Medallion Financial Corp (MFIN) Q3 2022 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to Medallion Financial Corp.'s third quarter earnings call. Joining me today are Andrew Murstein, President and Chief Operating Officer; and Anthony Cutrone, 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 third quarter's presentation on our website at medallion.com by 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 a 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 fast followers rather than leaders 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 compared to our recreational 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 in the 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 the 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. The loan 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. The current quarter provision is in addition to the growth penalty we incur when growing our loan portfolio, which includes an increase in charge-offs in our consumer loans, lower recoveries on our Medallion loans, and higher charge-offs with respect to our commercial loan portfolio. Our operating cost 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 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. Our first question comes from 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?

Hi, Owen. How are you doing? So on the recreational 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 home improvements, our coupon sits about 8.55% and it's down slightly at 10 basis points from a year ago. The decrease from a year ago in the home improvement segment is 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 happens in a week or two. 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.

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

Growth continues to look solid. We've been working on increasing our market share. A 40% growth is notably significant, but part of it can be attributed to seasonality. Typically, we see a higher volume of applications in the second and third quarters, so we anticipate a slowdown. However, compared to last year, our outlook is quite strong regarding what lies ahead.

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

Are you still raising rates? Are you continuing to be more selective on originations and tightening? Is that still a trend? Has anything changed from the comments last quarter?

Yeah. No change there. For the past two quarters we've been increasing 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 a 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 it will 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.

Got you. That was my next question. Regarding the cost, delinquencies are very low and credit remains in excellent shape. There has been a lot of discussion about the used car market. I would like to hear more about what you're observing in the RV sector. Are the patterns similar to those in the broader used car market in the US? Has any normalization begun? Can you provide any additional insights on the trends you are noticing?

In the quarter, we did see an uptick in charge-offs. Our delinquencies remain low. We think at some point it normalizes the charge-off experience, and 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.

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've worked for Leucadia. 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 has not done really well. And even if it has done well just with cycles has heavy losses and we've never entered into that field or niches, as you know even in 2008, 2009, 2010 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 our recreational segment.

It's much higher FICO. Regarding the other income line, there was a small loss this quarter following a significant gain last quarter. How should we view this line moving forward? Will it impact the bottom line, or should we just consider it negligible? Do you anticipate long-term gains on average over time due to some of the fintech investments? Please explain how we should approach this line, given its volatility.

I think the term "lumpy" describes our earnings well, even though I wish there was a better word. In this quarter, we incurred about a $1 million charge related to one of our equity investments in our mezzanine lending division. In the previous quarter, we experienced a $4.2 million gain from that same division. So, lumpy is indeed the right term. It's difficult to forecast these exits, and when they happen, the earnings aren't steady—they're aggressive and often one-time events. Last year, we saw significant gains from a fintech investment's disposition. Unfortunately, this lumpiness is what you can expect to see in our earnings moving 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.

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. 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.