Medallion Financial Corp (MFIN) 2021 Q3 法說會逐字稿

Greetings, and welcome to the Medallion Financial Third Quarter 2021 Earnings Conference Call. (Operator Instructions) 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 Murstein, President and Chief Operating Officer; and Larry 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. 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.

With that, let me turn the call over to Andrew. Andrew?

Thank you, Ken. Good morning, everyone. We had a strong quarter across the board. I'll start with the highlights. 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 and 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 the 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. We 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 our 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 predominantly towable RVs and boats at home improvement, which includes loans for home projects like replacement roofs, swimming pools and windows. Loan origination volume 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%, and our net home improvement portfolio grew over 8%. As mentioned earlier, the consumer portfolio represents 94% of our net consolidated total loans and 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 at quickly assessing the credit profile of their customers to determine borrower creditworthiness.

Furthermore, we believe there will be continued demand growth in both the recreational and home improvement markets. One last point in our consumer lending business is that the ROE for our consumer lending segments remain strong. 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. The segment generated $1.5 million of net income in the quarter.

We announced last quarter that we are working with an investment bank on 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 note 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 in 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 $340,000 and continues to be reflective of our low net charge-off 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 the fintech investment. We made a small $250,000 investment in 2016 when we were able to get an early look at the business plan through our strategic partnership program development process.

We believe this type of early access to companies 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 is 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 3rd quarter was $34.1 million compared to $29.1 million in the 2020 3rd 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 yield for our commercial portfolio was 12.66% compared to 13.11% a year ago. For the new loans originated in the quarter, the average interest yield was 12.47%.

Lastly, a quick update on our Medallion segment. During the quarter, we collected $7.6 million of cash related to the segment. Our Medallion exposure continues to decline, standing at $47.3 million at the end of September, most of which is loan collateral in the process of foreclosure. This is down 12% from the prior quarter and 42% from a year ago. As this exposure continues to dwindle, the impact it has on our bottom line is limited.

With that, I will now turn it back to Andrew.

Thanks, Larry. A couple more items to mention. We continue to make slow and steady progress on our strategic partnership program with fintechs and nonbank 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 2 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 we are today. We wish him all the best as he begins this next chapter in his life.

Larry's successor will be Anthony Cutrone, 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, we do not expect him to miss a beat. We will make this transition over the next couple of months and will go effective on January 1, 2022. Again, thank you to Larry, and congratulations to Anthony.

Larry and I are now happy to take your questions.

(Operator Instructions) Our first question comes from the line of Steve Moss with B. Riley.

Maybe just starting with loan pricing, kind of curious to hear about what the competitive environment is these days and where your new yields are coming on the portfolio these days?

We continue to have very attractive yields there. There's 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. We're doing about 14% yields in the RV and marine, and about 8%, 9% in home improvement.

Okay. And then just in terms of loan demand, Andrew, you sound pretty upbeat about the pipeline here. I mean, another good quarter of production as well. I know this tends to be seasonally a weaker quarter for you guys. Just kind of curious as to -- 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 prior years. So we continue to grow 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 2022.

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 they'll continue to be about what they are. We're really thankfully, 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 as that shrank, and we're adding people in our RV, marine and home improvement lending with the good growth that we project in the future.

(Operator Instructions) Our next question comes from the line of Alex Twerdahl with Piper Sandler.

First off, Larry, congrats on the retirement. Good luck with everything in the future.

Thank you very much.

I was hoping that maybe you could elaborate a little bit more when you talked about in your prepared remarks about the provision normalizing, if you had any sort of sense on sort of the time frame kind of when you put all the moving parts in kind of in this post-pandemic world? I guess, like 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 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 we're 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. It's way too good a result, but we're glad that it's happened. It's helpful to the numbers this quarter. But we expect down the road, sometime probably next year, we'll 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 the common sense expectation as things start to normalize?

Correct.

Okay. Great. And then I was just curious, the forward curve now has, I think, 4 rate hikes between now and the end of 2023. I'm just curious if anything has changed on your funding strategy on the consumer book just given that it's mostly CD-driven?

We think the spreads will continue to be very strong. As the older CDs roll off, we're putting new ones on at 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 2 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 roll over in about 1.5 years, 2 years.

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?

We're doing a mix. 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 lock in our spreads.

Okay. Great. And then just given the really strong performance on the consumer book, and I think you cited a little bit of increased competition. I'm just wondering if anything has changed in terms of your underwriting and sort of the credit standards, either the marine RV or the home improvement just to make sure that you guys get at least your fair share of the volume?

Credit standards have been very strong, especially over time. If you look at the portfolio now versus, say, 5, 10 years ago, we've been greatly strengthening the credit. In the last recession in 2008, '09 or so, average FICOs on RV and marine were probably about 600, and now they're probably about 660. And home improvement lending, we don't even have back then. We didn't start that until 2012. And that has an average FICO of about 760 today. So overall, the portfolio has really strengthened over time.

Okay. 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 consumer is today?

No. We've continued to basically maintain the way we've always thought about this business. It's a big market. We're 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 that's 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 certainly, in auto, we're hearing about supply issues potentially impacting auto at some banks. I'm just curious if you're seeing the same thing in that marine, RV segment?

Thankfully, we have not. That hasn't really come across us yet. So far, production and buying of those assets remain very strong.

Our next question comes from the line of Bill Dezellem with Tieton Capital Management.

Would you please kind of walk us through how the $7.6 million collection in the Medallion portfolio, how that flows through the -- to the bottom line or if there are costs associated with that?

Sure. And I'll let Anthony comment on that.

So there's actually no income statement effect with this. This is actual cash we receive. It's essentially reducing our loan exposure and our loans in the process of foreclosure exposure. That $7.6 million, $1.5 million of it comes from our loan portfolio and the balance is related to those other assets. The costs, we had collection costs in the quarter of $200,000, which includes a $500,000 recovery. So excluding that, it was $700,000.

So essentially, it's not a benefit to the P&L, but it is a cash flow benefit is the proper way to look at it.

That's correct.

That's helpful. And then relative to the fintech opportunities, would you walk through kind of more of detail behind kind of what you're looking at for your next incremental steps, the magnitude of how large those could be? And I guess I'll pause there.

We're at 2 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 they're purchased back and 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 2 partners within the next 3 to 6 months or so, so we'll double the program from 2 to 4. 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 other banks are doing very large volume there, and it's been very profitable. So that's our goal as well.

And either of these due new relationships, are you anticipating them to be meaningful contributors? Or the couple -- or the year from now when you're anticipating this whole program to be beneficial, it's really the aggregate of all 4 that will matter?

The 2 new ones, if -- and there's no guarantees that they'll come on board, but if they do, one or both of them actually could be meaningful. They're larger than the current partners. But it's hard to tell. It's not within our control. It's their business, their business model. They're 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 2 have been the last year or so, but it's out of our control.

Great. And congratulations to you, Larry, and to you, Anthony, both.

Thank you so much.

Thanks, Bill.

We have reached the end of the question-and-answer session. Mr. Murstein, 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. Thank 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 (212) 328-2176 on or at investorrelations@medallion.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.