Q4 2020 Medallion Financial Corp Earnings Call
Good morning, and welcome everyone to medallion financial's, 2024th quarter and full year earnings 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 Dot 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 and involves risks and uncertainties that may cause 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.
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 on.
Forward looking statements unless required by law.
I would now like to introduce and drew Murphy <unk> President of Medallion financial. Please go ahead Sir.
Good morning, everyone and thank you for participating in our 'twenty and 'twenty fourth quarter and year end earnings call.
Joining me on today's call is there a C E O ALP and Bernstein, our CFO, Larry Hall and on.
Director of Investor Relations, Alex or Zeno.
Good day, and financial took the appropriate steps in 'twenty and 'twenty to build a strong foundation for the future and an eventful year that provided a challenging operating environments.
During the year, we deemed and medallion portfolio was impaired as a result of the impact of COVID-19 on our borrowers, resulting at all loans being placed on non accrual status and their carrying value adjusted down to their net collateral value.
The fourth quarter, and we lowered our medallion values slightly.
We hope you will also have recoveries on a portion of the over $250 million of loans that we wrote off over the last five or so years.
Net medallion loans dropped to 88% from 105 million as of December 31st 2019 to $12 7 billion at year end 'twenty and 'twenty.
When looking at our consumer portfolio.
We commend the medallion bank for not only navigating this pandemic, but having a record year.
The applications grew significantly despite the bank raising its credit standards.
Good thing and the recreational and home improvement net loan portfolios growing 10% and 34% from December 31st 2019.
Covid related payment deferrals were largely resolved.
While average FICO scores at origination and continue to be relatively high and slightly below 700, and the recreational segment and just above seven and 50 of the home improvement segment.
The complements the consumer growth we have seen this year the bank began originating loans with its first fintech partner and the second quarter and also executed a non binding term sheet with another potential partner, both of which provide consumer finance services.
Our partnership program is expected to grow this year and.
And January we began to see an uptick and originations and look to provide a further update at the end of the first quarter of this year.
On the commercial side liquidity remains strong as medallion capital was you're approved for an additional 25 million of SBA leverage and the second quarter, which provides for a 10 year term and interest of less than 2% based on current rates.
Only one loan was put on non accrual and 'twenty and 'twenty and which we took a full reserve against and equity investment and the third and fourth quarter.
We expect a gradual recovery of performance within the overall portfolio in 'twenty and 'twenty one as many companies are now operating at pre Covid levels.
But those most negatively impacted by Covid, we are seeing a gradual improvement and operating conditions.
With respect to the overall business deal flow remains strong and medallion capital continues to pursue new opportunities.
Before turning the call over to Larry I'll quickly touch upon additional fourth quarter and full year highlights.
Net income from the company's consumer and commercial lending segments was $14 2 million and the quarter compared to $7 2 million on the prior year quarter, a 97% increase.
When he 'twenty and net income from medallions consumer and commercial segments was $41 6 million compared to $31.9 billion and 2019, a 30% increase.
And I and bank closed the year with a 16 point and 93% tier one leverage ratio 218, four and $5 million of total capital and a 34% efficiency ratio.
The consumer and home improvement lending segments contributed $48 million and annual net income to the bank and 15 million and the fourth quarter.
Both the highest since they began originating loans and 2004th.
Yeah.
Food and loan collateral and the process of foreclosure and old and Chicago medallion assets total medallion exposure comprised just 4% of our total assets at year end compared to 10% at December 31 2019.
So with that I will now turn the call over to Larry who will provide additional highlights on the fourth quarter and full year.
Thank you and you.
Net income was $6 $5 million or 26 cents per share compared to a net loss of $500000 and <unk> per share in the prior year quarter.
2020, total net loss was $34 $8 million compared to a net loss of $1 $8 million in 2019.
Our high net interest margins had been a consistent and our reporting we ended the fourth quarter was the strongest net interest margin and 13 years of 889% full year. Our net interest margin was 865 percentage.
Cash flow from operations increased 21% year over year to $79 million, and 'twenty and 'twenty up from $65 million and 2019.
As Andrew previously discussed as a result of lower and New York City medallion values from 90000, and $300 net 79000, and $500 net and the fourth quarter.
We recorded a loss of $3 $6 million for the medallion segment for the quarter.
We remain optimistic the medallion values and bottom and that the segments losses, if any will be manageable as our higher yielding and profitable consumer and commercial segments will continue to be our focus moving forward.
Net medallion loans dropped 88% from $105 million at the end of 2019 to $12 $7 million at the end of 'twenty and 'twenty.
When including loans and the process of foreclosure and own Chicago medallion assets total medallion exposure was $68 $8 million or 4% of assets as of December 31, 'twenty, and 'twenty compared to $159 $3 million or 10% a year ago.
Total provision for loan loss benefit was $3 $4 million into 'twenty, and 'twenty fourth quarter compared to a provision for loan losses of $10 $5 million and the prior year quarter.
For full year, 'twenty and 'twenty the provision for loan losses was $69 $8 million compared to $47 $4 million in 2019.
The higher consumer reserves are mainly due to the growth we are experiencing that lending segment as reserves are first established when the loans are booked.
The large difference and reserves was once again driven by the $42 $3 million provision we took on the medallion portfolio. This year as a result of the impairment of the medallion portfolio and the write down and New York City, and almost all of their market and medallion collateral values. The company recorded a net increase and reserves of approximately 11.
$5 million for the full year 'twenty and 'twenty.
Consumer loans still and the state of deferral were $6 $7 million or six tenths of a percentage as of December 31, 'twenty and 'twenty compared to the total gross extensions of $116 $3 million for the year.
We believe consumer loans and a state of deferral at year end were manageable and will decrease in 'twenty and 'twenty, one as our borrowers become current again and the economy continues to open up.
The consumer loan portfolio's average interest rate was 13, six 4% this quarter a slight drop from the $13 eight 7% we reported last quarter as we continue to be cautious and more selective on the loans, we choose to underwrite.
In addition, we continue to see the home improvement segment outpaced the growth of our recreation segment, which has lower losses and yields of the two however, both are showing noteworthy growth, which should continue into 'twenty and 'twenty one.
Net income from our consumer lending segment was $47 million for the year compared to $29 $7 million and 2019.
Our commercial lending segment recorded net income of $32000 and the fourth quarter and $893000 for the full year.
And that commercial lending portfolio was $62 million at the end of 'twenty and 'twenty compared to $66 $4 million at the end of 2019. The average interest yield was $13 three 9% compared to $13 six 3% and a year ago.
We expect a continued gradual recovery of performance and growth within the overall portfolio and 2021.
With that I'll now turn the call back to Andrew.
Yeah.
Thank you Larry operator, we can now begin the Q&A portion of the call.
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Our first question today is coming from Alex toward all of Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Alex.
First off I was wondering Larry if you could go through the moving parts of the of the loan loss reserve during the quarter, including how much of the provision was associated with the medallion the home improvement and the wreck portfolios as well as the charge off levels associated with each of those during the quarter.
Sure.
Consumer segment, the recreation business had about a $3 million provision for the quarter.
The home improvement had 737000 and there was a benefit of $7 2 million and the medallion segment.
And a lot of that had to do with excuse me recoveries.
That we received during the quarter.
The charge off ratio was remained very low and the consumer business is under 2% for the rack business and under a half a percent for the home improvement business.
And as ever and net recoveries and the medallion segment and that's the reason.
The provision was negative.
Okay.
And then just thinking about the provision going forward certainly the timing of recoveries and there's going to be hard to project, but how are you. How do you think we should be thinking about a normalized.
Provision level for 'twenty, 'twenty, one and for the consumer business and and sort of what.
What would be the underlying assumptions in terms of portfolio growth et cetera that would drive that.
And I'd say that Oh, I'm, sorry that it would probably be similar to what it's in the past and though we had pretty good growth, there, 10% and the rec and 34% or so and and home improvement. So I think things should continue pretty similar to how they've been.
And Larry I don't know if you wanted to pay it on anything to that.
No I think it's consistent I mean, we've got a long track record and the consumer business and what are the loss ratios have been and they've been pretty consistent quarter after quarter year. After year. So we're not really expecting anything unusual there.
And on.
On the medallion side is going to depend on whether the valuation of the collateral changes at all yeah. We think we're at the bottom but time will tell.
We're working hard on that and that can be a plus going forward.
Okay. Thanks, and then just kind of to that last point have you guys given any more thought to selling the medallion portfolio and just finally washing your hands of it and you know if you decided to do that do you think there'd be a market for it.
Yeah, we're always open to that you know and we want to really focus on our future, which is the bank and the consumer lending.
So you know if the prices rage, and certainly we'd sell it as Larry just stated it's pretty low right now.
And things have been as bad as they can be and any industry.
And we feel for the for the drivers they started getting out of the hole and then the pandemic hit and the government has not helped them at all so.
And this really has hit bottom it's not the perfect time to sell but if the price is fair and we could book a gain on a sale and we'd be interested and selling.
Understood and then just finally as I look at expenses as I was hoping maybe Larry you could give us a little bit of color on sort of how we should be thinking about run rate expenses for 'twenty and 'twenty. One I mean, certainly 'twenty and 'twenty had its fair share of noise with the pandemic et cetera, and I recall, you guys did do a cost saving and Furloughing program.
Around mid year, however, hasn't really seem to impact at least the salaries line, where we would have expected to see that impact. So maybe talk a little bit about why we haven't seen that impact and and if 'twenty 'twenty, one and if we're expecting expenses to trend lower or if there's something else we should be thinking about.
And I think it'll starts to drop you know you're right. We've furloughed a lot of people and and haven't released them yet and I think unfortunately, that's probably the next phase for us. So we're going to pick up some savings when the when we have to pull the trigger there.
Okay.
Yeah.
Understood. Thanks for taking my questions.
Thank you Alex.
Thank you. Our next question is coming from Steve Moss of B Riley Securities. Please go ahead.
Good morning.
Good morning.
Let me start off with the loan pricing here and just kind of curious what you're seeing in terms of transfer recreation and home improvement is there any increase in competition and I'm, just kind of the rates and the rates you're originating today.
Things are really continuing as they have which is a good thing since that's been so profitable for us.
On the consumer and the Rec side, we're still getting you know rates of 14% or more on many of those loans.
Home improvement has probably come in a little bit and that's been a touch of more competitive, but really not much more but the cost of funds is coming down and probably more than the yield is coming down. So we have a lot of Cds rolling off of our books with rates of two 2.5% that we took on.
And the last couple of years and we were just checking this morning, New C D costs for us for one year money and it's really unbelievable how low the low rates are these days and so I think 15 basis points for one year money. So you know we think these margins as impressive as the ore now could probably increase in 'twenty and 'twenty one.
Okay, Great that's helpful and then.
And also going back to expenses here.
See obviously good profitability here at the at the bank kind of curious as to what the potential is for maybe some efficiency initiatives or a reduction and expenses at the holding company.
And that's a good point and that we're focused on that we've been trying to trim back the expenses. There. So it's a little bit of a double edged sword honestly, because we have $278 million or so of charged off loans on the medallion side, but.
But we've got a couple of million dollars of overhead against debt collection team and workout people. So.
I think that's gonna pay off though you know we could cut back further, but then you lose the likelihood of collecting as much as that $278 million as he can.
So for example, you know if we and this is not an indication at all but if we're spending $5 million a year trying to collect it and we.
Don't we strike out it was a waste of money, but if we can collect you know a third of the 278 million and and $90 million and spend.
Three years $15 million I'm, just doing math, you know against that amount and then it's gonna be a windfall for us. So I think we just have to monitor it closely if we think we're going to have that kind of success and I think these resources are worth it but if we're not fortunate enough and the market gets worse for some reason and I think we have to make some further cut.
It's.
Okay.
That's helpful. And then maybe just on the subject of recoveries good good recoveries and the corner from the medallion portfolio kind of curious if you've had any subsequent recoveries subsequent and subsequent to quarter end and the people.
Oh, nothing that we can go into the subsequent but you know we're still hopeful that things are going to start falling on our way so to speak I mean, it can go on the opposite way for so many years now and I can't imagine the city getting worse and then it is now right I mean, it's been shut down which is unprecedented.
And so things are starting to get back a little bit to normal is still nowhere near normal and I think you know and sort of take time, a year or so perhaps maybe even more but you know I think we're on the right course, and I think that's going to pay off for us.
Great Alright, thank you very much.
Thank you.
Thank you. Our next question is coming from Mike Grondahl of Northland Securities. Please go ahead.
Hey, Thanks, guys and good morning, Hey, just I guess another question on the roughly 12 million of medallion.
Collection was that from one to three borrowers and sort of what happened that you ended up collecting that because you know it had been pretty small numbers that the previous several quarters. So if you could just shed a little bit more light there that'd be helpful.
Larry can you touch on it.
Well I mean, you know us.
We said before there is kind of on a long tail to do these recoveries because of the legal process you have to go through it takes a long time and at the same time some of these borrowers and some pretty substantial resources. They can bring to bear day delay payments and D&O slow the process down and so.
It's not something you can manage very easily but you know our people stay on it and they work hard and.
Was lucky that this quarter I think there may be three pretty good sized recoveries that came through them. All at the same time line and again were hopeful that will continue.
Got it so three borrowers made up that $12 million, just trying to get a feel for the mid day there.
And if you can.
Yes, you know historically.
Your provision expense first sort of the consumer the bank level.
And it was running closer to six seven.
Maybe 8 million a quarter and in this quarter and home improvement and Rec was a little under $4 million.
You know, obviously, the stimulus and things that helped with with credit quality.
Do you see that is sort of core staying at these levels or do you see after a quarter or two will be up at.
Something six seven and 8 million and it's kind of closer to our core provision level.
Yeah.
Okay.
Gross.
They they need to book reserves against every loans they put on the books and getting on debt the reserve levels haven't changed a lot.
As a percentage coverage because the the charge offs and loss ratios have been so low.
On the volume continues to increase of originations that are being recorded those reserves are going to go up a little bit to offset that.
Fair enough and.
You know Andy at a high level, how do you think about originations for 'twenty 'twenty one for.
For RV boat and the home improvement on the demand seems pretty robust out there, but you know 'twenty and 'twenty was strong and can you grow this and a 10% rate of 20% rate how are you kind of thinking about it.
Origination growth loan growth as you look forward.
And it should continue very strong I think I mean, we're expecting things to be business as usual the origination.
Growth for the Rec was I think 14%.
In 'twenty and 'twenty.
And for home improvement loans I believe it was 35% origination growth so and you know, they're too great and lines of business that they happen to be good pre.
Pre pandemic, there, even accelerating independent and make them do well soon as it's been definitely gets over so you know, we're very happy with the performance of that division and.
And that's that's the future of the company.
Got it two more questions one just.
Any comments on the first fintech partner and how that's ramping up and.
And and then maybe the second Fintech partner, you mentioned and and how do we just think of the contribution from both of those this year next year and.
And that scale.
The first one thing and got off to a slow start and and the beginning of 'twenty and 'twenty because their business was really.
Cosmetic surgery, and other elective surgery and that business was really slow and and at the beginning of 'twenty and 'twenty with the pandemic and hospitals not being able to accommodate them, but we're seeing a big pickup now in 'twenty and 'twenty. One so the January numbers look substantially better than the last year's numbers. The second Fintech partnership I think.
We're going to probably see signed up and the next 60 days or so and there. There's a lot of choices for us which is a good thing and probably even spoken to 10 potential partners, but we didn't want to grow.
<unk> too fast there we've got a kind of make sure we don't make any errors and it's very compliance driven and we want to be.
It's as good as possible and that area. So we should get the second one on the books. Shortly it's an extremely profitable business. If you pull up the financials of others in this space. All these banks as many of you know have.
All reports that are available to the public online and so you could see their profitability levels are companies like web and consulting Bank and cross River and all.
Others, I think there are always a pool well north of 20%.
So we're excited about this business you know, it's very small for us right now.
I think it'll have a small contribution in 'twenty and 'twenty, one, but it could really turn into a very large one in 'twenty and 'twenty two and beyond.
Got it and then just lastly, Andy.
And what are your two or three priorities for 2021.
And I'd say you know, we've really done a good job steering away from the medallion business and we had the vision to do that you know back in 2003, when we set up the bank.
Nobody saw Uber and Lyft and these other companies coming but we were fortunate enough to have the force sites to find new niches that we're even more profitable than those businesses were in like the legacy medallion business.
So I'd say, it's not taking our eye off the ball and we want to continue to block and tackle and stay in these business lines that have been so profitable for us where we're market leaders and.
And with the growth rates again of 10, and 35% and and <unk>.
Roy North of 20% and I think we're perfectly aligned for the future.
So just what deemphasize medallions and just.
Push on Yeah, I think it's I mean, that's your priority, yes, I, you know and I think we.
We deemphasize that for many years, but I think people are finally, realizing now and how far we've come so the medallion business is just a small fraction now before total assets I think it's under 5% So and Armani is long gone, but we just have to keep knocking out good quarters like this quarter.
If we can consistently do 25% quarters, where more and I'm not projecting that we do that and at all but just this quarter, but I thought it was a very good quarter was a turning point for our company and if we can continue to do that I think you know the writings on the wall, where the stock could possibly go I think it will all be and a very good position and the fuel.
Sure.
Got it Okay. One last question then Andy I mean.
Basically you hit 25 cents this quarter.
Because you had the benefit.
Of the medallion.
Not a provision, but a benefit of $7 2 million.
E is what was pointed out so I mean, you're kind of breakeven without no no I wouldn't I don't I wouldn't say that I wouldn't say that the medallion division still lost money for the quarter, a small amount, but we had I don't know Larry can correct me about and the $8 million, which is what hopefully will be a one time write down.
And we took the values and the medallion down from.
And on 89070, 9000 and yourself. So that was I think between five and $8 million, which should not continue but on a net net I think we lost a couple of million dollars again, and and the medallion quota, but again, Larry good correctly.
No we didn't.
We lost.
$3 6 million and the quarter.
So Mike you're right I mean, you had some positive one time, one way, but you had you know a big negative with the medallion value write down of debt 10000 per medallion and the other way. So we're not projecting anything but are both those things.
Six to repeat and the future it would be a benefit for us and net benefit.
No. That's that's the I mean, the bank debt.
Thanks, very profitable and it just kind of cleaning up legacy stuff. So okay.
Thanks.
The bank made 14, and a half million dollars for the quarter. So.
Hopefully they continue that if they continue a run rate like that again, not projecting that they will or won't but just doing the math of $14 million per quarter was $56 million for the year or so.
Yes.
Right right Okay.
Yeah.
At this time I'd like to turn the floor back over to Mr. Bernstein for closing comments great.
Great well I want to thank everyone for attending this morning's call. We're happy to follow up if your question was not answered to that and please contact our Investor Relations Department at 212328 to one seven and six or via email at Investor Relations at medallion Dotcom.
Com.
Thanks, very much for participating and please feel free to follow up with and he calls that weren't on answered today any questions. We appreciate it thanks again.
Okay.
Yeah.
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