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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 D. 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 non-core 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 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 predominantly towable RVs and boats, and 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 and 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 remains 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 non-core 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 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 $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 a 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 third quarter was $34.1 million compared to $29.1 million in the 2020 third 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. This 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 this 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 the call 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 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. 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 it 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.
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 you 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 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. 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, you know, 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. We continue to grow these businesses extremely well. I think home improvement grew about 26% year-over-year. We'd expect the growth to continue into the fourth quarter and into 2022.
Okay. That's helpful. Just maybe one last one on non-op ex expenses here, down from last quarter. Just kind of curious as to, you know, 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 thankful for the first time in many years now in growth mode. You know, the Medallion portfolio is pretty much behind us. As we grow, we hope to continue to expand and add people like we've been doing in the bank. We still have a very good mindset for cost containment, and we'll continue to do that. 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.
All right. Thank you very much. Appreciate all the color.
Thank you.
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 Twerdahl 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.
Thank you very much.
I was hoping that maybe you could elaborate a little bit more when you talked about your prepared remarks about the provision normalizing, if you had any sort of sense on sort of the timeframe, kind of when you put all the moving parts in kind of 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, you know, 15 years or so that the bank has been a part of the operations, they've mostly normalized at around 2.5%-3% loss rates. You know, we're obviously significantly below that and actually ended up in a net recovery position in the rec portfolio in this quarter. That's not sustainable. It's way too good a result. You know, we're glad that it's happened. It's helpful to the numbers this quarter. We expect that, you know, down the road sometime probably next year, we'll get back towards more normalized 2.5%-3%.
You're not seeing anything right now in the early trends to suggest that we're gonna get there in the next couple quarters. That's just sort of the common sense expectation as things start to normalize.
Correct.
Okay, great. Then, you know, I was just curious, you know, the forward curve now has, I think, four rate hikes between now and the end of 2023. I'm just curious if anything's changed on your funding strategy on the consumer book, you know, just given that it's, you know, 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. 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 gonna be able to prepay any of that debt for about 2 years or so. I think that's about 7.5%-8.5% rates. If we were 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. You know, we're trying to really match everything that we can since the margins are so healthy. Not really try to guess what's happening with rates and just lock in our spreads.
Okay, great. 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's 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, you know, 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, 9 or so, average FICOs on RV and marine were probably about 600, and now they're probably about 660. Home improvement lending, we didn't even have back then. We didn't start that till 2012. That has an average FICO of about 760 today. Overall, the portfolio's really strengthened over time.
Okay. In terms of sort of your willingness and 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. I think we'll probably continue that trend. It's worked very well for us.
Great. Then just a final question from me. I'm just curious if you're seeing any slowdown, just due to sort of supply chain issues. You know, certainly in auto, we're hearing about, you know, supply issues, you know, 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.
Thank you for taking my questions.
Thank you, Alex.
Our next question comes from the line of Bill Dezellem with Tieton Capital Management. Please proceed with your question.
Thank you. Would you please, like, kind of walk us through how the $7.6 million collection in the Medallion portfolio flows through to the bottom line or if there are costs associated with that?
Sure. I'll let Anthony comment on that.
Hi, Bill. There's actually no income statement effect with this. This is actual cash we received. It's essentially reducing our loan exposure and our loans in the process of foreclosure exposure. That's $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. Excluding that, it was $700,000.
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.
Thank you. That's helpful. 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? 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 gonna sign another 2 partners within the next 3-6 months or 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. Other banks are doing very large volume there, and it's been very profitable. That's our goal as well.
In either of these two new relationships, are you anticipating them to be meaningful contributors? A year or a couple or a year from now, when you're anticipating this whole program to be beneficial, it's really the aggregate of all four that will matter.
The two new ones, 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, you know, 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 two have been the last year or so, but it's out of our control.
Great. Thank you and congratulations to you, Larry, and to you, Anthony, both.
Thank you so much.
Thanks, Bill.
Thank you. We have reached the end of the question and answer session. Andrew 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 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.