Medallion Financial Corp (MFIN) 2020 Q2 法說會逐字稿

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

Before we begin formal remarks, we would need to remind everyone that matters discussed on this call, including 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 or projection of financial information made during this call is based on information available as of the date of this call. We disclaim any obligation to update any forward-looking statements unless required by law.

I would now like to introduce Andrew Murstein, President of Medallion Financial.

Good morning, everyone, and thank you for participating in our 2020 second 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. Company executed on our strategy in the second quarter of growing our profitable consumer and commercial lending segments while reducing our total Medallion-related exposure despite a rather challenging operating environment.

Let me start with providing an update on the Medallion portfolio. The company's net medallion lending portfolio, excluding loan collateral in the process of foreclosure, at the end of the second quarter, was $84.4 million, a 20% reduction from the end of 2019 and a 30% reduction from the 2019 second quarter. When looking at medallion Bank on a stand-alone basis, their total net medallion exposure was 7.4% of their total assets and net medallion loans were 8.7% of the bank's net loans receivable as of June 30. The medallion collateral value in New York market dropped slightly from $130,000 gross or $124,500 net at the end of the first quarter to $125,000 gross or $119,500 net at the end of the second quarter. It is still evident that the industry continues to be impacted by COVID-19 with a sharp reduction in overall cab ridership.

Our focus is to get our Medallion lending segment to a breakeven over the next few quarters while focusing on the recovery and collections process. Spite of the economic uncertainty resulting from COVID-19, our consumer lending segment had strong growth in application volumes during the quarter. This was a result of the demand we saw for our products as consumer spending continues to shift away from traditional entertainment and air travel to staycations and leisure activities that provide less contact. In addition, we have seen an upswing in demand for home improvements as our home improvement portfolio grew 14% from the end of 2019. Medallion Bank also tightened its credit criteria in pursuit of improving asset quality and has been able to meet the loan demand that is seen, which ultimately resulted in the consumer portfolio now reaching an all-time high of $1.04 billion in outstandings as June 30, 2020.

Consumer originations were $150.9 million in the second quarter, up from $136.2 million in the prior year period and $103.1 million in the 2020 first quarter. We believe that the bank is well positioned to move forward and continue to grow. At the end of the second quarter, Medallion Bank had $223 million in capital and a Tier 1 leverage ratio of 16.96%.

Second quarter, the bank began originating loans for its first fintech partner. Due to the pandemic, originations have been slower than anticipated. However, we look to get back expected lending levels as things normalize. We continue to see a steady stream of potential partners that fit our criteria and are still on target to have another partner signed up before the year is over. We will continue to provide updates on the progress of our strategic partnership program during our quarterly earnings.

Company's net commercial lending portfolio was $68.1 million as of June 30, 2020, compared to $66.4 million at the end of 2019 and $60.4 million at the end of the 2019 second quarter. Credit quality has remained solid as only one loan was put on nonaccrual in the first 6 months of the year. As a result of this improved performance across the portfolio and the government loans to Medallion Capital's portfolio companies, there are no major concerns at this time. The portfolio is diverse, and we will continue to monitor it closely. In addition, we were just approved for an additional $25 million of SBA leverage. Deal flow and demand has increased compared to prior quarters. Medallion Capital remains well capitalized to continue to grow. However, they will continue to do so on a very selective basis.

Net income from Medallion's consumer and commercial lending segments totaled $9 million in the second quarter compared to $7.7 million in the 2019 second quarter, a 17% increase.

I'll now turn the call over to Larry, who will provide additional highlights of the second quarter.

Thank you, Andy. Net loss was $4 million or $0.16 per share compared to a net loss of $7.5 million or $0.31 per share in the prior year quarter and the loss of $13.6 million or $0.56 per share in the 2020 first quarter. Given the current environment, along with the uncertainty of the long-term impact of COVID-19 on our consumer and medallion lending segments, the company increased its loan loss provisions by an additional $6.8 million in the second quarter.

Our net interest margin remained strong at 8.23% in the 2020 second quarter, down from 8.80% last quarter and 8.46% in the 2019 second quarter. The decreases reflected the impact of our increased liquidity as we took in additional broker deposits as an abundance of caution in this environment and reserves established for potential COVID-related deferred interest that may not be collectible. Over time, our higher-yielding consumer and commercial segments will continue to outweigh the lower-yielding medallion segment as the former continues to grow and the latter reduces quarter after quarter. Total provision for loan losses was $16.9 million in the second quarter compared to $16.5 million in the prior quarter and $15.2 million in the 2019 second quarter.

Excluding loan collateral in the process of foreclosure, our net medallion loan portfolio decreased to $84.4 million at the end of the second quarter, a 20% decrease from year-end and a 30% decrease from the 2019 second quarter. When including loan collateral in the process of foreclosure, the company's net medallion assets were $130.5 million or 8% of total assets as of June 30, 2020, compared to $172.7 million or 12% a year ago.

Loan delinquencies on the medallion side were lower this quarter as a result of the COVID-19 deferrals. However, medallion loans deferred and that were in the state of deferral were $99.2 million or 82% of total gross loans, which we will continue to monitor. The difference reflects the loans that have come off the deferral program and whose current payment history is too soon to determine any meaningful trends. The total amount of payments deferred was $1.4 million. Medallion loan delinquencies 90 days or more past due were $12 million or 10.3% of total gross loans at the end of the second quarter compared to $2.8 million or 2% at year-end and $3.7 million or 2.7% a year ago. The impact of the COVID-related deferrals on actual or future delinquency trends is unknown at this time, but certainly resulted in lower percentages for this quarter. Loan delinquencies on the consumer side were lower this quarter as a result of the COVID-19 deferrals. However, consumer loans in the state of deferral were only $35.1 million or 3.3% of total gross loans, which we will continue to monitor. The total amount of deferred loans were $94.6 million or 5,077 loans, which is 8.9% of the gross loan consumer portfolio. The difference reflects loans that have come off of the deferral program and whose current payment history is too soon to determine any meaningful trends.

Consumer loan delinquencies, 90 days or more past due were $3.5 million or 0.33% of total gross loans at the end of the second quarter, compared to $6 million or 0.64% at year-end and $3.8 million or 0.44% a year ago. The impact of the COVID-related deferrals on actual or future delinquency trends is unknown at this time but certainly resulted in lower percentages for this quarter.

The consumer loan portfolio's average interest rate remains stable. This quarter, the average interest rate on the portfolio was 14.14% compared to 14.54% at the end of 2019 and 14.82% in the same period last year. Our commercial lending segment recorded net income of $394,000 in the second quarter. The net commercial lending portfolio was $68.1 million at the end of the second quarter compared to $66.4 million at the end of 2019 and $60.4 million in the same period last year. The average interest yield was 13.38%, up from 10.04% in the first quarter and in line with the 13.75% a year ago.

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

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

(Operator Instructions) Our first question is from Alex Twerdahl with Piper Sandler.

Okay. Alex, are you there?

I'm here. Can you hear me?

Oh, Yes, we got you now.

Okay. First question for me. Obviously, a huge quarter for the consumer business in the second quarter. Can you just comment a little bit on has that demand continued into the third quarter? And maybe what the pipeline looks like as we head into the third quarter for the consumer business?

Sure. We're really in very nice businesses right now. It's nice for a change. Well, not a change. We've been in these businesses for 15-plus years, but they're really starting to show how profitable they are and continue to be. So the boat loans and the RV loans, we found some very strong demand in the quarter and continuing. A lot of people are not going on trips. They're not going to hotels, going to the airplanes. And the home improvement loans are also surging. They're being used by homeowners all across the country who are spending a lot more time at home, obviously, in fixing their houses or new pools or roofing or solar panels or HVAC systems. So we think they'll all continue. They've been growing at very healthy rates. I think they're up about 16% in the RV and marine space from last year and about 35% on the home improvement lending front. So we see demand -- strong demand continuing.

That's great to hear. And then switching gears to the medallion. Can you just talk a little bit about how medallion owners could have benefited from some of the provisions of the CARES Act to get through this crisis?

Yes. They're all small business owners. So they were all eligible or most of them were. And most of them took PPP money or other types of CARES Act money. It's a little bit of a band-aid for them, frankly, though, it's helping, as it is for many Americans just temporarily. The medallion business is still tough out there. But this at least got them through a couple of months, and there are some other plans that are being talked about away from the federal plans, that the city and the state continued to focus on this industry and try to help it. So our hope is that's something will come through to help a lot of these small business owners.

Okay. We'll continue to monitor that. And then the $6.8 million adjustment to the reserve due to COVID, can you just talk a little bit, Larry, maybe about how you came to that number? What percentage is medallion? What percentage is consumer? What percentage is commercial?

I mean it was a pretty judgmental area since nobody knows what the real impact of the COVID is going to be. But we obviously felt that using standard methodologies that we've used in the past, maybe did make total sense this quarter since the uncertainties and impacts were likely to be severe. So we made our best estimate about a reasonable amount of increase that we needed above and beyond the normal methodologies. It was probably split more towards the medallion side than the consumer side, but both sides, we did a nice impact, too.

Okay. And then with the huge consumer growth that you had during the quarter, I would have expected to see net interest income increase more meaningfully from the first quarter, and yet it really didn't. Were there some reversals of net interest income from the medallion portfolio that offset that in the second quarter that we should be aware of to potentially take out in future quarters?

Larry, you want to touch on that?

Yes. We took a kind of conservative posture on the amount of interest accruals that actually occurred during the second quarter and reserved roughly 50% of that amount. (inaudible) possible…

Right. And the other thing that we did was we took in a lot of extra brokerage CDs. When the COVID started to hit in March or so, a lot of banks like us really just -- were very cautious and didn't know what the liquidity situation and the CD market would be. So we took in a lot of CDs, which kind of sat on our books, but now that money is being put out. So when the money is sitting on your books, obviously, the net interest margin comes down a little. But now that most of it's being put up, we expect to see an expansion of net interest margin.

Okay. And then final question for me. I've seen some headlines recently for some new sponsorship deals for your driver in RPAC. Will some of those sponsorships make their way through the Medallion P&L in coming quarters? Are they already in there? Or are they personal sponsorships that just don't impact the business?

Yes. No, they should be meaningful to us. For those who don't know, RPAC is Richard Petty Motorsports, which is a NASCAR legacy investment that we had years ago. We had a sports SPAC that we did actually in about 2010. Sports SPACs are continuing to be very much in the news these days. So we owned a team, the majority ownership of the team and our driver is the only black driver in NASCAR in about 50 years. And he's been at the forefront of social change in America. He's done a great job really talking about Black Lives Matter and social change and has had a tremendous amount of interest from sponsors. So one is Cash App, which is owned by Square, which is Jack Dorsey's company that's signed a multimillion-dollar deal with us about a month ago. So that you'll see this year and next year. And then there are several other groups, I don't know if they'll pull the trigger like Cash App did, but several other Fortune 500 companies are really talking about getting involved with this movement and supporting the team and thankfully, will be the beneficiary if those things happen.

Our next question is from Scott Buck with B. Riley FBR.

I was hoping you might be able to walk us through or at least remind us of the mechanics of the loan deferrals since I think this is the first quarter we've seen them in the release.

Larry?

I mean, basically, the borrowers request to have some forbearance on the payments that they owe. And pretty much across the board, we've accommodated both the consumer borrowers and the medallion borrowers with a 60- to 90-day deferrals. Some of them have come back as those deferrals have expired and asked for an additional deferral. And we're looking at those, particularly on the medallion side, more on a case-by-case kind of basis.

On the consumer side, most of the deferrals happened at the very beginning of this process. And as each month went on, there have been fewer and fewer requested. And we're now just starting to see what happens when some of these borrowers' deferral periods have ended and what their payment history is going to look like going forward. But as we said before, it's too early in that process to really draw on the conclusions.

That's helpful. When do you think you'll have some real color, especially on the medallion side with the deferrals in terms of who comes back and starts paying again, making regular payments versus which loans kind of fall into delinquency at that time?

I would think probably September or so. This cab industry is usually pretty slow anyway in -- during the summer months, July and August. So it all depends upon how quickly the city reopens. I think September is usually a good month in the industry. So if things start coming back, I don't think they'll be near normal, but if they're slightly normal at that time, we think that will be very helpful to the industry.

And just to put some parameters on it, the consumer portfolio is $1 billion portfolio now. It's all-time high, yielding about 14.5%. So just using the math there, you're talking about $145 million of income coming in on those loans. The cab medallion portfolio is now down to just $84 million. So at a 4% rate, even if nobody paid, you're only talking about $3.5 million or so of income lost. So it's overwhelmingly in the consumer area with that high rate that we have and the size of that portfolio.

So the medallion portfolio, again, even though most of it is in deferral, it really should not have a big impact on the growth of the company going forward.

Great. I think that perspective is helpful. Last one for me. It sounds like you have a new fintech partnership in the works. Is there any color you can provide there in terms of what kind of contribution that partnership could have on results once completely scaled up?

That should be a very strong business for us. I don't think we're going to see it honestly, though, this year. We're still ramping up. But the strategic partnership business is very much a fee income business, where we're getting about 50 to 100 basis points on the loans when they come in. So if we get to the point where we're doing as much as $500 million a year, you could have $25 million or more of fee income. There's a cost associated with that. So that's not the profit at all, but it should be a very high-volume business and profitable, but probably you're talking about a year from now.

I think the first customer that was signed up is in the health care industry, dentist work, cosmetic work, same thing for the second will be in the medical and cosmetic industry. And there's a lot of demand from partners to partner with Utah banks. There's probably a dozen or so names that we're talking to. So we've been very selective. We continue to be very cautious in this business, especially in this environment. But eventually, we hope this is going to be a very profitable business for us.

Our next question is from Mike Grondahl with Northland Securities.

This is Owen Rickert, in for Mike this morning. I just had a question regarding deferrals and forbearance on the consumer book. Are the customers now paying? I think you just talked about this, but shed some more light on it.

Sure. In the medallion area, no. I mean that business still is struggling. The streets, if you look in New York, are still pretty much empty. But as I pointed out before, it's only a couple of million dollars of lost income per year versus the $145 million of consumer revenue that's coming in.

On the consumer front, yes, I think you probably have about 8% that is currently delinquent. So the history was most people asked for deferrals back in April. That was the peak period for us. And then May was down and June was down, July was down, thankfully. So the trends are going in the right direction. And for all those that ask deferrals, only 8% or 30 days or more are delinquent right now.

We have reached the end of our Q&A session. I would like to turn it back to Andrew for closing remarks.

So we wanted to thank everybody again for the call. Thank you, Sherri, for hosting this for us. If anyone has any follow-up questions, please feel free to call us at any time at (212) 328-2176 or at e-mail investorrelations@medallion.com.

Thanks very much, and I hope everybody has a great day. Thank you.

Thank you.

Thank you. That does conclude today's conference. You may disconnect your lines at this time, and have a pleasant day.