Ladies and gentlemen, good morning and welcome to the Medallion Financial Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ken Cooper. Please go ahead.

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 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 will turn it over to Andrew Murstein, President.

Thank you, Ken. Good morning, everyone. Medallion Financial had a strong third quarter that culminated with our best earnings for the 9 months ended September 30 in any year since our IPO over 27 years ago. In the third quarter, we generated $11.2 million of net income and $0.48 of earnings per share. Year-to-date, we are at $40.8 million of net income and $1.77 of earnings per share. These results have again been driven by higher than normal originations in our consumer lending, solid results from our commercial lending, continued success in cash collections from our taxi medallion loans, and a successful effort to leverage our operating costs. We have been clear for some time now that our strategy is to grow net interest income by offsetting rising cost to borrow with continued growth in loan originations. We have done that for another quarter, even as origination activity has started to normalize back to historical levels. As we look to the future, we will continue to take proactive steps to raise our credit standards and increased pricing. With total assets at over $2.5 billion, we anticipate loan growth to moderate from the levels we have seen over the past 2 years, which should enhance earnings with reduced credit allowances needed at origination. This provides more flexibility and options for us to consider around capital allocation, such as the 25% increase in the dividend of board authorized starting next month, which enhances shareholder returns. Moving to the update for each of our segments. Our Consumer Lending business had another quarter of heightened activity of originations. We believe this robust origination activity is due to our target customer, still being active in purchasing towable RVs, small boats and single project home improvements. These all have active markets today as compared to the…

Thank you, Andrew. Good morning, everyone. For the quarter, net interest income grew 16% to $48.8 million from the prior year, driven by increased interest rates on new originations, coupled with the loan growth we’ve experienced since the prior year. These two factors have been able to counteract the rising cost of funds we continue to experience. Our net interest margin on gross loans was 8.35% for the quarter, as compared to 8.48% in the second quarter and 8.63% in the prior year quarter. The compression in net interest margin is related to two things. First, home improvement lending has been the fastest-growing component of our consumer lending business. With these fund credits having a much lower interest rate than compared to our much larger recreation portfolio. The second is the rising cost of funds we are experiencing in tandem with the current interest rate environment. Although we have been successful in increasing our own rates, it is not on a one-to-one basis. Specific to originations, we are currently writing at an average rate of 11.75% on home improvement loans, up from approximately 9% a year ago at an average rate of approximately 16.25% on recreation loans, up from 14.75% a year ago. In addition to passing along interest rate increases, we continue to take proactive measures to tighten credit in our consumer lending. At the end of 2018, sub-prime loans were 66% of the recreation portfolio. Today, some prime loans are 38% of that portfolio. Our provision for credit loss was $14.5 million for the quarter, compared to $10 million in the prior year quarter. The increased provision is primarily a result of one, the continued normalization of loss experience in our consumer portfolio up from the unprecedented lows experienced during the pandemic and two, the growth of our…

Thank you. [Operator Instructions] Our first question comes from the line of Mike Grondahl with Northland Securities. Please go ahead.

Hey, guys. Thanks a lot. Two questions maybe to start off with. Could you kind of give us a sense of your margin outlook going forward? And then, Anthony, I think we typically get net charge-offs kind of by-category in dollars and percent. Could you also provide those?

Sure. So with regards to the margin, we still believe, as we’ve said for a couple of quarters that there is going to continue to be compression. But we think we bottom out at around 8% net interest margin. We still have a ways to go in terms of our cost of funds rising. But I think what’s important to note is, that we’ve passed along, especially in the most recent year, a large number of increased rates on new originations. So we think as we get closer to the top of the credit cycle, there’ll be a little bit more compression. But then as we’ve increased the rates on – and our book matures in terms of a higher average interest rate, that should help us long-term.

Got it. Got it. So a couple of more quarters of compression until you hit about 8%. Is that the – did I hear that right?

Yes, I think that’s fair. And obviously, what the Fed decides to do is going to be a catalyst for a lot of things, but that’s how we’re seeing it. And to your other question about charge-offs for the quarter, charge-offs in rec and home improvement were $9 million and $3 million. Commercial was 0, and we had $1.7 million of recoveries on taxis.

Got it. And then on your CDs, what was the average rate you’re paying at the end of 3Q, kind of compared to market?

We’re probably about 150 to 175 basis points below, what a current 3-year CD would be? So we think we creep up. And again, that goes back to what we were just talking about. We – our cost of funds is going to increase towards that $475 ish $500 level over the next several quarters. But again, our top line is going to continue to increase as we’ve seen it do for the past several quarters now.

Yes. You’ve done a good job of raising yield. That’s for sure. And then Andy, two questions for you. One, how are you thinking about the $160 million of debt at the holding company, as you get these taxicab medallion collections? And then secondly, how are you thinking about 2024?

So let me just also touch on the net interest margin. The net interest income, we expect, of course, to increase, just to be clear there. So the margin is, Anthony has been saying accurately for several quarters now, it should go down to about that 8%. But as the portfolio grows, the margins continue to shrink, but the net interest income continues to increase. Because of the volume of the portfolio, the originations. The debt amount, we think is conservative at that level. We’re not really leveraged too much. We’ve always operated, as you know, Mike, you’ve known us for many, many years. So for about 30 years, we were a regulated investment company, BDC, so we were limited to about 1:1 debt-to-equity. So we’ve always kind of operated at a low leverage ratio. So we refinanced that debt, as you know, that was nice to put behind us. We have debt coming due in March 2024, which we refinanced as we announced on September 30. So we don’t anticipate adding significant new debt, if any debt at all for the next year or so. In terms of the outlook for 2024, I’d say, overall, we’re pretty optimistic as the numbers continue to show and the results continue to show. We’ve had strong loan demand in RV, Marine, Home Improvement. Mezzanine continues to be very strong, too. This is probably one of the highest deal flow we’ve seen from that division in the 25 years that we’ve owned them. So across the board, continued growth, hopefully, more collections from the Medallion portfolio. We’ve done a great job collecting on a lot of loans there. We still owe about $200 million, and we will do whatever we can to collect as much of that. You have congestion pricing hitting New York City soon. So that could be a boost for Medallion prices when they try to keep consumer cars out of the city, more people ideally will be taking taxis as well as Ubers. And we increased the dividend. So as everybody can kind of sit back and watch the growth in 2024, they’ll be able to receive a $0.40 per share dividend. So overall, I’d say we’re bullish on the year ahead.

Great. Hey, thanks, again.

Thank you.

Thank you. Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Hi. Andrew, did I hear you say that there was $200 million in Medallions outstanding?

That’s where we’re owed, correct. As you know, they are written down to a much lower number. It’s less than 1% of our assets today, but that’s how much legally we’re owed. The collections can come through by either for closing on the Medallions, which are worth about $150 million or so now in New York City. We’re carrying them, as you know, at a lower number. But all these – and we’ve been saying this for many, many years, all the loans have personal guarantees attached to them. So thankfully, we’re seeing a lot of settlements this year. I don’t know if the borrowers are bullish on the congestion pricing plan. we’re just business in general, but they are coming in and settling with us. So hopefully, that continues.

Got it. For the $9.4 million medallion recovery in the fourth quarter, why is that a gain? Shouldn’t that be a recovery?

So yes, I know it is a recovery. It’s going to be a benefit in our provision. So this – these assets had been written down to a book value of $1.4 million. So it’s the difference between the cash collected and the asset that goes away, that’s the $8 million.

Okay. So that’s simply just – we could potentially have a lower loan loss provision than normal, right?

Right. Yes. So that $8 million should all flow through as a benefit in the loan loss provision. That’s correct.

And then where are you thinking of taking the reserve ratio?

Yes. So currently, we’re around $420 million on rec and just about $220 million or so on Home Improvement. We think those are good numbers. So in connection with the adoption of CECL on January 1, we’ve got a – we do a lot more quantitative forecasting, and we look at future expected losses. If the economy were to take a sudden downturn, which we’ve been expecting that – those rates could step up. But if we continue with the pace of where we are, we think those are good numbers, and that’s where the allowances should remain.

Okay. And then given a final question. Given your comments in terms of loan growth to moderate, should we expect relatively, what does moderate mean? I mean, is the sort of growth rate you’re looking?

Yes. So I think in the 9 months, consumer loans grew around 16%. And we’ve been experiencing 20% to 30% growth year-over-year in those two categories. And that was good. And we intentionally did that and made those took the opportunity to take these recoveries and this capital, that we generated from these Medallion collections and reinvest it in the business. I think going forward, we would expect somewhere in the ballpark of 8% to 12% growth, with the ability to increase that or decrease it as necessary. I think growing at 20% is different when you’ve got $100 million – $1 billion balance sheet as opposed to growing at 20% when you’ve got a $2.5 billion balance sheet.

Good, that’s for me. Thank you.

Thank you. Our next question comes from the line of Matt Howlett with B. Riley Securities. Please go ahead.

Thanks for taking my question. Another fine quarter. And there just seems to be this disconnect between you guys are performing what the market views you at. And I want to get to that. But the first question is the – with the moderation in loan growth, the excess capital, I mean you just raised the dividend, you have a high-class problem, you have a lot of capital, you are above I think 15%, well above 15%. And it looks like you will generate more capital. You got that gain coming into the third quarter. So, you already got sort of $0.25 in the bank already. My question to you is, could you – what do you think about in terms of excess capital, could you get more aggressive buying another platform, buying back shares? Just talk to me about what you have been running at this breakneck speed in loan growth as good as slow. It’s going to free up a lot of capital, you have got great earnings. Anything we should think about plans with that capital?

I think we are always looking at new businesses and acquisitions. It’s really not a good time to go off base and go into new lines of business. All of our businesses are doing so well, so we are going to continue to focus on them. I would say that we probably have a lot of good options, since we don’t plan on going into new businesses. That could be buying back more stock. Last year, I think we bought about 10% of the company back in 2022. The buyback is another $20 million to go. It lets us raise the dividend as you stated. We are now paying $0.40 a share, so we raised 25%. So, we can put more money into the bank if need be. If we are surprised and loan growth is stronger and we are able to really pass on a lot of the increases in prices to our borrowers and charge more, that’s always a good option for us too, but it’s nice to have options.

Yes. And I think the one thing that I would add to that is we do have a large amount of capital, regulatory capital at the bank, we also have a high minimum that we have got to maintain, a 15% capital maintenance ratio that, as you are aware. So, given the size of book that we have now, a slight deviation because of CECL, in what we need to record as an allowance, could have a meaningful impact on that ratio. So, if we need to stay at 15%, staying just above 15% at the size we are, doesn’t actually – it doesn’t work for us. So, we need a larger buffer to account for that variability, which we haven’t yet experienced in the nine months since we have adopted CECL. But if the economy does take a downturn, we might. And I think that’s why we want to make sure that we have got ample capital cushion, as well as to what Andrew said, increasing the dividend and providing other shareholder returns that we can.

Yes. Look, it’s a high-class problem to have. It looks like your capital generation is only going to increase. So, when I look at Slide 11, I think the charge and most of the banks have been out there saying charge-offs on their credit card or auto is going to be kind of pre-pandemic levels by early next year. You guys are a little bit – you guys are – you guys are not quite there, but you are almost in charges. When I look at that chart, though, given the movement up in credit, the FICO, the more home improvement you have, I mean that you kind of show a 6% charge-off in 2009, but it doesn’t seem like you would ever – get ever close to that even if we go into a major recession.

Yes. We hope not. I think what I said earlier is important. Just in 2018, two-thirds of our recreational portfolio was subprime. In subprime, that’s the regulatory definition, 660 FICO. Today, that’s a third. So, we have drastically changed the credit quality of this portfolio over a number of years. And we hope that, that – as well as in the past year, stepping up the rates that we are getting on new origination. So, we think that all of those things are good steps and should help us undoubtedly when we hit the next downturn.

Yes. And then my final question is for both of you and especially Andy, you have been obviously running the company a long time, what’s the disconnect here, between the numbers you are putting out that 20-plus ROEs, the significant discount to book, what’s the disconnect between your performance in the market? Are people just looking at prior cycles or looking at the banks, they are not appreciating your underwriting, you are moving up in credit, all your pricing, I mean what’s – can you just maybe just go over that for me. Thank you very much.

Yes, that’s a tough one to answer. It’s a great question, though. Years ago, you are right, we have been at this a long time in the late ‘90s, I think we were making $1 a share. The stock was at 30%. We are trading at 30x earnings. Now we are at, as you pointed out in your note this morning, Matt, I don’t know, 3.5x earnings, kind of shockingly low. So, I really hope we just can get in front of more buyers, more institutional buyers. It doesn’t take much to move the needle if we can get some good institutional support in the stock and a large volume of stock being bought that will surely drive up the price. And we are doing more conferences, getting more eyeballs, getting more phone calls these days. So, I just think if we continue to produce, it’s going to be hard for the market to endure so much longer.

Yes. Look, the taxi medallion is now a tailwind for you, given you already had $8 million in pretax again in October, was that – did I read that correctly?

Yes, exactly. Yes, that’s been icing on the cake for us to last, or pretty big cake, I guess because we are collecting a lot of money there. So, we will continue to do so, I hope. Again, the business is picking up the Medallion business. It bottomed down at about $79,000 Medallion. It’s been picking up ever since the last few years.

Yes. And I would just add that this is consistent what we are experiencing in the Medallion space right now. It’s consistent with what Andrew and management here has been saying all along. If you go back a number of years, when we were in the height of the issues that the taxi medallion space was encountering, we always knew and we were transparent about it, that eventually, we get to a point where the prices aren’t going to go down any further. And at that point, then we would benefit, as we had already taken the pain. So, I think that’s what we have experienced not just the past nine months, but also last year as well.

Well, it just looks like there is significant off-balance sheet value of those taxis. It’s obviously a huge tailwind to your earnings going forward on top of really great performance. And hopefully, they will see – people will see the performance, versus what we are seeing from the banks, what the problems they are experiencing and some of your performance, so congratulations. Thanks Anthony and thanks Andy.

Thank you, Matt.

Thank you.

Thank you. As there are no further questions, I would now hand the conference over to Andrew Murstein, President for any closing comments.

Thank you again for joining us this morning. Our company is doing well and we have a lot to be proud of. We are working hard and seeing great results that position us well to continue to deliver shareholder value. 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. Thanks again and have a great rest of your day.

Thank you. The conference of Medallion Financial has now concluded. Thank you for your participation. You may now disconnect your lines.