Medallion Financial Corp (MFIN) 2017 Q1 法說會逐字稿

Good day, everyone and welcome to the Medallion Financial First Quarter 2017 Earnings Conference Call. Today's conference is being recorded and at this time, I would like to turn the conference over to Garrett Edson. Please go ahead, sir.

Thank you, Ilanda and good afternoon. By now, everyone should have access to the earnings announcement, which was released prior to this call, 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. 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 now like to introduce Andrew Murstein, President of Medallion Financial.

Thank you, Garrett and welcome everyone to Medallion Financial's first quarter earnings call. We appreciate your continued support of Medallion. Joining me on today's call is our Chairman, Alvin Murstein and our CFO, Larry Hall. Beginning with this afternoon's call, we will be holding conference calls consistently after each quarterly earnings release. For the first call, we want to spend a few minutes focusing on the Company on a higher level and our strategic plans to continue the transformation of our Company. Larry will then take us through some brief financial highlights regarding our first quarter and then we'll take some questions that analysts and investors have provided to us before the call.

Let me provide everyone with a quick history of the Company and our main operating segments. True to our name, my grandfather started Medallion back in 1937 and our sole business for many years was originating, acquiring, and servicing Medallion loans for taxi cabs. We had significant success for a long time and in 2002, I made the decision to begin diversifying our business lines. Given our past lending success, a natural pursuit was the formation of Medallion Bank and eventually we acquired a consumer loan portfolio.

Since then, we've considerably ramped up the size of our consumer loan segment, which underwrites loans for recreational vehicles, boats, and home improvements. At the end of 2016, the portfolio reached over $700 million in receivables for the first time and we have more than tripled the size of this portfolio in just the last five years. Perhaps most importantly, we have been prudent in underwriting these loans. We typically see 90-plus day delinquency rates for these consumer loans of under 1% of receivables and overall delinquency rates range between 1% and 3%.

In concert with our diversification strategy in recent years, we've also been working to grow our commercial loans segment primarily through mezzanine lending and our Medallion Capital subsidiary. Since we've increased our focus on mezzanine loans, the segment has generated consistent profitability and we've been able to keep 90-day delinquencies to a minimum.

We've made consumer and mezzanine lending the primary focus of our strategy in recent years as a result of both their high profitability and the current environment in the medallion lending industry. Due to increased competition in this space, medallion values over the last couple of years have significantly declined in most cities and delinquencies have increased. In the past couple of years, we formally commenced a process of reducing our exposure to medallion loans and focused more and more on our growing consumer finance and mezzanine segments and formalized that strategy earlier this year. That brings us to today.

While we acknowledge that it would take additional time before the medallion business will be contributing at the levels we expect, we are starting to make some necessary headway. We have slowly, but effectively reduced our exposure to medallion lending over the past couple of years and now manage $485 million of medallion loans at the end of the first quarter 2017, a 23% reduction from the prior year. At Medallion Bank, medallion loans now comprise [less than 22%] of the bank's assets and we expect to reduce that further in the coming quarters.

Furthermore, we took significant action in the fourth quarter of 2016 to write-off and reserve for a large amount of our non-performing loans. We have now written off or reserved for over $100 million of medallion loans over the past several quarters and thus are carrying them on our books at a significant discount to par. Importantly, we did this despite having personal guarantees associated with the loans and the medallions pledged as collateral, which implies there could be material recoveries in the future.

In the first quarter of 2017, we took additional charge-offs and began to address some of our larger delinquent accounts to bring them into current status as we ramped up our collection efforts. The end result in the quarter due to our efforts was that total delinquencies actually improved from where they stood at the end of 2016 even after disregarding loans that have been charged off. To be clear, we have plenty of work left to do on this front, but the improvement in delinquencies for the first time since 2014 is a very positive sign.

From a consumer lending perspective, we will continue to focus on growing our portfolio as well as monetizing performing consumer loans when it can be accomplished at a premium or necessary to reinforce the bank's leverage ratio. In the first quarter, we sold $94 million of consumer loans and recorded a gain on sale of $2.7 million. We still ended the quarter with a sizable consumer loan portfolio of $642 million and as I noted, we've more than tripled the size of our portfolio in just the last five years. Most importantly, after two quarters where the bank recorded a net decrease in net assets due to the large write-off of medallion loans, the bank returned to profitability in the first quarter despite over $10 million in write-downs from the medallion portfolio.

Notably, we generated over $17 million in operating income before taxes from our Consumer division for the quarter. In time, we believe that as the medallion industry fully stabilizes and so long as we continue our strong Consumer performance, we'll be able to more fully realize the bank's earnings power. Finally, we also ended the quarter with the bank's capital ratio over 15%, which is very well-capitalized and considerably higher than the vast majority of banks in the US. I'll now turn the call over to Larry who will give some brief highlights regarding first quarter results.

Thank you, Andy and let me take you through some first quarter highlights. In the first quarter, Medallion Financial recorded net increase in net assets resulting from operations of $1.1 million or $0.05 per diluted share compared to $6.8 million or $0.28 per diluted share in the prior year period. A decline in net interest income and net realized and unrealized gains was partially offset by a $2.3 million reduction of salary and benefits expense due to lower headcount and a reduction of bonuses from the prior year period.

At Medallion Bank, we generated first quarter net increase in net assets resulting from operations of $4.3 million compared to $6.2 million in the prior year period. Net investment income before taxes was $17.2 million, an increase from [$16.3 million] in the prior year period. At the bank, our consumer lending portfolio as of March 31 stood at $642 million. This is a reduction from $701 million at the end of last year due to the sale of performing loans that Andy just mentioned and partially offset by ongoing portfolio growth.

The portfolio's average interest rate improved to 14.8% versus 14.3% in the prior quarter as the loans we sold were home improvement loans that have lower yields thus enhancing the yield mix of our portfolio. 90-plus day delinquencies on the consumer portfolio stood at 0.37%, an improvement from 0.43% in the prior quarter. The bank's medallion lending portfolio as of March 31 stood at $234 million, a 28% reduction from the prior year and an 11% reduction from the last quarter alone.

Medallion loans now represent just 22% of Medallion Bank's assets. The average interest rate improved slightly on a sequential basis to 3.82%. 90-plus day delinquencies were $17.9 million, a significant decline from $39 million on a sequential basis. Part of the decline is due to Medallion write-offs of $10 million in the first quarter and part was due to certain large delinquent accounts that were brought current during the quarter. At Medallion Financial and our other subsidiaries, the Medallion lending portfolio as of March 31 stood at $251 million, a 17% decline from the prior year and a 6% decline sequentially. 90-plus day delinquencies as of March 31 on a managed basis with Medallion Bank decreased by over $22 million for the quarter. So combined, our total managed medallion loans as of March 31 were $485 million, 23% lower than $630 million as of the prior year. We expect to continue to reduce our exposure to medallion loans over time.

Our commercial loan portfolio, which is primarily made up of our mezzanine lending portfolio, stood at $74 million, a 11% reduction from the prior year period due to prepayments and maturing loans. The average interest rate on commercial loans was 12.88%, a slight reduction from [13.05%] in the prior quarter due to the aforementioned prepayments and maturities.

As of March 31, the bank's Tier 1 capital to average assets leverage ratio was 15.2%. The bank had $114 million in cash on its balance sheet and is well capitalized. Medallion Financial had debt of $338 million as of March 31, a decline from $349 million as of December 31. With that, I'll now turn the call back to Andy.

Thanks, Larry. When we announced today's call a few days ago, we asked for emailed questions from the investment community. I will now answer those questions.

Thanks, Andy. First question. Per your proxy, can you explain the bonus compensation for the year despite the large decline in stock price and the large dividend cut in 2016?

Sure. Well, as Medallion's largest shareholder, no one felt the effect of the stock decline and dividend cut more than I did personally due in part to the stock's performance, my bonus was cut by approximately 60% from the prior year and Alvin, our Chairman's, was cut by about 45%.

If we fall short on executing on our strategy in 2017, we'd expect that the Board will cut our discretionary bonuses further. We're working very hard to improve the value of our shares for both the near and long-term. I'd also note, we firmly believe management and other insiders' ownership of 15% of Medallion's common stock aligns us with our shareholders. As we execute on our strategy, we will benefit alongside our shareholders.

Thanks, Andy. Next question, what is the status of the negotiations with respect to the sale of minority interest in Medallion Bank?

Right, so we hired an investment bank in the first quarter of 2017 to explore options. So far we've seen solid interest from various sources and investment structures beyond the simple minority investment. When and if a definitive agreement is reached and signed, we'll announce and provide additional details at that time.

What is the carrying value for Medallion Bank as of March 31, 2017 on the balance sheet?

Sure. Well, the bank's value was marked-to-market at $284 million as of March 31. The valuation increased in the quarter due entirely to what the bank earned and also retained and that was approximately $4.2 million.

Next question. What is the latest on your RIC, BDC evaluation process? Wouldn't de-RICing and de-BDCing the business allow you to simplify your structure, allow you to retain earnings going forward and potentially unlock value?

Larry, why don't you take that one?

Sure. We have not made a firm decision yet on whether to de-RIC and de-BDC, but we do not expect to be a RIC for 2017. Assuming that occurs, we would be able to use losses outside of the bank to reduce our bank taxes due to filing of a consolidated tax return. RICs are not permitted to consolidate tax-paying entities like our bank and their tax returns, but if we de-RIC, we would be able to do so. I would like to note that if we decide to de-RIC, we can still be a BDC.

De-RICing and de-BDCing our Company does have a number of positive attributes. However, if we went ahead and received shareholder approval to no longer be a BDC, it would be very difficult to reverse course should we ever want to return to RIC, BDC status again. We want to be absolutely certain that this is the right course of action for Medallion.

Next question. What is management's current view and near-term outlook for the Medallion markets in New York City and Chicago? Are the reduced collateral values mentioned in the fourth quarter earnings release proving to be viable?

Well, we believe that stabilization is beginning to occur in those markets. In the next couple of quarters, we will hopefully confirm that this is the case. In New York for example, the City Council recently passed some new regulations to help medallion owners including a large reduction in the medallion transfer tax from 5% down to [0.5%] and they also changed the rule so that there is now only one class of medallion.

In the past, if you remember, there were two owner/driver medallions and corporate medallions, which could be owned by either fleets or investors, but now that they've simplified the classes, that's beneficial to us as well as the industry as a whole as individuals can now actually sell their medallions to fleets. So the City of New York has been very supportive of the medallion industry recently.

In terms of sales, which was the latter part of the question, there were 19 sales roughly in Chicago in the first quarter, they averaged $64,000 which foots well with our current carrying value of about $60,000 there. In New York, there were three sales, they were a bit diversified. One was a foreclosure at a value of [$550,000, which was above our reduced valuation of $500,000] and the other two were sales, one was an estate at a below valuation, [quick all-cash sale] from a driver who retired and he had to leave the country.

The next question, can you comment on the prospects for reinstating cash dividends in the near future?

Well, we and the Board evaluate our dividend policy each quarter. At this time, we believe the best way to use our capital is to further help grow our profit of Consumer Lending segment where we actually have pre-tax return on equity of over 50%. That and the other profitable business lines as well reduce our debt exposure.

Next question, what is limiting the Company from aggressively buying back Medallion common stock? Do you think that the Company could actually buy back a substantial number of shares in 2017?

Well, as I just noted, we believe the best uses of capital right now is to grow our profitable segments and reduce our debt exposure. That said we do have a repurchase program in place and should we see further improvement in our business and in our capital positions, we would definitely consider going back into the market.

Next question, can you give any reasons for encouragement for anyone either thinking about buying Medallion stock or for current shareholders?

Sure. While it's the market's job to determine valuation, we believe that we can focus on executing and producing sustained quarters that demonstrate stabilizing Medallion performance and we continue to reduce our exposure while continuing to profitably increase our originations in consumer and mezzanine lending. The market will hopefully begin valuing the Company more appropriately. We see that we're trading at a large discount to book value, so we do feel that there's a lot of upside if we execute our plan correctly and the first quarter is just a start, but we have to continue to execute going forward and we're working hard to do just that.

Next question. Looking two to three years out, what does management believe will be the percentage of revenue coming from medallion financing?

It's difficult to predict exactly. Right now, it's under 20%. As we look out into the future, I think it will be under 10%.

Next question, why did you sell a portion of your consumer loan portfolio in the first quarter? Why didn't you just hold on to the loans and collect 10% interest per year until maturity?

Larry, you want to take that?

Okay, the opportunity presented itself to enhance the bank's liquidity by selling some of our lower yielding performing home improvement loans and we acted upon that. We still have over $640 million of consumer loans in our portfolio and expect to grow the portfolio further in the coming quarters. In addition, loan demand remains strong for our consumer loans, which should enable us to re-lend the proceeds from the sale in a very rapid fashion.

Thanks, Larry. Next question. Further, you noted that your mezzanine segment has a robust pipeline to grow that loan portfolio in 2017, can you expand on this?

Sure. Look, the Minneapolis-based team has been working well together for over 25 years. We are able to use a variety of sources to feed our pipeline. We believe the pipeline is well-positioned to help us grow the mezzanine segment this year. The segment is a small part of our business, but it provides us with a solid source of profits. In 2016, for example, the segment earned slightly over $8 million for the Company.

Okay, the next question. Can you update us on your current liquidity status and your relationship with your banks?

Sure. We feel we've got a very good and open relationship with all of our warehouse lenders. We'll provide updates on any material extensions in due course. We reduced our debt by $11 million in the first quarter and by over $60 million over the last two years and we'll continue to work hard in reducing this amount throughout 2017.

Okay and pertaining to your collection efforts, how have you ramped up efforts this quarter on medallion loans?

Well, we expect to foreclose on loans that are more than 180 days past due and eventually collect on the collateral and/or the personal guarantees. Remember, every single one of our loans is backed up. As we did this quarter, we would prefer to work with our accounts to bring them back in the current status, but when that can't be accomplished, we'll look to collect for the benefit of our Company and our shareholders.

Okay and I have no other questions from the shareholders at this time.

Okay. Well, I'd like to thank everyone for attending this afternoon's call and we look forward to updating you further on our progress on our call next quarter. While we tried to get as many questions as we could in today, we realize that there are others and we're happy to follow up if your question was not answered. So to that end, please contact Investor Relations at 212-328-2176 or via email at investorrelations@medallion.com. That will conclude the call. So thank you everyone and have a great afternoon.

And everyone, that will conclude today's conference. Thank you all for joining.