Medallion Bank

Today, and welcome to the Medallion Financial Second Quarter Earnings Conference Call. All participants will be listed on only mode. Should you need assistance, please signal a conference specialist with presses star followed by 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 telephone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Ken Cooper, Investor Relations. Please go ahead.

Thank you and good morning, everyone. Welcome to Medallion Financial Corp's second quarter earnings call. Joining me today are Andrew Murstein, President and Chief Operating Officer, and Anthony Catrone, 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 second 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.

Thank you, Ken, and good morning. We were pleased with another solid quarter. We produced $7.1 million of net income and $0.30 of earnings per share. For the first half of the year, we have delivered $17.1 million of net income to our shareholders. This has been driven by the performance of our loan portfolio and the high yields we earned. Looking at our segments, REC lending, our largest segment, had another strong quarter. The highlight was originating more than $200 million of loans. Importantly, most of these loans came from high interest rates as we continued to have success passing through elevated market rates to borrowers. Our average interest rate as of June 30th was 14.8%, up 18 basis points from a year ago. In addition, we continue to originate loans to individuals with stronger credit profiles in the prime and near prime segment of the credit spectrum. Our home improvement lending segment grew 6% over the prior year quarter and now sits at $773 million. This segment continues to be dominated by super prime borrowers with strong credit scores. Like the REC segment, We have passed on some of the Fed rate increases to our borrowers, and our current average rate of 9.71% is 50 basis points higher than a year ago. Our commercial lending segment had a steady quarter, generating $500,000 of earnings. The loan portfolio grew 19% from a year ago and is now at $110 million, with an average interest rate of 13.05%. I'd like to briefly mention two other items. One, after an absence of about five years, we were pleased to again be included in the Russell 3000. This is another testament to the continued growth and performance of our company. And two, we continue to effectively deploy capital for shareholders. During the quarter, we repurchased $1.5 million of our common stock, which left us with $16.4 million remaining on our authorized $40 million share buyback plan. We have now utilized nearly 60% of the current buyback plan authorized just two years ago. We expect to remain opportunistic on any future share repurchases. Our share buyback activity together with our 10 cent per quarter dividend and net income performance continues to deliver positive results for our shareholders. With that, I will now turn the call over to Anthony, who will provide some additional insight into our quarter.

Thank you, Andrew. Good morning, everyone. For the quarter, net interest income grew 7% to $49.9 million from the prior year and grew 4% from the first quarter. Growth in our net interest income is driven by loan portfolio growth, along with the increased rates charged on our recent loan originations. offset by the higher interest expense as a result of increased borrowing costs and larger amounts borrowed. Our net interest margin on gross loans was 8.12% for the quarter, down 36 basis points from the second quarter of last year, and up two basis points from the first quarter. During the quarter, we allocated recreation loans at an average rate of 14.94%, and home improvement loans at an average rate of 11.67%. both in excess of current weighted average coupons in these portfolios. Current average origination rates in July are at above 16% for recreation loans and around 11% for home improvement loans. For the past several quarters, we have been focused on increasing the average coupon on our loan portfolio and will continue to do so with originations being at rates above that of our current portfolio. This is a slower process than we experienced with the rise in our cost of funds. We anticipate that our average coupon and yield will continue to increase well after our cost of funds plateaus, at which point we will experience expansion in our net interest margin. During the quarter, we originated $309 million of loans, including $210 million of recreation loans and $68 million of home improvement loans. Total loans outstanding increased 11% from a year ago to $2.4 billion, with the corresponding yield during the quarter increasing to 11.52%. We maintained our tightened credit criteria, which we believe has and will continue to help us constrain losses long-term. During the quarter, prime originations in our recreation portfolio were 68% of total originations, and as of June 30th, 65% of our recreation portfolio were prime credits. Consumer loans more than 90 days past due were $7.2 million or .33% of the total loan portfolio as compared to $6.1 million or .3% a year ago. Our provision for credit loss was $18.6 million for the quarter, an increase from $17.2 million in the first quarter and 10.1 million in the prior year quarter. Both the current and prior quarter included a net benefit related to tax and medallion loans of roughly $1 million, and in the prior year quarter included a benefit of 5.3 million. 4.2 million of the current quarter's credit provision is specifically related to the growth in our consumer portfolio, particularly recreation loans. As our portfolio continues to grow, we'll continue to experience this growth penalty which causes an immediate reduction in current earnings. The seasonality in our business, with the second quarter typically having stronger origination levels than other quarters, exacerbates this growth penalty. However, looking ahead, a larger portfolio at our current origination rates coupled with the credit criteria we require should enhance our earnings long term. Operating expenses were $20 million during the quarter, up from $18.2 million in the first quarter, and up from $19 million in the second quarter of 2023. The current quarter operating expenses were higher primarily due to elevated legal and professional fees associated with the company's successful defense against an activist's proxy campaign. We continue to believe that the growth in our net interest income will outpace any increase in our operating costs as we continue to scale our lending businesses. For the quarter, net income attributable to our shareholders was $7.1 million, with $0.30 per diluted share, which included approximately $0.12 per share related to additional credit allowances tied to consumer loan growth, as well as approximately $0.04 per share related to the elevated legal and professional fees. Our net book value as of June 30th was $15.25 per share, up from $13.66 a year ago. That covers our second quarter results.

Andrew and I are now happy to take your questions.

We now begin the question and answer session. To ask a question, you may press Start and 1 on your touchtone telephone. If you're using a speakerphone, please pick up your answer before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Start and 2. The first question is from Mike Ronald with Northland Securities. Please go ahead.

Hey, guys. Could you talk a little bit about your outlook for RV and boat and also home improvement, just, you know, growth, margin, credit, kind of how are you thinking about the second half in those two big areas?

Sure. How are you doing, Mike? Good to speak to you. So as it relates to RV, we grew 10% in Q2. Q2 is typically our largest origination quarter. We'll see those originations peak in terms of levels in July and then begin to settle in August and September. And then Q4 is somewhat quiet. So we would expect Q3 to look somewhere between the originations in Q1 and Q2. two, a blend of the dose two. We'll probably end the year around a billion and a half, a little more than a billion and a half, so a little bit higher from where we are. I think we end the year with about 15% growth in REC. And on the home improvement, Q3 is typically the larger origination quarter for home improvement. That's really where that space hits its stride. There's a There's a three- to four-month lag between when a loan gets approved to when it actually gets funded just because of the time it takes to actually fulfill these improvements. So we should see some bigger growth in Q3.

Got it. And then kind of two follow-ups on that. Is home improvement gotten more competitive? Yes. Is that down year over year because of less demand, or you guys tighten credit more? And then just kind of a credit outlook for each one.

Yeah, I wouldn't say that it's gotten more competitive. Home Improvement's always been competitive with the super prime FICOs there. I think we've held it back a little bit. As we look to grow, we're looking to make sure that we're deploying in the right space. Obviously, we're looking at credit. From a credit perspective, everyone knows how good the credits are in home improvement. Two-thirds of our originations on the rec side are now prime credits, and 65% of the total portfolio is prime. So I think we're focusing on that to make sure that we're cognizant of where our margin is and where we want our yield to be, and we're making decisions there. But we do expect that to pick up in Q3, like I said.

Got it. Just credit overall?

I think the term we used is cautiously optimistic. The average FICO in the REC portfolio is 685. 2024 originations, the average originations for the six months, 689. So this is a different portfolio than we had five and ten years ago.

And as you know, Mike, we did a new debt offering last week, I think of June or so, so very recently. And that had an A- investment grade rating as well.

Got it. Got it. Hey, I'll jump back in the queue, guys. Thanks.

The next question is from Christopher Nolan with Ludenberg Talman. Please go ahead.

Hey, guys. Congratulations on the quarter. Congratulations on the inclusion in the Russell. I guess the first question is going to be professional fees. Should we expect... operating expenses decrease in coming quarters? Any guidance on that?

Yeah, so the legal and professional fees were elevated in Q2 with the proxy season. It was probably about a million, a little over a million, million two, million four, somewhere in that range. I think our EPS was affected by about four cents to the downside because of that, so we wouldn't expect that to recur in Q3. Great.

And then net charge-offs in the quarter. I didn't see it in the press release. Do you guys have a hard number you can provide?

Yeah, we have it in the supplement on our website. But, yeah, net charge-offs for the quarter, $12.6 million. That's $10.7 in REC, $2.8 in home improvement, and then $900,000 benefit in taxi. Great.

Final question, do you guys have any breakdown in terms of employment by your borrowers? I mean, what percentage of those work for the government? Which percentage work for private industry, things like that?

I don't know that we disclose that, and it's not a metric that we look at particularly as to the type of employment. All of our borrowers are employed. And we do typically lend to borrowers, even though their credit might not be A-plus on the REC side, they usually have a higher wage than you would typically see in near-prime lending.

Okay. The reason I ask is there's a large amount of government debt which has to be refinanced, federal government debt, at much higher rates. And given that we're in an election year, things can go in a lot of different directions in terms of government employment. And I want to see whether or not you guys have any particularly heavy exposure to government employees.

Right. I don't believe we do. I'm just thinking through loan applications that we've looked at recently, and very few would have fit that category.

Great. Thank you very much for taking my questions.

Thanks, Chris.

The next question is from Matthew Hall at B. Riley. Please go ahead.

Hey, good morning, Andrew and Anthony. Thanks for taking my question.

Sure, Matt. Good morning.

First on the margin here, look, a little bit of an up performance in the quarter. I think Anthony said last quarter it could tick down to eight-ish, I thought you might have said. But here we're going to hear from the Fed this afternoon and really think it's 100% certain we're going to start getting cuts by September. What's the outlook? I mean, where are CD rates now? I mean, five-year CD rates, where could they go with that? You know, federal funds go down 200 basis points from here next year. And will you begin lowering kind of your coupons? I mean, at some point, just give me the outlook here. You guys have done a great job defending the NIM. You have one of the highest in the banking sector. You've raised coupons. But here we're going to get a proper change in the cycle here, and I want to see, you know, how this is going to impact what your strategy is.

Yeah, so as of yesterday, you know, short-duration CDs, You know, three, six months, they're hovering around 5%. If you go out to three years, we got four and a half, and then five years, new issuances are, you know, 4.3. So, you know, hopefully you're right. You know, we do get the rate cut in September, and we should start seeing those come in. You know, our overall, you know, the overall CD cost is 3.5%. So, again, I don't think anything's changed. We did see a benefit, the two basis point increase from Q1. We're definitely closer to the bottom of that NIM compression we've been talking about for a while than not. I'm sorry, what was the last part?

You're closer to the bottom than what?

Yeah, we definitely feel that we're closer to the bottom of the NIM compression that we've been talking about than not being there. Yeah. And just in terms of yields, you know, we don't have any discussions right now about, you know, lowering the rates that we're originating on. You know, I think we're comfortable where we are. But, you know, obviously the market will dictate to a certain extent, you know, where we lend and at what rates.

Yeah, look, I mean, great job with raising rates and offsetting. It's been a tightening cycle here. We look forward to, you know, the next cycle here.

Some of the things we get, you know, we hear quite often, you know, can you go any higher on the REC portfolio? Can you get another 200, 300 basis points? And we've looked into this, and I think that the short answer is we can. The longer answer is we don't want to because of adverse selection. So, you know, coupled with the credit that we're getting now, we would get, you know, loans that we typically don't want to be funding.

Absolutely. No, I hear you. On the growth penalty on the REC, on the reserve penalty, How would you recommend us look at it? By backing out all the 12 cents and saying you'll make up for that, you know, the life of a loan, you're just getting penalized by what was exceptional growth. And what I'm assuming is you're using probably very harsh, you know, forward loss assumptions, really booking these at, you know, the U.S. is booking them at 4% or 5% charge-off rates. And it's just something that we're trying to get more, you know, used to. I just want to hear from you again on the growth penalties.

Yeah, so it was $4.2 million, and, you know, it's the put-on cost for booking a new loan. So, you know, it's the allowance we've got to book as we grow our portfolio. You know, 10% – you know, we're not going to grow 10% each quarter. So I think, you know, like I said earlier, you know, I think year-to-date, you know, we're probably around 15. So if you come up with, you know, an average of where you think – of where you think a traditional quarter's growth is, that's probably the add-back.

Right. Gotcha. Look, I appreciate the conservatism, and it's certainly something that's impacting earnings and artificially weighing down results, but I think to the benefit of all shareholders. Next question, just two more on the solar deal you did. Andy, any update on just how that's going?

It's going well. I think this is the strategic partnership area where, as many of you know, FinTechs are sending us loans. We're funding them. We're charging a fee for that. We're getting the flow for a couple of days, and then they buy the loans back. So I'd say it's probably out of the gate. It's a little bit slower than we thought, but I think long term it has a lot of potential. Usually when you start new programs, there's a lot of tire kicking we like to do It's a great business. You just have to make sure you're strong on compliance, which we are here. We've got a great group in Utah. So usually they like to dot the I's and cross the T's, and then once the program is underway for a quarter or so, then the volume should really pick up.

What type of yields? You get probably what, a mid-teens yield for a little bit, and you get probably what, a success fee or an origination fee? Is that how it works?

Yes, origination fees can range from 15 basis points to 50 basis points upfront on the loan. Then you'll have the float for a couple of days. The paper could be across the board from 12% up to 24% or so. We're talking to some new partners now. Again, compliance is very key here. Some of the other banks in this space have gotten consent orders over the last year or two because they grew too quickly. We don't want to make that mistake, but that's also an opportunity for us now because many of the fintechs are not going to them because the regulators are telling them basically to slow down. Therefore, we're seeing those opportunities ourselves now for the first time.

I would just add, we're selective about the type of partner we want. A lot of other players in this space, they operate on razor-thin margins and just do a whole lot of volume. And, you know, to what Andrew said, you know, with the compliance that's key to this, you know, there's a lot of opportunity for foot fault if you're not careful. So that's where we are.

Thanks for that. We look forward to the update and possibly new announcements on new partnerships. Last one from me, buybacks and tangible book. Where did tangible book come in this quarter and And congratulations on buying back stock. I think it was $8.23. And I just want to look at how you think about the dynamic of buybacks and tangible book and so forth.

So book value was $15.25. I think we've spoken about this in the past. Tangible book isn't something that we view as a meaningful metric just because it doesn't show the whole story of what went on here and how we came about with our goodwill. So when we calculate, we calculate an adjusted tangible book of 974 share. And what we do, it's the traditional tangible book calculation. We back out from equity or common equity, the goodwill, the intangible assets. We also add back a $43 million tax liability that relates specifically to that goodwill and intangible assets. So when you go through that calculation, we come up with 974.

Okay, so you're still buying that stock well below gap book and still below tangible book. Correct.

Yes.

And would you like to continue just to do buybacks, Andrew? I mean, you've got a great dividend. How do you look at the dynamic between raising the dividend, doing more buybacks, or allocating more capital for growth? I mean, you've got a lot of great opportunities out there. I'm assuming you probably look at book value more – You look at your NEV being closer to 15 than the 974.

Yes, correct. You know, they're all very good options for the shareholders. I think a combination of both is the goal in terms of maintaining and raising a dividend eventually and buying back stock. It's been very strong growth, as you know, 10% from one quarter to the next. It won't be this much, but that's an annualized 40% basis. As Anthony said, it's probably 15% rec growth through the year. So it's all good problems to have. We have to juggle, do we put more money into the bank and let that continue to grow at 15% or more per year where the ROEs are super high? Do we increase the dividend, which that would be our goal, again, to do that? Where do you buy back stock? And thankfully, we've been able to do all three. So we try to do a blend of the three depending upon the timing and the opportunity at that time.

Yeah, look, I mean, you've been really a great allocator of capital. And, you know, that share count keeps on getting knocked down. And I think people are missing it. You bought back a lot of stock, you know, last several years. So, you know, certainly keep up the good work and look forward to hearing you next quarter.

Thanks very much, Matt.

We have a follow-up question from Mike Crandall with Norland Securities. Please go ahead.

Hey, guys, just two follow-up questions quick. With the EPS, you called out like $0.04 of pressure from professional fees and $0.12 from the portfolio growth. But did you say how much – was it a benefit, the $2.3 million of taxi medallion collections? Could you quantify that, Anthony?

Yeah, so it's, you know, the 2.3, you know, net of tax, it comes out to about four cents. But, you know, we wouldn't view that, you know, the 2.3 is probably a fair estimate of what we're going to collect ongoing. And I think what's hitting the income statement in Q2 and similarly in Q1 is going to be recurring. It's just a function of where these assets are marked and you know, on our balance sheet and the cash that's coming in. So I wouldn't say that's an ad back. I think that's just a run rate now.

Got it. Fair enough. Fair enough.

Yeah, I think it was fair last year. You know, we quantified. The numbers were significantly higher, and, you know, we can understand the ad back. But at these levels, this is, you know, where we expect to be, and, you know, we don't see anything changing.

Got it. And, you know, for both of you, maybe, Anything 3Q, 4Q, 25, just looking ahead, anything you want to call out as you guys are driving this business, any trends you're seeing, or is, I don't know, roughly 35, 40 cents kind of the right core earnings level to kind of grow off of? I don't know, just anything in the business you're seeing that you want to talk about.

I'd say the goal has been, which we've been doing very successfully, just increasing the size of this portfolio. It throws off an enormous amount of cash. We have $2 billion plus of loans throwing off hundreds of millions of dollars a year. So the key for all of us, I think, is continue that, but don't get carried away and maintain strong credit quality, which we believe we have and the rating agencies believe that we have. And then the rate cuts will kick in shortly, you know, maybe September where no one knows when and how many. But once that starts to happen, the wind is going to be on our back. We're going to have this large portfolio with an enormous spread already of 800-plus basis points. That should only get larger over time.

Got it. Hey, thanks, guys. Thank you, Mike.

This concludes our question and answer session. I would like to turn the conference back over to the management for any closing remarks.

Just wanted to thank everyone again for joining us this morning. As I mentioned, we are pleased with the performance halfway through the year. As we move to the second half, we're going to remain focused on delivering shareholder value by driving our businesses to our high standards and delivering smart capital allocation. As always, if you have any questions, please feel free to contact our investor relations team at 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 rest of your day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Goodbye.