Q3 2022 Medallion Financial Corp Earnings Call

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.

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As a reminder, this conference is being recorded.

I will now turn the conference silver to Ken Cooper with 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 Murphy, President and Chief operating Officer, and Anthony Petrone, 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.

<unk> Litigation Reform Act of 1995 as amended.

Forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results could 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 call.

Reputation on our website by Disney Medallion Dot com and clicking on Investor relation presentation is near the top of the page with that let me now turn the call over to Andrew Andrew.

Thank you Ken and good morning, everyone.

We're 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 $38 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 resulting in solid loan growth for us.

Each of our consumer lending segments had a good quarter home improvement continues to be our fastest growing segment with 44% loan growth or marine and RV business with 25% growth in 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 a new loans originated.

During times of increasing rates what are 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 in this period of rising rates there is no different.

Regarding capital allocation, we declared and paid a dividend of <unk> <unk> 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 a 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 years quarter with the increase being directly attributable to loan growth and the high yields earned on our loans.

Our net interest margin was 891% 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 a 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 at 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.

Hello loss provision was $10 million up from $7 8 million in the second quarter and up from a benefit of 300000 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 and 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 of.

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 <unk> 32 cents 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 helps 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 one on your telephone keypad.

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

Okay.

Okay.

Our first question comes from the line of Mike Grondahl 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 improvement for this year as compared to last year.

Okay.

And 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 $14 21.

Weighted average on that portfolio.

On the on the home improvements are coupons, it's about 855, and it's down slightly at 10 basis points from a year ago the decrease the.

The decrease from a year ago in the home improvements.

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 that today and what was the blended rate of the portfolio at the end of September .

Sure. So the blended rate is a 163 basis points at the end of September .

Today at the end of the quarter, we we're putting on Cds and the $3 50 to $4 50 range.

They've come up slightly ahead of whatever fed action that happens in a week or two.

Last year at this time, we will probably around anywhere from 20 to 110 basis points. So theres been some pretty rapid moves.

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.

It's still very strong, but the home improvement stable consumer segment I think last quarter, you said that things could continue this could slow youre actually raising rates are tightening underwriting standards I mean any update on the outlook. It looks still very strong and just update on both segments and what youre seeing from dealers. What are you 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 so.

Part of it is seasonality, we usually have a lot more applications in Q2 and Q3. So you would expect it to slow down.

As opposed to last year I would say is very solid in terms of what we think is ahead.

I'd agree with that.

The consumer is.

Still really strong we're not seeing any significant signs of slowdown but we.

We know that Theyre coming.

Right.

We're still raising rates or are you still seeing.

We're selective on originations tightening that's still a trend that has anything changed from sort of the comments last quarter.

Yes, no change there for.

For the past two quarter was we've been we've been increasing there is 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.

This cycle.

I don't know that will be dollar for dollar.

Because we had a significantly large margin to begin with but I could see R. R.

Our topline going up 300 basis points.

When this is done.

Got you Yeah and that was sort of my next question on the cost of the delinquencies are very low the credit cost remains pristine I mean, theres been a lot out there.

About the used car market and I know you love to hear more about what youre seeing on the RV side.

Whether it's the patterns are similar to what we're seeing on the broader used car market.

In the U S.

Any normalization as it started.

Yes.

Anything any more additional color on trends you're seeing.

In the Q, we did see an uptick in charge offs or delinquencies remain loan.

Remain low.

And we think.

At some point.

It normalizes the charge off experience, 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.

For a pullback.

I'll add also that.

The management team, who has obviously done a great job for us when they were running the bank prior to us forming our bank.

Worked for Leucadia. They also went into the auto finance business.

We've never touch that to be honest, it's really a very different credit model than what we do.

Over time, the auto finance business.

<unk> done really well on and even if it is done well just with cycles has heavy losses, and we've never entered into that field.

Niches as you know even in 2008 910, when we were in a recession stope performed extremely well and we would expect to come out well out of the next recession as well.

And that experience was before we had the home improvement Division.

Which historically has a lower charge off experienced in Iraq.

Right its much higher FICO.

And then last question. The other income line I mean, there was a little bit of a loss quarter.

Quarter, there was a big gain last quarter and we have it.

We think about that that line going forward is going to is going to move the bottom line around it.

Just sort of zeroed out 18 that 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 that it's lumpy.

I think lumpy.

I wish there was a better word to describe it but we view that in the past.

During the quarter, we took about $1 million charge on.

On one of our equity investments 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 we're going to.

It's hard to predict these exits and when they occur its not a smooth.

It's not a smooth.

Earning.

It's it's aggressive it's one time last year, we had a lot of gains on the disposition of a fintech investment.

So so.

I think unfortunately.

That's the Lumpiness youre going to see in our earnings going forward.

Also to add long term.

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 that we can.

Can.

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.

Question comes from the line of Mike Grondahl from.

<unk> Securities. Please go ahead.

Hey, guys. This is Alan again.

Were there any taxi cab recoveries collected during the quarter.

Sure. Yes, we did have some it was probably about a half a million that hit the.

Hit the income statement.

I think <unk>.

Last quarter. It was some $6 million that hit the income statement.

This quarter, it's it's less we've always said that those recoveries, we expect to recover a fair amount.

But.

Similar to our the gains and the losses on the equity investments that over time produce positive results, it's lumpy and it's hard to predict those.

Okay.

Yes.

Got it and then can you break out.

I'm, sorry, I said 500000.

Actually $1 $8 million in the quarter.

Okay got it.

Total net charge offs related recreation home improvement commercial medallion can you break that out.

Yes.

It was $7 7 million.

$4 two of that related to the <unk> portfolio of $1 one was home improvement.

At $3 nine of that was commercial.

And then a million and a half dollar recovery.

And medallions.

Okay. Thank you and one more quick one.

The $10 million provision for loan losses, what was that for.

Yes.

Its that net recovery youre 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 the reserves are right around 400 basis points on the rack loans and about 175, plus or minus on the home improvement loans. So to the extent that that continues to scale that portfolio, but we do we do record provisions on that and that runs through our income statement.

Great. Thank you for answering my question.

Thank you all.

Yeah.

Thank you Les.

Ladies and gentlemen, we have reached the end of the question and answer session and now I would like to turn the conference available to Mr. Andrew Molson 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 for 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.

And have a great rest of your day and weekend ahead.

Thank you.

The conference of Medallion financial has now concluded.

You for your participation you may now disconnect your lines.

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