quarter with 21.8 million available under the plan. With that, I will now turn the call over to Anthony, who will provide some additional insight about our quarter.

Thank you, Andrew. Good morning, everyone. Net interest income of $42 million grew 8% from the second quarter and 23% from the previous year's quarter, with the increase being directly attributable to loan growth and the high yields earned on our loans. Our net interest margin was 8.91% for the quarter, a decrease of 16 basis points from the second quarter and 57 basis points from the prior year quarter. Part of this is driven by growth in our home improvement segment, which carries a lower yield than our rec and commercial segments, and to a lesser extent due to an increase in our cost of funds. We expect our cost of funds to rise near-term if prevailing interest rates continue at or rise from these levels. As we've said for the past several quarters, we expect rising interest rates to have a compressing effect on our net interest margin, which is what we began to see in the third quarter. We also expect to increase the rates we charge on our new originations, which we've begun to do over the past two quarters, and we believe that despite contraction in our net interest margin, the growth in our loan portfolio will counter that compression and allow us to maintain these levels of net interest income. A low loss provision was $10 million, up from $7.8 million in the second quarter, and up from a benefit of $300,000 in the prior year quarter. Current quarter provision, in addition to the growth penalty we incur when growing our loan portfolio, including an increase in charge-offs in our consumer loans, lower recoveries on our medallion loans, as well as higher charge-offs with respect to our commercial loan portfolio. Our operating costs as a percentage of net interest income came down for the third consecutive quarter and was 46%. As we continue to grow, we expect operating costs to continue to rise, but at a lesser rate than our top line. Additionally, we continue to experience higher legal and professional costs, which will continue to fluctuate and remain elevated in the coming quarters. Net income attributable to Medallion Financial shareholders was $7.6 million for the quarter compared to $15.9 million in the previous year quarter. The decrease in earnings from a year ago is attributable to the increased loan loss provision I referred to earlier, as well as the absence of a $2.7 million equity gain earned on a FinTech investment in the prior year, offset by the 23% growth in our net interest income. Our diluted earnings per share was $0.32 for the quarter and was $1.26 for the nine-month period. One last note on the medallion segment. During the quarter, we collected $5 million related to these assets, which helped further reduce our net medallion exposure to $27.6 million down from $47.3 million just a year ago. That covers our third quarter financial overview.

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

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Ladies and gentlemen, we will wait for a moment while we poll for questions.

Our first question comes from the line of Mike Grondel from Northland Securities. Please go ahead.

Hi, guys. This is Owen on for Mike. What was the yield on both RV and boat loans as well as home improvements for this year as compared to last year?

Hi, Owen. How are you doing? So on the REC portfolio, our yield is down about 46 basis points from a year ago. The coupon stands around 1421 weighted average on that portfolio. On the home improvements, our coupon sits about 855, and it's down slightly at 10 basis points from a year ago. The decrease from a year ago on the home improvement, it's primarily due to credit as well as competitive pressures.

Got it. Thank you. And then one more quick one. What was the average CD rate during the quarter and where is it today? And what was the blended rate of the portfolio at the end of September?

Sure. So the blended rate is 163 basis points at the end of September. Today, at the end of the quarter, we were putting on CDs in the 350 to 450 range. They've come up slightly ahead of whatever Fed action that happens in a week or two. You know, last year at this time, we were probably around anywhere from 20 to 110 basis points. So there's been some pretty rapid movement there on the debt side.

Got it. Thank you. I'll hop back in the queue. Thank you.

Our next question comes from the line of Matthew Howlett from B. Riley. Please go ahead.

Oh, hey, guys. Good morning. Thanks for taking my question. Just on the outlook for growth, I mean, you know, it's still very strong, you know, about the home improvement, still the consumer segment. I think last quarter you said that, you know, things could continue to slow. You're obviously raising rates. You're tightening. I mean, any update on the outlook? It looks still very strong. Just update on both segments, what you're seeing from dealers, what you're seeing from your partners on the home improvement side.

Growth continues to look solid. We've been trying to grow market share. Obviously, 40% growth is pretty significant. But part of it is seasonality. We usually have a lot more applications in Q2 and Q3. So we'd expect it to slow down. But as opposed to last year, I'd say it's very solid in terms of what we think is ahead.

Yeah, and I'd agree with that. The consumer... is still really strong. We're not seeing any significant signs of slowdown, but, you know, we know that they're coming.

Right. You're still raising rates? Are you still, you know, being more selective on originations, tightening? Is that still a trend? Has anything changed from, you know, sort of the comments last quarter?

Yeah, no change there. You know, for the past two quarters, we've been increasing significantly. There's a lag on when that actually trickles onto our income statement and we actually see the benefit of it. There's anywhere from a 30-day to 120-day lag in our consumer business depending upon the recreational vehicle or the type of home improvement and when we actually commit to these loans and when we actually fund. So we should start seeing that hit the top line in the next quarter or two. I think we're probably going to experience upwards of 400 basis points in terms of increased costs when we get through this cycle. I don't know that we'll be dollar for dollar because we had a significantly large margin to begin with, but I could see our top line going up, 300 basis points when this is done.

Gotcha. That was sort of my next question on that. The cost of delinquencies are obviously very low. The credit just remains pristine. There's been a lot out there about the used car market. I'd love to hear more about what you're seeing on the RV side, whether the patterns are similar to what we're seeing from the broader used car market in the U.S. Any normalization as it started? Any more additional color on trends you're seeing?

You know, in the queue, we did see an uptick in charge-offs. Our delinquencies remain low. And we think, you know, at some point, you know, it normalizes, you know, the charge-off experience. You know, we're starting to get back to that normal historic level. But like I said, the consumer still remains strong, and we're just waiting for a pullback.

And I'll add also that the management team, who's obviously done a great job for us, when they were running the bank prior to us forming our bank, they worked for Lucadia, they also went into the auto finance business. And we've never touched that, to be honest. It's really a very different credit model than what we do. Over time, the auto finance business If not done really well, and even if it is done well, just with cycles, has heavy losses, and we've never entered into that field. Our niches, as you know, even in 2008, 9, 10, when we were in a recession, still performed extremely well, and we'd expect to come out well out of the next recession as well.

Yeah, and that experience was before we had the Home Improvement Division, which historically has a lower charge-off experience than a REC.

Right, it's a much higher FICO. And the last question, the other income line, I mean, there's a little bit of a loss. You know, the quarter, there was a big gain last quarter. I mean, how about, you know, we think about that line going forward is going to move the bottom line around. I mean, should we just sort of zero it out? Do you think there'll be just long-term sort of gains on average over time, given some of the fintech investments? Just walk us through how we should look at that line item, given it's lumpy.

Yeah, you know, I think lumpy – I wish there was a better word to describe it, but we've used that in the past. You know, during the quarter, we took about a million-dollar charge on one of our equity investments that's tied to our mezzanine lending division. In the prior quarter, we had a $4.2 million gain tied to that division. So lumpy is the right word to describe it. You know, we're going to – it's hard to predict these exits, and when they occur, it's not a smooth – It's not a smooth earning. It's aggressive, and it's one time. Last year, we had a lot of gains on the disposition of a fintech investment. So I think, unfortunately, that's the lumpiness you're going to see in our earnings going forward.

And also to add, long-term, it usually smooths out, so to speak. So We went back and we looked at the results here over the last 20 or so years. We entered into this business in 1998, actually. And the results, we can't guarantee any results in the future, of course, but the results historically have averaged about 13%. So it's been a very successful division for us, but as Anthony points out, it could jump around. Great.

I'll jump back in the queue. I appreciate the comments, guys. Thank you. Thanks, Matt. Thank you.

Our next question comes from the line of Mike Grundle from Northland Securities. Please go ahead.

Hey, guys. This is Owen again. Were there any tax decap recoveries collected during the quarter?

Sure, yeah. We did have some. It was probably about a half a million that hit the income statement. You know, I think last quarter it was some $6 million that hit the income statement. This quarter it's less. We've always said that those recoveries, you know, we expect to recover a fair amount. But similar to our, you know, the gains and the losses on the equity investments that over time, you know, produce positive results, it's lumpy and it's hard to predict those.

Got it. And then can you break out total net charge?

I'm sorry. I said $500,000. It was actually $1.8 million in the quarter.

Okay.

Got it.

And then of total net charge-offs related to recreation, home improvement, commercial, medallion, could you break that out?

Yeah. So it was $7.7 million. $4.2 of that related to the rec portfolio. $1.1 was home improvement. 3.9 of that was commercial, and then a $1.5 million recovery in medallions.

Okay, thank you. And one more quick one. The $10 million provision for loan losses, what was that for?

Yeah, so it's that net recovery you're seeing, the $7.7 million we just spoke about, as well as the growth penalty we get by increasing our loan portfolio. So the reserves are right around 400 basis points on the REC loans and about 175 plus or minus on the home improvement loans. So to the extent that that continues to scale that portfolio, we do record provisions on that and that runs through our income statement.

Great. Thank you for answering my question. Thank you all.

thank you ladies and gentlemen we have reached the end of the question and answer session and now I would like to turn the conference over to Mr. Andrew Merson president for closing comments thank you again for joining us on our earnings call for our employees on the call thank you for everything you do to make our company great for those of you who are shareholders of Medallion on this call thank you through your investment and your trust. 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, and have a great rest of your day and weekend ahead. Thank you. The conference of Medallion Financial has now concluded. Thank you for your participation.

You may now disconnect your lines.