Q3 2021 Medallion Financial Corp Earnings Call
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Greetings and welcome to the medallion financial third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Ken Cooper of Investor Relations. Thank you Sir you may begin.
Thank you and good morning, everyone welcome to medallion Financial's third quarter earnings call. Joining me today are Andrew <unk>, President and Chief Operating Officer, and Mary Hall, 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 earlier and in our filings with the SEC.
Forward looking statements made today are as the date of this call and we do not undertake any obligation to update. These forward looking statements with that let me turn the call over to Andrew Andrew.
Thank you Ken good morning, everyone.
Had a strong quarter across the board I'll start with the highlights now.
Net income was $15 9 million, which was our fourth quarter in a row of sequential growth.
What is most pleasing is that our performance is being driven by fundamentals on strength within both our consumer and commercial lending segments.
In addition, we believe our noncore businesses continue to stabilize and their impact on our core business will further diminish.
Net interest income grew 17% to $34 1 million, resulting in a net interest margin of 9.48%, reflecting a 6% increase in our consumer loans during the quarter.
Our strong net interest margin continues to be a significant differentiator for us, placing us among the top of our peers.
Our net loan portfolio grew 15% year over year to $1.4 billion.
94% of our total net loans are in our fast growing consumer lending segments.
Experienced 26% year over year growth in our home improvement segment, which continues to be our fastest growing business.
One last highlight driving our performance. This quarter is that we had a loan loss benefit instead of a provision which reflects the strong borrower performance on our loans. The foundation of this performance is driven by our focus on consumer lending, we continue to see strength in both consumer lending segments recreation, which is.
Only tolerable rvs and boats at home improvement, which includes loans for home projects like replacement roofs, swimming pools and windows.
So I Wanna origination volumes stayed strong and helped deliver growth rates consistent with the first half of the year.
During the quarter, our net recreational loan portfolio grew 5%, although our net home improvement portfolio grew over 8%.
As mentioned earlier, the consumer portfolio represents 94% of our net consolidated total loans at 72% of our total assets.
We expect growth in our loan portfolio to continue we have a strong process of working with qualified contractors and dealers are quickly assessing the credit profile of their customers to determine borrower credit worthiness.
Furthermore, we believe there will be continued demand growth in both the recreational at home improvement markets.
One last point that our consumer lending business is that the ROE for our consumer lending segments remains strong and year to date, the ROE is 26%.
We are also expecting to grow our commercial lending business. This continues to be a solid business for us we had another good quarter of loan originations for commercial with $5 7 million of originations.
<unk> generated $1 5 million of net income in the quarter.
We announced last quarter that we are working with an investment banker strategic alternatives for our noncore assets. We moved this initiative forward during the quarter, but due to the sensitive nature of these potential transactions. We do not have a specific update for you at this time.
I'd just like to know that this is important to us and we are working hard to evaluate our options as we complete transactions, we will keep you updated.
With that I will now turn the call over to Larry who will provide additional financial highlights on the quarter.
Thank you Andy.
We had another strong quarter, making this the fourth straight quarter of driving improvement and growth in our bottom line, we delivered strong growth in our key metrics, including net interest income net income and EPS.
Our balance sheet remains strong and has continued to improve.
We had another quarter of low loan loss activity across all of our lending segments. The total provision for loan losses was a benefit of $340000 and continues to be reflective of our low net charge offs experience.
We believe loan losses, and recoveries will normalize in the future.
Ideally the normalization of our loan loss provision will be partially offset by the continued growth of net interest income.
We had a $2.7 million gain on the sale of stock in a fintech investment we made a small 250000 dollar investment in 2016, when we were able to get an early look at the business plan through our strategic partnership program development process. We.
We believe this type of early access the company's via our strategic partnership program gives us an opportunity to make investments at attractive entry points.
To be clear this investment has been a home run for us and it's not something we expect will be the norm in the future. However, we will explore making similar investments in similar companies in the future with the hope of having similar outcomes.
Moving to other financial highlights.
We continue to grow net interest income and maintain a strong net interest margin as Andy mentioned, our net interest margin of 9.48% during the quarter is on the high side when compared to our industry peers. This is a testament to our teams and our strategies.
Net interest income for the 2021 third quarter was $34 $1 million compared to $29 $1 million in the 2023rd quarter, a 17% increase.
The consumer loan portfolio's average interest rate was 12, 8%. This quarter. This compares to the 13, 9% from last year's third quarter and reflects faster growth in the home improvement area, which has higher FICO scores and lower yields than rec.
Salaries and benefits for the third quarter was in line with the second quarter at $8 million and total operating costs were $18 $7 million down $1 $1 million from the prior quarter, primarily reflective of lower collection costs and professional fees.
Gross commercial loans were $72 $1 million at the end of the third quarter compared to $69 $5 million at the end of the second quarter. The sequential growth was driven by another good quarter of loan originations.
The average interest yields for our commercial portfolio was $12 six 6% compared to $13, one 1% a year ago.
When the new loans originated in the quarter the average interest yield was 12.47%.
Lastly, a quick update on medallion segment during the quarter, we collected $7 $6 million of cash related to this segment. Our medallion exposure continues to decline standing at $47 $3 million at the end of September.
First of which is loan collateral in the process of foreclosure.
This is down 12% from the prior quarter and 42% from a year ago.
Is this exposure continues to dwindle the impact it has on our Bottomline is limited.
With that I will now turn the call back to Andrew.
Thanks, Larry a couple of more items dimension.
We continue to make slow and steady progress on our strategic partnership program with fin techs and non bank lenders during the quarter, we originated $3 million of loans, an increase from the prior quarter.
In addition, we are in the process of securing partnerships with two additional partners to bolster this program.
This remains a long term opportunity for us.
And finally on behalf of the entire medallion team I would like to say, thank you and good luck to Larry as you saw in our earnings press release, Larry has decided to retire after a 45 year career in finance.
We were fortunate to have him with us for 21 of those years, Larry has been instrumental to our relentless drive for operational excellence and strong financial discipline.
He and his team have helped us build a strong and flexible balance sheet and implement a strong process and control structure.
Plus Larry has helped us navigate and overcome the challenges we have faced over several business cycles and as our company has evolved into what where you are today.
We wish him all the best as he begins this next chapter in his life.
Larry's successor will be Anthony control, who many of you know Anthony has been with US for about 14 years and we are fortunate to be in a position to have larry's successor already on the team.
He has shown strong leadership since coming on board and he is extremely knowledgeable about our business. Although he has big shoes to fill and we do not expect him to Miss a beat.
We will make this transition over the next couple of months and we will go effective on January one 2022 again, thank you to Larry and congratulations to Anthony.
Larry and I are now happy to take your questions.
Yes.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he 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, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Steve Moss with B. Riley. Please proceed with your question.
Good morning, good morning.
Maybe just starting with loan pricing kind of curious to hear about what the competitive environment is these days and you know where your new yields are coming on port on the portfolio. These days.
We continue to have very attractive yields there.
As a little bit of new competition, but nothing outside the norm not new competition just continued I'd say.
So the spreads continue to be extremely large were doing about 14% yields in the RV and marine and about eight 9% in home improvement.
Okay.
And then just in terms.
Of loan demand and you sound pretty upbeat about the pipeline here another good quarter production as well.
I know that tends to be seasonally a weaker quarter for you guys just kind of curious as to.
Yes.
Do we expect that trend to continue here for the fourth quarter and just overall thoughts.
It is a little seasonal but the numbers are still above last year and in prior years. So we continue to.
These businesses extremely well I think home improvement grew about 26% year over year. So we'd expect the growth to continue into the fourth quarter and into 'twenty to 'twenty two.
Okay. That's helpful. And then just maybe one last one on expenses here down from last quarter, just kind of curious as to how you're thinking about the run rate into the fourth quarter.
I think there continues to be about what they are we're really thankfully for us for the first time in many years now in growth mode.
The medallion portfolio is pretty much behind us so as we grow we hope to continue to expand and add people like we've been doing in the bank, but we still have a very good mindset for cost containment and we'll continue to do that so it's a good balance now that we have we really cut back a lot on our medallion portfolio.
Overhead is that shrink and we're adding people in our RV marine and home improvement lending with the good growth that we project in the future.
Alright. Thank you very much I appreciate all the color. Thank you.
Yeah.
And as a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Alex where it all with Piper Sandler. Please proceed with your question.
Hey, good morning, guys good morning, Alex.
Hey, first off Larry Congrats on the retirement, good luck with everything in the future.
You very much.
Was hoping that maybe you could elaborate a little bit more when he talked about in your prepared remarks about the provision normalizing. If you had any sort of sense in that and so the timeframe kind of when you put all the moving parts and kind of in the post pandemic world.
I guess, what sort of how you think about a normalized provision level and sort of when we might see that.
Sure I mean, if you look at the.
The reserve levels and the loss levels over the last 15 years or so that the bank has been a part of the operations they've mostly normalized at around 2.5% to 3% loss rates and you know were obviously significantly below that and actually ended up in a net recovery position in the rec portfolio in this quarter. So that's not sustainable I'd say its way to get it resolved.
But you know where we're glad that it's happened it's helpful to the numbers this quarter.
But we expect to you know down the road sometime probably next year I will get back towards more normalized 2.5% to 3%.
Okay, but you're not seeing anything right now in the early trends that suggest that we're going to get there in the next couple of quarters. That's just sort of common sense expectation as things start to normalize correct.
Okay, Great and then I was just curious.
Lauren curve now has I think four rate hikes between now and the end of 'twenty two 'twenty three I'm just curious if anything's changed on your funding strategy in the consumer book just.
Just given that it's a.
Most of the C D driven.
We think the spreads will continue to be very strong as the older Cds roll off we're putting new ones on it at all.
50 basis points or more below that cost.
And then we have some long term debt that we've been raising over the last several years.
And that should be lowered also we're not going to be able to prepay any of that debt for about two years or so I think that's about 7.5% to 8.5% rates. So if we're putting it on our books today it would be significantly lower hopefully rates stay where they are and we'll be able to pick up some more cost savings when those.
Rollover and about a year and a half two years.
So you're not doing anything at this point to extend the CD maturities or anything like that just to kind of lock in current funding.
There we're doing a mix you know we're trying to really match everything that we can since the margins are so healthy so not really try to guess what's happening with rates and just luck in our spreads.
Okay, Great and then you know just given the really strong performance on the consumer book and I think you said it a little bit of increased competition I'm. Just wondering if anything has changed in terms of your underwriting in sort of the credit standards, either that or the marine RV or the or the home improvement just to make sure that you guys get it leased.
Your fair share of the volume.
Credit standards have been very strong, especially over time, if you look at the portfolio now versus.
Say 510 years ago, we've been greatly strengthening the credit in the last recession in 2008, nine or so average FICO on RV and marine would probably about 600 and now they're probably about 660 at home improvement lending. We don't even have back then you can start that till 2012.
And that has an average FICO of about $7 60 today. So overall the portfolio is really strengthened over time.
Okay, and and in terms of sort of your willingness to put on new customers has anything changed in sort of the acceptance rate just given how strong the consumers today.
No. We've we've continued to basically maintain the way we've always thought about this business, it's a big market for us.
Selective with our customers, we can afford to be when we're starting with such a small base of $1 billion or so of loans. So I think we'll probably continue that trend. This worked very well for us.
Great and then just a final question for me I'm, just curious if you're seeing any slowdown.
Just due to sort of supply chain issues and you know certainly in an auto we're hearing about it.
You know its supply issue as you know potentially impacting auto at some banks I'm just curious if you're seeing the same thing and that marine RV segment.
Thankfully, we have not that hasn't really come across us yet so so far our production and are buying of those assets are remain very strong.
Thank you for taking my questions.
Thank you Alex.
Our next question comes from the line of Bill does Allen with Titan Capital Management. Please proceed with your question.
Thank you would you please.
Walk us through how the $7 6 million collection in the medallion portfolio.
How that flows through the <unk>.
<unk> to the bottom line or if there are cost associated with that sure.
Sure and I'll, let Anthony comment on that.
Hey, Bill.
So so there's actually no income statement effect with this this is actual cash we receive it as essentially reducing our loan exposure and our loans in the process of foreclosure exposure.
That 7.61, and a half million of it comes from our loan portfolio and the balance is related to those other assets.
The costs are we had collection costs in.
In the quarter.
Of $200000, which includes a $500000 recovery so excluding that it was it was 700000.
So essentially yes.
It's not a benefit to the P&L, but it is a cash flow benefit is they are is the proper way to look at it that's correct.
Thank you that's helpful and then relative to the to the Fintech.
Opportunities would you walk through kind of more of a detail behind.
Whats Youre looking at for your next incremental steps that magnitude.
How large those could be in and I guess I'll pause there.
Whereas our two strategic partners currently.
For those of you that don't know about that business. We started it a couple of years ago. I think it holds a lot of promise for us. It's still very small now we only generated about $3 million of loans or so for the quarter, but it's a great way for the bank to earn extra fee income the loans are sent to the bank the bank funds them and then there.
Purchased back in the bank earns a fee so they have very little to almost no credit risk on it.
The hope is that we're going to sign another two partner is within the next three to six months or so so we'll double the program from two to four I don't expect it to really be significant probably until about a year from now or so it kind of has to build up in time, but.
But other banks are doing very large volume there and it's been a very profitable so that that's our goal as well.
Neither of these two new relationships or are you anticipating them to.
To be meaningful contributors or the couple of years a year from now when you're anticipating initial program to be beneficial and it's really the aggregate of all four that will that will matter.
The two new ones, if and there's no guarantees that they will come on board, but if.
If they do what one one or both of them actually it could be meaningful there they're larger than the current partners, but you know it's hard to tell it's not within our control as their business their business model their really.
Looking at building up quickly the Fintech sector. As you know is really doing extremely well. These days. So the hope is certainly that their volume is a lot.
Higher than where our two have been the last year or so, but it's it's out of our control.
Great. Thank you and congratulations to you Larry Ann to you Anthony both.
Thank you so much thanks Bill.
Hi.
Thank you we have reached the end of the question and answer session. Mr. Mercy and I would now like to turn the floor back over to you for closing comments.
Thank you as you can tell we're very pleased with the performance and where we're headed with our growth strategy.
You all for participating today and your interest in medallion. If you have additional questions feel free to contact our investor relations team. They can be reached at 212328 to $1 seven six or at Investor relations at medallion Dot com.
Thank you and have a great day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a good day.
Okay.