Q3 2020 Medallion Financial Corp Earnings Call

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 dotcom.

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 involves 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.

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 Companys filings with the Securities and Exchange Commission each forward looking statement a projection.

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 <unk> president of my that medallion financial. Thank you Sir you may begin.

Morning, everyone. Thank you for participating 2023rd quarter earnings call.

Joining me on today's call.

Hello, Alvin bursting.

CFO.

Hello.

<unk> director of Investor Relations Alex.

That's just jump right into the medallion portfolio.

As a result of the negative impact.

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Well it's.

Taxi industry the company took the necessary steps up.

Remaining medallion portfolio.

That's placing all medallion loans on non accrual status, a lowering of the New York City medallion collateral value.

Sales of $300. That's at the end of the third quarter a substantial drop.

On the net carrying value of 119500 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, a cab ridership in New York City.

For the first nine months of the year.

Just to collect 8.8 million on the medallion relieves assets.

Yeah, the third quarter, the company that medallion lending portfolio 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 its Josh medallion loans on our books that figure is now just 33.5 billion or 2.5% of assets.

We believe this quarter's write downs on reserves now puts Smith died losses effectively behind us a better allows our core lending segments to become the focus of attention.

You are optimistic that we will have a strong fourth quarter of strong 2021.

With that being said, let's now touch upon our consumer and commercial lending segments.

Our consumer lending segment had strong growth in application volumes once again, this quarter, which led to originations of $136 million for the quarter up 9% from the 29 <unk> third quarter.

That recreational and home improvement loan portfolios grew 13%.

36% from September Thirtyth 2019.

Demand for home improvements and recreational vehicles continues to be present in this economic environment.

Yeah, I think stay the course of tightening credit criteria pursuit of improving overall asset quality. It was able to meet the loan demand in the third quarter.

Overdone related payment deferrals, and our consumer lending segments were largely resolved during the quarter.

Average FICO scores at origination now were slightly below 700, and the recreational segment.

Just above 750 in the home improvement segment.

We ended the third quarter, the die Bank could 207.2 billion in capital at a tier one leverage ratio of 15.47%.

As previously stated the bank began originating loans for its first fin Tech partner this past spring.

We remain optimistic we will launch or a second partner in the fourth quarter.

We continue to develop new leads with companies looking to partner with an industrial bags like medallion bank look to grow this business.

The company's net commercial lending portfolio, the 68 million as of September Thirtyth Twentytwenty compared to the 66.4 billion at the end of 2019.

64.6 million at the end of the 29th year third quarter.

No additional loans were placed on non accrual 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 non accrual this year and we took a partial reserve against an equity investment this quarter.

Deal flow is presence medallion capital continues to be selective for the remainder of the year, but still remains well diversified across a broad range of geographies and industries.

Net income for medallions consumer and commercial lending segments totaled 14.1 billion in the third quarter, a 27.4 billion for the nine 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 was $23.6 million or 97 cents per share compared to net income of $5 million or 20 cents per share in the prior year quarter.

Andrew previously stated as a result of the peering 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 you'd have a minimal impact on our results moving forward.

I will now become more clear than ever that our profitable in higher yielding consumer and commercial segments should easily outweighed the unprofitable and lower yielding medallion segment.

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 Thirtyth 2020, compared to $164.4 million, we'd love in percent of total assets a year ago.

Our net interest margin increased to 8.72% this quarter from 8.23% in the 2022nd quarter and remains in line with the 8.71% we reported in the 2019 third quarter increase.

The increase this quarter from last quarter reflected the increase of our interest earning assets, which resulted in the increased yield and are performing assets.

Total provision for loan losses was $39.7 million in the 2023rd quarter compared to $8.3 million in the 2019 third quarter. A large difference was driven by the 37.2 million dollar provision we took on the medallion portfolio this quarter.

As a result of the impairment of the medallion portfolio and the write down in the <unk> in New York City, and almost all of their medallion market collateral values. The company recorded a net increase in reserves of approximately $24.7 million.

For the nine months ended September Thirtyth 2020, the provision for loan losses was $73.2 million compared to $36.9 million for the nine months ended September 32019.

Consumer loans still in the stage the fertile were $5.6 million or five tenths of a percent of gross consumer loans as of September thirtyth 2020, compared to $35.1 million or 3.3% of total gross consumer loans as of June 32020.

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 portfolios 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 business is.

The home improvement business grew at a rate of 37% year over year.

Our commercial lending segment recorded net income of $312000 in the third quarter and $861000 for the first nine 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 yeah.

The average interest yield was 13.42 per cent 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 and a portion of the call.

At this time, we'll be conducting a question and answer session. If you would.

I'd like to ask a question. Please press star one on your telephone keypad a confirmation to indicate your line is in the question queue. You May press starts you. If you would like to all of your questions from the queue.

Since using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keep one moment, while we poll for questions.

Our first question comes on the line of Alex Twerdahl with Piper Sandals. You May proceed with your question.

Hey, good morning, guys morning.

First off I was just wondering how you guys arrived at the 90000 dollar value for collateral in New York City seems pretty conservative to me when I look at the top 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 are medallion values are actually going to drop down to that level and the near term.

Thank you Alex so what we usually do it and we did again this quarter as we look at all the transfers for the quarter and the median was correct above that number but we ruled out a few that were not arm's length in our view, we usually do a lot of due diligence here, we talk to the city officials about the transfer is retarded.

Dr brokers about what's about to go through what has gone through so we knocked out a couple of sales that were between 150 and $200000 that the city officials kind of indicated perhaps were not arm's length. So if you're locked out off than the median is about 95000, and we usually take about a five.

Thousand dollar cost to sell the medallion is an estimate and that's how we got that 90300.

In terms of future prices, you know, it's hard to tell but the business looks like it's coming back slowly in New York City. You know 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 that's the whole thing is on non accrual. One is there a possibility that the collateral values do rebound that there could be a write up in the portfolio and then just remind US you know in terms of the recoveries.

No actually hit the P. it out over the next couple of quarters I should they should they arise.

I'm sure. The first part of the question on the reserves, you're right, you're always able to reverse reserves that you've booked at least back to the original them out you can't obviously right an asset up above its original par, but you can reverse reserves, but just because of what's going on in medallion industry for the last couple of years, it's not likely that one quarter would make us change our mind and do.

Any kind of a reversal I think we need to see several quarters is that kind of activity before we believed that it was really sustainable.

I turn to 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 does the other aspect of impairing everything and put it on non accrual of course is that all the accrued interest was reversed and we wont be booking any more interest income.

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

And now we'd be open minded about selling it back in January right before the pandemic head there was a lot of interest in the sector. There were probably about five or more major private equity firms and funds that we spoke to 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 than sell them at a depressed price, but if the price was fair in our mind that we can get them entirely off of our books that we would probably entertain that.

Great. Thanks for taking my questions sure. Thank you.

Our next question comes from the line of Mark Blinn Dahl with Northland Securities. You May proceed with your question.

Hi, Yeah. Good morning, guys a couple of questions on the medallions one.

The annualized revenue yes.

Is that roughly you know the 100 million times, 4% to 5% just trying to figure out you know interesting.

How much of a hit that's gonna take going forward.

It is 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 lot.

So in terms of the hit you know not much the first nine months of this year. Unfortunately, we only probably at about $86000 or payments come in.

Joe as you know, it's not going to really affect us in the future if you're talking about now at 33 million dollar loan portfolio, which is you know I've been here 30 years, it's never been anywhere near this level of $33 million at 4%, you're only talking about a million to even if everybody was paying which which they're not so.

It should not have a big effect or less in the future.

Got it.

Yeah, and then can you talk a little bit just two questions on the consumer portfolio.

One is I I think your kids coming but.

What percentage of that consumer portfolio is deferred right now.

Or or getting like four parents support and then secondly, how do we think about growth with your tier one a little bit above 15%.

[noise] the consumer loan still in a state of deferral were 5.6 million or five tenths of a percent of the gross consumer loans at September Thirtyth.

And that's down sharply from a roughly 35 million or 3% at the second quarter.

Yeah that that portfolio. It's been great. You know, 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 were probably in the top percentages of banks in the country most of capital ratios of 8% to 10% or so so this is very well capitalized.

And we don't think it's going to affect consumer growth at.

At all you know the medallions.

Right offs. This quarter, we were kind of holding our breath to make sure that when we wrote those off a weak what are affected hopefully and what the capital ratio would be we didn't 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.

Got it that's good to hear thank you.

Great. Thanks.

[noise], 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 <unk> for closing remarks.

Thank you Laura and I also wanted to thank everyone for attending this morning's call were happy to follow up your question. If it was not an answer today to that end. Please contact our Investor Relations Department at 2123 to eight to 176 or email at Investor Relations at medallion.

Dot 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.

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