Medallion Financial Corp (MFIN) 2020 Q3 法說會逐字稿

Good morning, and welcome, everyone, to Medallion Financial's 2020 Third Quarter Earnings Conference Call. By now, everyone should have access to the earnings announcement, which was released prior to this call, and which may also be found on the company's website at medallion.com.

Before we begin formal remarks, we need to remind everyone that the matters discussed on this call include forward-looking statements or projected financial information that involve risks and uncertainties that may cause the company's actual results to differ materially from those projected in such forward-looking statements and projected financial information. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. For further information on factors that could impact the company and the statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission. Each forward-looking statement and projection of financial information made during this call is based on information available to us as of the date of this call. We disclaim any obligation to update our forward-looking statements unless required by law.

I would like to introduce Mr. Andrew Murstein, President of Medallion Financial. Thank you, sir. You may begin.

Good morning, everyone, and thank you for participating in our 2020 third quarter earnings call. Joining me on today's call is our CEO, Alvin Murstein; our CFO, Larry Hall; and our Director of Investor Relations, Alex Arzeno.

Let's just jump right into the Medallion portfolio. As a result of the negative impact on the ongoing COVID-19 pandemic on the taxi industry, the company took the necessary steps of impairing our remaining medallion portfolio, thus placing all medallion loans on nonaccrual status and lowering of the New York City Medallion collateral value to $90,300 debt at the end of the third quarter, a substantial drop from the net carrying value of $119,500 last quarter. While we remain optimistic about the potential for long-term recoveries and our ability to collect, such recoveries are primarily dependent upon, among other things, the overall health of the taxi industry and cab ridership in New York City. For the first 9 months of the year, we have managed to collect $8.8 million on the Medallion-related assets.

At the end of the third quarter, the company's net Medallion lending portfolio, a loan collateral in the process of foreclosure, total Medallion-related assets stood at $85 million, which is just 5% of total assets. In terms of adjusted medallion loans on our books, that figure is now just $33.5 million or 2.5% of assets. We believe this quarter's write-downs and reserves now puts Medallion losses effectively behind us and better allows our core lending segments to become the focus of attention. We're optimistic that we will have a strong fourth quarter and strong 2021.

With that being said, let's now touch upon our consumer and commercial lending segments. Our consumer lending segments had strong growth in application volumes once again this quarter, which led to originations of $136 million for the quarter, up 9% from the 2019 third quarter. Net recreational and home improvement loan portfolios grew 13% and 36% from September 30, 2019, as demand for home improvements and recreational vehicles continues to be present in this economic environment.

Medallion Bank stayed the course of tightening credit criteria in pursuit of improving overall asset quality and was able to meet the loan demand in the third quarter. COVID-related payment deferrals in our consumer lending segments were largely resolved during the quarter, while average FICO scores at origination now are slightly below 700 in the recreational segment and just above 750 in the home improvement segment. At the end of the third quarter, Medallion Bank had $207.2 million in capital and a Tier 1 leverage ratio of 15.47%. As previously stated, the bank began originating loans for its first fintech partner this past spring. We remain optimistic we will launch our second partner in the fourth quarter. We continue to develop new leads with companies looking to partner with an industrial bank, like Medallion Bank, and will look to grow this business.

The company's net commercial lending portfolio was $68 million as of September 30, 2020, compared to the $66.4 million at the end of 2019 and $64.6 million at the end of the 2019 third quarter. No additional loans were placed on nonaccrual in the third quarter nor were any reserves taken against the loan portfolio demonstrating the commercial portfolio has remained stable. One loan was put on nonaccrual this year, and we took a partial reserve against an equity investment this quarter. Though deal flow is present, Medallion Capital will continue to be selective for the remainder of the year and still remains well diversified across a broad range of geographies and industries.

Net income for Medallion's consumer and commercial lending segments totaled $14.1 million in the third quarter and $27.4 million for the 9 months of the year.

I'll now turn this call over to Larry, who will provide additional highlights on the third quarter.

Thank you, Andrew. Net loss of $23.6 million or $0.97 per share compared to net income of $5 million or $0.20 per share in the prior year quarter. As Andrew previously stated, as a result of impairing all medallion loans, along with the uncertainty of the long-term impact of COVID-19 on our medallion lending segment, we recorded a loss of $35.9 million for that segment for the quarter. Future losses coming from our medallion lending segment should have a minimal impact on our results moving forward. It will now become more clearer than ever that our profitable and higher-yielding consumer and commercial segments should easily outweigh the unprofitable and lower-yielding medallion segments.

Excluding loan collateral in the process of foreclosure, our net medallion loan portfolio now stands at $33.5 million at the end of the third quarter, a 68% decrease from year-end and a 70% decrease from the 2019 third quarter. When including loans in the process of foreclosure and own Chicago medallion assets, total medallion exposure was $81.3 million or 5% of total assets as of September 30, 2020, compared to $164.4 million or 11% of total assets a year ago.

Our net interest margin increased to 8.72% this quarter from 8.23% in the 2020 second quarter and remained in line with the 8.71% we reported in the 2019 third quarter. The increase this quarter from last quarter reflected the increase of our interest-earning assets, which resulted in the increased yield on our performing assets. Total provision for loan losses was $39.7 million in the 2020 third quarter compared to $8.3 million in the 2019 third quarter. A large difference was driven by the $37.2 million provision we took on the Medallion portfolio this quarter. As a result of the impairment of the Medallion portfolio and the write-down in New York City and almost all other medallion market collateral values, the company recorded a net increase in reserves of approximately $24.7 million. For the 9 months ended September 30, 2020, the provision for loan losses was $73.2 million compared to $36.9 million for the 9 months ended September 30, 2019.

Consumer loans still in the state of deferral were $5.6 million or 0.5% of gross consumer loans as of September 30, 2020, compared to $35.1 million or 3.3% of total gross consumer loans as of June 30, 2020. The ultimate outcome of the deferral program continues to remain to be seen, however, it is evident that consumer loans in the state of deferral this quarter were substantially less than the second quarter as the economy begins to rebound and borrowers become current again.

The consumer loan portfolio's average interest rate was 13.87% this quarter as a result of tightening our underwriting criteria and being more selective on the loans we choose to underwrite. This compares to 14.54% at the end of 2019 and 14.67% in the same period last year, due mainly from the growth of our home improvement business outpacing the growth of our RV and marine businesses. The home improvement business grew at a rate of 37% year-over-year.

Our commercial lending segment recorded net income of $312,000 in the third quarter and $861,000 for the first 9 months of the year. The net commercial lending portfolio was $68 million at the end of the third quarter compared to $66.4 million at the end of 2019 and $64.6 million in the same period last year. The average interest yield was 13.42% compared to 13.72% a year ago.

With that, I'll now turn the call back to Andrew.

Thank you, Larry. Operator, we can now begin the Q&A portion of the call.

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

First off, I was just wondering how you guys arrived at the $90,000 value for collateral in New York City? Seems pretty conservative to me when I look at some recent transfers in the market. I'm just wondering if it, in fact, is just a conservative approach or if you think that collateral values or medallion values are actually going to drop down to that level in the near term.

Thank you, Alex. So what we usually do, and we did again this quarter, is we look at all of the transfers for the quarter and the median was correct above that number. But we rolled out a few that were non-arm's length in our view. We usually do a lot of due diligence here. We talk to the city officials about the transfers. We try to talk to brokers about what's about to go through, what has gone through. So we knocked out a couple of sales that were between $150,000 and $200,000 that the city officials kind of indicated perhaps were not arm's length. So if you knock that off, then the median is about $95,000, and we usually think about a $5,000 cost to sell a Medallion as an estimate, and that's how we got that $90,300.

In terms of future prices, it's hard to tell that the business looks like it's coming back slowly in New York City. Just the eye test will kind of tell you that if you look on the streets you'll see a lot more cabs occupied, but it's pretty hard to predict what future values might be.

Okay. And then maybe, Larry, you can kind of help us understand or remind us how the accounting works now that the whole thing is on nonaccrual. One, is there a possibility that if collateral values do rebound that there could be a write-up in the portfolio? And then just remind us, in terms of the recoveries, how they'll actually hit the P&L over the next couple of quarters should they arise?

Sure. The first part of the question on the reserves, you're always able to reverse reserves that you've booked at least back to the original amount, you can't obviously write an asset up above its original par. But you can reverse reserves. But just because of what's going on in the medallion industry for the last couple of years, it's not likely that 1 quarter would make us change our mind and do any kind of a reversal. I think we'd need to see several quarters of that kind of activity before we believe that it was really sustainable.

In terms of the accounting, I mean, basically, all the cash that comes in is most likely going to be applied to principal. If there was a charge-off that we received cash for that would be viewed as a recovery. And the other aspect of impairing everything and put it on nonaccrual, of course, is that all the accrued interest was reversed, and we won't be booking any more interest income.

Okay. And then, I mean now that it's written down, would you consider selling off the portfolio and just completely washing your hands of it or you plan to continue servicing it?

No, we'd be open-minded about selling it back. In January, right before the pandemic hit, there was a lot of interest in this sector. There were probably about 5 or more major private equity firms and funds that we spoke to who were interested in this space. They usually targeted kind of a 25% or higher return. So at some discounted level, I'd rather give those types of returns to our shareholders rather then selling them at a depressed price. But if the price was fair in our mind and we can get them entirely off of our books, I think we would probably entertain that.

Our next question comes from the line of Mark (sic) [Mike] Grondahl with Northland Securities.

A couple of questions on the medallions. One, the annualized revenue hit, is that roughly the $100 million times 4% to 5%? Just trying to figure out interesting how much of a hit that's going to take going forward. And then, Larry, if you could talk or maybe quantify for us the accrued interest that was reversed in the quarter, how big was that? How much did that contribute to the loss?

So in terms of the hit, not much. The first 9 months of this year, unfortunately, we only probably had about $86,000 of payments come in. So it's not going to really affect us in the future. If you're talking about now a $33 million loan portfolio, which is -- I've been here 30 years, it's never been anywhere near this level. $33 million at 4%, you're only talking about $1.2 million, even if everybody was paying, which they're not. So it should not have a big effect on us in the future.

Got it. And then can you talk a little bit -- just 2 questions on the consumer portfolio. One is, I think your queue is coming, but what percentage of that consumer portfolio is deferred right now or getting, like, forbearance support? And then secondly, how do we think about growth with your Tier 1 a little bit above 15%?

The consumer loans still in the state of deferral were $5.6 million or 0.5% of the gross consumer loans at September 30, and that's down sharply from roughly $35 million or 3% at the second quarter.

Yes. That portfolio has been great. We were expecting higher deferrals, honestly, and it's really been working out very well for us. In terms of the capital ratio of the bank, you're right, it's about 15.47% or so, which is still very high compared to most banks. We're probably in the top percentages. The banks in the country most have capital ratios of, I don't know, 8% to 10% or so. So this is very well capitalized. And we don't think it's going to affect consumer growth at all. The Medallions write-offs this quarter, we were kind of holding our breath to make sure that when we roll those off, it wouldn't affect it, hopefully. And what the capital ratio would be, we did know, and then we were pleasantly surprised that it was as high as it was. And the growth in consumer just keeps chugging along. I don't think the medallion business will be affecting it at all.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Andrew Murstein for closing remarks.

Thank you, Laura. And I also wanted to thank everyone for attending this morning's call. We're happy to follow up your question if it was not answered today. To that end, please contact our Investor Relations Department at (212) 328-2176 or e-mail at investorrelations@medallion.com. Thanks, everybody, and have a great day.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.