Medallion Bank

Good day and welcome to the Medallion Financial Corp. Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key 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 your touchtone phone. To withdraw your question, please press star then two. Please turn the conference over to Ken Cooper, Investor Relations. Please go

ahead. Thank you and good morning, everyone. Welcome to Medallion Financial Corp. Third Quarter Earnings Call. Joining me today are Andrew Mirstein, 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 Legislation Reform Act of 1995 as 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 third 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 executed well again in the third quarter. We delivered $8.6 million of net income and $0.37 of earnings per share for our shareholders. This was driven by good loan origination activity, stability in our portfolio metrics, and continued strengthening of the credit quality of our borrowers. -to-date, we have delivered over $25 million of net income and $1.09 per share of earnings. We are extremely pleased with these results. The hard work we have done over the past few years is helping drive our performance. This centers around targeting an enhanced borrower base with continued small movements to improve credit quality. We believe this lowers our risk profile and results in better financial performance since payment patterns stay more predictable and stable. Our current loan portfolio skews more prime to superprime borrowers while we have been decreasing the level of subprime credit in the portfolio. In addition, we are pleased to see the initial move of dropping its rate. We believe that with this drop, we could be at the beginning of a longer-term declining rate trend over time. This is good for Medallion as our business reacts well in a declining rate environment. We believe our cost of funds will eventually drop from current levels, which could further enhance our already strong net interest margin. Moving to our segments, rec lending and another strong quarter, which included $139 million of new loan originations. Originations were up 50% from the third quarter of last year and down sequentially from the second quarter as expected. The second quarter is typically the most active quarter for RV and boat sales as it is the beginning of the season. This dips down in the third quarter as there are more loans in the second quarter. Importantly, most of these loans have high but competitive interest rates. Our average interest rate as of September 30th was 14.92%, up 19 basis points from a year ago and 12 basis points from just one quarter ago. Our home improvement lending segment grew 8% over the prior year quarter and now sits at $814 million. Our current average rate of .76% is 38 basis points higher than a year ago and five basis points above the most recent prior quarter. Our commercial lending segment was stable with the loan portfolio staying the same as the second quarter at $110 million and delivering a comparable average interest rate of nearly 13%. We like this segment since repayment history is strong and we have a long track record of over 25 years of realizing gains on the equity investments we typically receive as part of these transactions. As a reminder, this entire portfolio has virtually zero exposure to commercial real estate. Finally, I'd like to touch on capital allocation. We continue to be intensely focused on deploying capital for shareholders with the goal of maximizing overall returns. During the quarter, we repurchase $1 million of our common stock at an average share price of $7.89 and still have over $15 million remaining on our current authorized $40 million share buyback plan. In addition, we are pleased to announce that our board has increased our quarterly dividend 10% to 11 cents beginning with the dividend payable in November. As has always been the case with our dividend, and particularly since it was reinstated in the first quarter of 2022, our goal continues to be providing a tangible return to our shareholders that is sustainable long term. We have now increased our dividend for a second time since its reinstatement, which underscores our confidence in the company's future and commitment to shareholder value. 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 8% to $52.7 million from a year ago and grew 6% from the prior quarter as our interest income earned on a growing loan portfolio outpaced the growth in our cost of funds, with interest income benefiting from a larger loan portfolio and an increased yield on new originations. Our net interest margin on gross loans was .11% for the quarter, down one basis point from the prior quarter, and down 24 basis points from a year ago. During the quarter, we originated recreation loans at an average rate of .33% and home improvement loans at an average rate of 10.75%. We continue to originate both consumer loan products at rates above the current weighted average coupons of these portfolios. Our average rates charged on new originations in October remained above 16% for recreation loans and near 11% for home improvement loans. We anticipate that our average couponed and yield will continue to increase well after our cost of funds plateaus. Our average cost of funds was .05% during the quarter, up 77 basis points from a year ago, with the average cost of deposits and borrowings at Medallion Bank increasing 78 basis points to .67% over that same period. The average interest rate on our deposits was .68% as of the end of September. During the quarter, we originated over $275 million of loans, including $139 million of recreation loans, $97 million of home improvement loans, and $40 million of strategic partnership loans. Total loans outstanding were $2.5 billion, increasing 13% from a year ago and 4% from the prior quarter, with our corresponding yield increasing 47 basis points from a year ago to 11.75%. Consumer loans more than 90 days past due were $6.9 million or .39% of the total consumer loans as compared to $6.9 million or .34% a year ago. Our provision for credit loss was $20.2 million for the quarter, an increase from both the $18.6 million in the second quarter and the $14.5 million in the prior year quarter. The current quarter included a $2.5 million net benefit related to taxi medallion loans, which compared to a $1.8 million benefit in the prior year quarter. $2.2 million of the current year quarter's provision specifically related to consumer loan growth. Net charge-offs during the quarter were $13.4 million or .18% of our average portfolio compared to $10.4 million or .88% of average portfolio in the prior year. Operating expenses were $19 million during the quarter, down from $20 million experienced in the prior quarter and $19.1 million incurred in the prior year quarter, with the decrease from the prior quarter overwhelmingly attributable to elevated costs experienced in that quarter associated with the contested proxy. For the quarter, net income attributable to our shareholders was $8.6 million or $0.37 per share, which included approximately $0.07 per share related to additional credit allowances tied to consumer loan growth. Our net book value as of September 30th was $15.70 per share, up from $15.25 in the prior quarter and $14.06 a year ago. That covers our third quarter results. Andrew and I are now happy to take your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. To withdraw your question, please press star then two. And at this time, we'll just pause momentarily to assemble our roster. And the first question will come from Christopher Nolan from Ladenberg-Falman. Please go ahead.

Hey guys. Any non-recurring items in the quarter?

Hey Chris. Good morning. No, it was fairly clean. You know, our taxi medallion recoveries were a little elevated than what we typically see, $4.1 million of cash collected. We tend to hover around $2.5 to $3.00 on a normal quarter, so that increased EPS slightly, but nothing significant other than that.

And then I guess, General, turning to reserves, is it fair to say that your reserve ratio is really a full, so it's sort of a calculation? Is that a fair assessment?

Yeah, you cut out there for a second, Chris. Could you just repeat that?

Yeah, is your reserve ratio a function of CISL?

Yes. Yeah, so, you know, big picture. You know, we look at, you know, our historic losses to determine, you know, what the projected loss experience will be going forward and, you know, come up with an appropriate allowance.

Okay, that said, does the Fed easing or future easing affect that calculation at all? In other words, do you expect a lower reserve ratio going forward as a result of...

I think, you know, we would expect that, you know, our allowance ratio be a function of, you know, delinquencies and historical loss experience, not so much, you know, Fed easing. Although, you know, if the Fed does lower rates, you know, and, you know, the consumer gets relief overall, that should help delinquencies, you know, and, you know, moving forward.

Great. And... The asset quality is hanging in there. And you guys are... Should we expect lower loan yields because you're going for a higher quality client?

I don't think so. We've been able to, you know, keep our origination levels high. You know, I think that particularly in rec, you know, we've continued with, you know, 16-ish on new originations, you know, and our average, you know, coupon is below that. So, we'll continue to see that increase. Similarly on home improvements, you know, we're writing at levels above our average. I think during Q3, we wrote at levels a little bit lower than what we did in Q2. That's not necessarily credit related, you know. It's more about the mix and the type of loans that we're writing in Q3. We've focused a lot on pool loans rather than, you know, traditional home improvement loans when you think of windows and roofs. And the reason being is that we've seen that those, you know, have a better credit response in terms of charge-offs down the line. So, we've gotten slightly less yield on those new originations, still more than what our book sits at. But we believe that it's going to perform better long term.

Okay, that's it for me. Thank

you, Porter.

Thanks, Chris.

Again, if you would like to ask a question, please press star then one. The next question is from Mike Grendal from Northland Securities. Please go ahead.

Hey, guys. Congrats on the quarter. Originations, especially REC, was pretty strong. Why and kind of what's your outlook for originations?

Hey, Mike. How you doing? Good.

Thank

you. Yeah, we had a good Q3. And, you know, again, we've read this in the past. You know, typically, Q2 and Q3 is where we see, you know, big amounts of originations, particularly in REC. And that comes in then in Q4. So, you know, we wouldn't expect Q3 to be indicative of what we see in Q4. You know, the portfolio will probably stay flat, maybe a little bit of contraction, similar to what we saw in Q4 of last year. The portfolio may have shrunk, you know, by about 1% before it starts to up again in Q1 of next year.

Got it. And then, you know, going back to the 4.1 million of taxicab collections, what was the EPS benefit associated with that? I know some of it's running through the provision, but what would you call out in the 37 cents?

So the 4.1 translates into about $2.8 million of credits on the income statement that, you know, benefit the bottom line. So if you just, you know, quantified that $2.8 million, it's 8 cents a share. But again, collections were high. You know, I think last quarter was more indicative of what we expect to see quarter in, quarter out, which was about $2.5 million. And that generates about 4 cents. So, you know, there was a couple of pennies added to EPS because of the collections. There was one larger collection we probably brought in about $1 million on a settlement that all hit the income statement. You know, typically with a normal quarter of $2.5 million of collections, you know, 50% of every dollar collected is going to hit the income statement. In this quarter, it was more like two-thirds.

Got it. Got it. Okay. That's helpful. And then with the provision, you know, let's call it $20 million. You know, clearly there was the benefit of $2.5 million from the collections, but also you called out the $2.2 million going the other way kind of for growth. Is $20 million the right way to think about kind of your core provision now, or is it more like $22 million?

You know,

there's still a fair amount of uncertainty with, you know, where the economy goes. So, I don't want to peg the number to, you know, 20 or 22. You know, it could be closer to the 22 than 20. You know, we'll continue to have medallion recoveries even if we collect, you know, normal run rate. So, I think it's somewhere in between there. You know, again, you know, we go into our slower quarters in Q4 and, you know, in Q1 with seasonality. You know, we might see delinquencies like we saw last year tick up. That's going to cause us to have to, you know, bolster our allowance. Growth should be slower so we won't have the, you know, the growth penalty that we experienced there. You know, we're not seeing any indications that we're out of the woods in this economy yet. We're also not seeing any, you know, warning signs that, you know, something, you know, drastic is going to happen.

Fair, fair. And then, hey, just two more. One, the overall margin was only down one bit sequentially. Are we getting closer to a bottom than what you anticipated? I mean, I don't know that you can call a bottom yet, but kind of how are you feeling about the margin?

Yeah, I think we're getting, we're almost there. You know, I think we've been looking at eight-ish, you know, maybe, you know, slightly below that, but not meaningfully below that as what we think the bottom to be. I think, you know, in Q2, the NIM increased slightly. You know, we dropped the basis point this quarter. I think we're almost there. You know, our cost of funds, it's interesting, you know, with CD costs, you know, leading up into the, you know, the Fed cut in September, we saw three and five-year CD's, you know, run down in terms of the cost. Since that rate cut, I guess everyone was baking in, you know, the possibility of three rate cuts by the end of the year. I think that expectation has waned a little bit, so we've seen those costs come back up. You know, I think current issuances are in the four-ish range. So we've got a little bit of ways to go before our, you know, our CD's are priced at current levels. But, you know, another rate cut or two should help out significantly.

Got it. And then, hey, lastly, congrats on the FinTech volume, the 40 million in 3Q up from 24 million. But can you remind us of the economics on that 40 million?

So the way that works is a FinTech will send a loan to us, we'll fund it, and then they'll buy it back typically a few days later. So if done properly, there's no credit risk here. We're not really holding the paper, and they provide guarantees in case there's anything happening to them, which is extremely rare, of course, within that 48-hour period or so. But it ranges, but let's just use an example of 50 bips. So we'll take a fee of 50 basis points of the loan, and we'll get the float for a couple of days as well.

Got it. So on that 40 million, I guess 1% would be 400 grand. I don't know, you made about 200 grand. Is that the right way to think about it in the quarter?

We probably made close to that. It just happens to work the way that you're saying in this quarter. But the goal here is, you know, it's nice that it's a growing business. It's nice that it's breaking even or making a little bit of money. Our hope is to really accelerate this business. I think we're going to have a very strong fourth quarter. So we were a little late to the game here. We kind of watched others go into the field just out of precaution. We weren't sure how the business would work and how the regulators would look at it and got comfortable with it. So we're gaining some steam now though. We've got a good group that we took a CEO of another bank that's very active in this space. We hired him a couple of years ago, and finally it's starting to pay off for us.

Great. And lastly, just as a follow-up to that, what line on the P&L does that come through?

So the interest we earn on the three or four days we hold the loans, that's up an interest income. And the fee, in Andrew's example, the 50 basis points, that's in other income.

In other. Okay. Hey, thanks

guys. Thank you. Thanks, Mike.

And the next question will be from Matthew Howlett from B. Riley. Please go ahead. Hi, good

morning. Hi, Andrew. Hi, Anthony.

Hi, Matthew. Morning.

Hey, look, congrats on the dividend bump and the continued share repurchases. I just want to ask you, what can we expect sort of going forward? Do you want to bump the dividend 10 plus percent every year and obviously keep buying back shares? Sort of how are you thinking about capital return? What are you leaning towards? You want to just continue to do both?

Sure. Yeah. I mean, I think, you know, we've always said that, you know, we're committed to shareholder return. You know, I don't think we want to commit to a 10% dividend increase annually, but, you know, long term, I think our intent and the board's intent is to, you know, reward the shareholders, you know, for their ownership. So I, you know, we don't want to get ahead of ourselves, but I don't think it's out of the question. But, you know, we're just happy that we're at 11 cents right now.

Yeah. And to add, the goal is definitely to increase it. It's hard, as Anthony said, to pick a percentage, but the goal should be to opportunistically look at what is in front of us. So the last couple of quarters, this is an extremely strong quarter with the growth rates that we had of 4 and 5% from the prior quarter. So the stock buyback was small, it was only about a million dollars. That'll eventually slow, and then that'll give us an opportunity to review jumping back into the market for buying stock. So between those three things, buying stock, paying a dividend and growing, we look at all three and I think we've effectively accomplished success in all three recently.

Yeah, look, I mean, we were surprised by the dividend increase and it's, the stock's already paying a nice yield. So congratulations on that. You know, the share repurchases, I mean, I know you said, what was tangible? I know you said GapBook's getting close to 16. I know you think that's more of the real book, but what was tangible book at the end of the quarter?

Sure, so you know, we do believe that book value is the best measure for assessing the value of our company, but we understand that tangible book is something everyone likes to look at, you know. So we don't actually think tangible book is a good indication of value, but adjusted tangible book is. So it's essentially the same calculation, we just adjust for a $43 million deferred tax liability that sits on our balance sheet that relates specifically to the goodwill and the tangible assets. So when you factor that in, adjusted tangible book comes out to $10.17.

Wow, that was what, $9.75 last quarter or something?

Yeah, so as you know, it increases the same as book value each quarter, slightly more because it's a benefit of backing out that amortization.

Yeah,

that makes the stock map.

It's been growing a lot. Go ahead. Off the top of my head, you know, years ago it was probably $5 or so a share. So the last three years and nine months, our pre-tax earnings have probably been, I don't know, about over a quarter of a billion dollars. So it's starting to add up.

Yeah, you're probably one of the only banks trading at a discount, not only the gap book, but the even tangible book. So those share repurchases make a lot of sense and they're great to see for shareholders. Moving towards the margin, I want to just drill down a little bit. Anthony, you said what, the new CD rates are what, fourish and currently available at .7%ish? Your CD rates at the end of the quarter?

Yeah, so at the end of September, 368 is our weighted cost on the CDs. And we're new issuances recently ranging anywhere from $3.95 to $4.15. So it's in that fourish range. So we're probably about 30 basis points away from the current market.

Yeah, look, it's incredible because you're continuing to push up coupons on your consumer lending businesses. And what I want to ask is, what's the average loan term? Because it's $4.92 and you're putting things on above 16%. So you're getting runoff from these lower legacy yielding rec loans that you're replacing with.

Yeah, I mean, when we write these loans, we write them up to terms up to 15 years. Realistically, overwhelmingly, they stay on our books for about 36 to 42 months.

Okay, wow. Okay, that was again more like seven years. Okay, so they're rolling off pretty fast. You're getting several hundred millions of just conversation, right?

Correct.

On the rec.

Yes.

So when we think about the margin, I don't want to have you give guidance, but I mean, we could be back to 9% in a couple years, if not earlier, if the rates stay here or start to go lower.

Yeah, I was going to say that we were at those levels. Anthony is being modest. He's been done a very good job predicting where the bottom would be. He's been saying publicly on these calls and elsewhere that he thought it would get down to 8% and then kind of bounce around there and then start going back up again. So that would be our goal is to get it back up. It's not going to happen overnight, but to get it back up to those levels.

Yeah, well, once our cost of funds does hit that terminal level, it plateaus, it's not going to rise anymore for at least an extended amount of time, we should start to see that NIM expand. Our current book, with the exception of what rolls off, is going to continue to have the coupon it has, .92% currently. New originations are higher, so we should still see growth in that yield. We get further down the line, and that's why we don't like to get too ahead of ourselves. We've got to look at competitive pricing and how that's going to affect our business, but we're comfortable seeing what we're seeing right now. With the prospects of more cuts, we think that's going to have a good effect on us.

The way you're growing the portfolio and the potential to margin to expand, and your buying back shares, it just has a powerful impact on EPS. We can all do the work we want to do. Congrats on managing that through this cycle. I guess just the last one, on those FinTech partnerships, you have one, Andrew and Anthony, with Solar, you've got this personal loan one. Are you going to do a few deals a year? What do you think? Because it's obviously to morph into the FinTech space could really be interesting for you guys long term.

I think the goal is probably to add one every six months or so. We could add more if we wanted to, but the trick in this business is not to get ahead of yourselves and over your skis and make mistakes. It's very compliance driven, and we've got such a strong relationship with our regulators. We want to keep it that way. Slow and steady wins the race. We'll keep adding partners one or two every six months to a year or so. We've been very selective with those partners. We're getting a lot of applicants, a lot of our competitors have stumbled over the last year or so. We're getting a lot of their looks now, so to speak. Hopefully, we'll continue to add on new partners.

Great. Well, congrats on the DIV&LIFT Great Quarter. Thanks, guys.

Thank you, Matt. Thanks.

Ladies and gentlemen, this concludes today's question and answer session. I would like to turn the conference back to Andrew Marstein for any closing remarks.

Thank you again for joining us this morning. We continue to be pleased with our performance and results. We look forward to closing a great year on a strong note. We remain focused on delivering shareholder value, efficiently deploying our capital, and driving each of our businesses with excellence. 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. Have a great rest of your day.

The conference has concluded. Thank you for attending today's presentation. You may now disconnect.