Q1 2021 Medallion Financial Corp Earnings Call
Okay.
Good morning, and welcome everyone to medallion Financial's 2021 first quarter earnings call line.
And now everyone should have access to the earnings announcement, which was the lease prior to this call and which.
And then also be found on the company's website and medallion dot com.
Before we get formal remarks and need to remind everyone that the matters discussed on this call include forward looking statements or projected financial information and 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 Exchange Commission.
Each forward looking statements and projections 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 Mr. Andrew Berger Mercy President of the daily furniture. Thank you Sir you may begin.
Good morning, everyone and thank you for participating in our 2021 first quarter earnings call.
Joining me on today's call is our CEO, Alvin and Burstein and our CFO Larry Hall.
As a result show we were pleased that we continued the momentum from a strong fourth quarter and through the first quarter of 2021.
Let's quickly touch upon the medallion segment, and then I will give you some highlights on the consumer and commercial segments before turning the call over to Larry Hall.
As a result of several factors, including New York City is slowly beginning to open up we have began experiencing an uptick in demand for medallions in New York City.
The company left New York City medallion values unchanged from the prior quarter was slightly adjusting some smaller taxi and market values downward.
These non cash valuation adjustments of several million dollars along with increased net interest loss, partially led to a $1 $9 million loss for the medallion lending segment this quarter, which was significantly lower than the $10 4 million dollar loss and a year ago quarter.
Additionally losses for the quarter were partly mitigated by a $1.8 million gain on extinguishment of medallion related debt, resulting from our successful debt private placements and December 'twenty, and 2020 and 'twenty, one first quarter.
Our efforts will continue to be on recovering as much as possible. While we remain hopeful ridership will increase and the second half of the year.
When looking at our consumer portfolio medallion bank once again posted a strong quarter as we head into our busier months given the seasonal volume increases we typically see the second and third quarters.
COVID-19 related payment deferrals were largely resolved last quarter.
Loan volume continues to remain robust, resulting and the recreational and home improvement and net loan portfolios growing 11% and 33% from March 31, 2020, while consumer originations were up 37% from the first quarter of last year.
The consumer portfolio and now represents 93% of total gross loan receivables as of March 31st 2021.
And March of this year, the bank executed and non binding term sheet with another potential fintech partner, which should be active and the next 30 days.
We remain optimistic the program at medallion Bank will grow this year and we will see an increase in volume and for more to partners as the economy begins to stabilize.
Yeah.
On the commercial side liquidity remained strong and many of our mezzanine portfolio companies were able to access the paycheck protection program last year, providing needed liquidity and.
Mezzanine and portfolio performance is slowly recover.
The full recovery by the end of the year a deal flow is as strong as we've seen and the 20 plus years and we've been in this business.
Let me quickly touch upon some additional first quarter highlights.
Net income from the company's consumer and commercial lending segments increased to $15 1 million for 2021 compared to $4 3 million a year ago, which was lower and part due to provisions we took as a result of COVID-19.
Medallion Bank closed the first quarter with an 18 point O, 3% tier one leverage ratio and $228 6 million of total capital.
Including loan collateral and the process simple closure and old Chicago medallion assets told him and die and exposure comprised 4% of our total assets as of March 31, 2021, compared to 9% at March 31, 'twenty 'twenty.
So with that I will now turn the call over to Larry who will provide additional highlights on the first quarter.
Thank you Andrew.
Net income was $8 $4 million or 34 cents per share compared to a net loss of $13 $6 million or 56 cents per share in the prior year quarter.
Net interest income was $28 $7 million and the quarter, primarily reflecting the contribution of the consumer lending segments compared to $26 $5 million in the 2020 quarter.
This was our second profitable quarter in a row and we hope that the medallion issues are behind us.
Our net interest margin has been consistent in our reporting we ended the first quarter with a strong net interest margin of 9.18%.
This is well above average when compared to other financial institutions.
Net cash provided by operating activities increased 25% quarter over quarter to $21.1 million from $16 $8 million into 2020 first quarter.
As Andrew previously discussed New York City Medallion values stayed the same from last quarter and stand at 79000 and $500 net.
The company's net medallion lending portfolio exclusive of loan collateral and the process of foreclosure was $11.2 million as of March 31, 2021, compared to $96 $2 million at March 31, 2020, and 88% decrease.
Total provision for loan losses was $3 million into 2020, one first quarter compared to a provision for loan losses of $16 $5 million in the prior year quarter.
We booked a $1 million provision for loan loss benefit and the medallion lending segment, while recording a $3 $6 million provision for recreation and a 450000 dollar provision for home improvement.
As the consumer portfolio continues to grow we expect provisioning to be in line with our growth expectations.
Consumer loans still and the state of deferral were immaterial as a percentage of the portfolio.
The consumer loan portfolio's average interest rate was 13.44% this quarter down from the $14 four 2%, we recorded and the 2020 quarter as we remained cautious and more selective on the loans, we chose to underwrite as well as experienced faster growth and a home improvement lending business, which has lower yields than <unk>.
Recreation lending, but low and losses as well.
All of our consumer lending lines are showing growth and low charge offs and delinquencies, which we are hopeful will continue throughout the year.
Net income from the company's consumer and commercial lending segments increased to $15 $1 million in 2020, one compared to $4 $3 million a year ago on net interest income for the 2021 first quarter was $31 $4 million compared to $27 $4 million into 2020 first quarter on <unk>.
8% increase.
Our commercial lending segment recorded net income of $337000 and the first quarter and $155000 and the same period last year.
And net commercial lending portfolio was $58 $9 million at the end of the first quarter compared to $68 $3 million and the same period last year, reflecting the early payoff of several large relationships.
That said the pipeline the future bookings is at a very high level and we anticipate meaningful growth over the rest of the year.
The average interest yield was $12 six 5% compared to 13.0% to 5% a year ago.
With that I'll now turn the call back to Andrew.
Okay.
Thank you Larry.
Operator, we can now begin the Q&A portion of the call.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
And so indicate your line is and the question queue.
You May press Star two if you'll let you move your questions and the Q for participants using speaker equipment and may be necessary to pick up your handset before person Sarkies one moment, please as we pull for questions.
Our first question comes from the line of Alex <unk> with Piper Sandler. Please go with your question.
Hey, good morning, guys.
Morning.
And it was great to see the the decline and and expenses led by about salaries as well as professional expenses and I was wondering if you could.
Elaborate a little bit more on what drove those decreases and then I think and your and the release it says that you're taking steps and.
And then you hope will produce long term value for shareholders and I was wondering if you can elaborate a little bit more on what those steps might be.
Sure. Thank you Alex.
And we're continuing to focus on cost cutting things Thats, what management wants and I know, that's what we want and what shareholders want as well. So you know we as discussed prior we furloughed a lot of people and then ended up on letting them go a couple of months ago, we've been consolidating our offices.
We have other taking another cost measures. So the trends are definitely hitting exactly where we want we're probably a little bit ahead of schedule and in that regard.
Legal and last year was kind of high on that was a little bit abnormal a year ago period. So this quarter. It was more in line with expectations. So overtime I think youre going to see these trends continue I think we're going to continue to save money on and operate as lean as possible.
So would you say that the first quarter for some of those items that are not as seasonal.
Is it pretty good indicator of the of the starting point for the remainder of the year, there's nothing in there and that's kind of noncore and nonrecurring that's and that's going to reverse and the second quarter.
And it could be a little bit shopping and it's not going to be a direct line downward from time to time for example, with legal and if we take measures to try to collect on loans that are past, though you could see that number go up but.
And the general trend will be where it is and continue hopefully lower over time.
And in terms of the second point on our strategic plan and building value for shareholders.
You know, we're really focused on our core lines of business.
Some of the other mines the non core lines. The other Cros, we sold off were looking at doing something now with RPM.
The orange will be selling off as well. So there's just a lot of value and our consumer line of business.
<unk> been doing great. The Roe's are north of 25%. So that's where the focus is going to be is continuing to grow the bank. As you saw the last two quarters. This all day, Bangor and about 14, and a half million on average per quarter. So that's a great run rate of over $50 million per year.
And I think that can grow from that so I think we're on a very good place right now.
Great and then you know Larry you touched on and a little bit the consumer yields dropped about 100 basis points. I think you kind of alluded to the mix shift between home improvement and rec and maybe going up a little bit in terms of credit quality, where do you see what do you see those those yields shaken out over time and can you just remind us there's and there's really no correlation between those.
<unk> and <unk>.
And then he benchmark interest rate correct.
Yes, correct I mean, there are probably going to stay pretty consistent with what we reported this quarter.
The credit quality aspect to it continues to improve and the yields come down a little bit from that and we're also having lower borrowing costs and so the net interest margins are likely to remain real strong.
Got it and are you seeing any additional competition in that space.
Yeah.
So some yes.
Okay.
And then you guys raised about 85 million Bucks and and senior notes, leaving a little bit over 50 million beyond the debt that you paid off in April. So maybe you can elaborate a little bit more on what the proceeds for that additional 50 plus million dollars is.
Yes, we're very pleased with how that deal when it was oversubscribed.
And thankfully a lot of interest on our company, we really turn the ship around the last few years. So our cost of money has been going down. The other publicly traded debt was think of about 9% traded on the M. Finn al and that was all retired as you pointed out we replace that with money at about seven and a quarter seven 5% or so we received an investment.
Grade rating on that and are there and the rest of the money will probably go to pay down some more banks, if not all of the banks overtime we'd.
We'd like to start growing medallion capital and that was a big profit center for us years ago, they've been a little slow the last few years really because of our issues because we have lots of capital to give them, but now we're in a much better position. So the mezzanine group, which is out and Minneapolis in the past, we have done really well with.
And we probably averaged 17% returns and as you know there's no guarantee of the future.
But we wanted to put more money into that we wanted to put more money into our bank when need be the bank returns should be even higher than that and so probably just to stick with our knitting and.
Really what turns us around are those lines of business and that's what we want to focus on to grow.
Perfect and then just a final question for me is the million dollars that you released or that you had a provision benefit for and the medallion loan what exactly drove that debt provision benefit.
I you know just the mechanics, you know good recoveries that we got that lowered the need to and be booking any provisions and the fact that the New York market.
A flat and it's been a long time since we haven't had an adjustment on that market and a quarter.
What where do you have the the level of recoveries Andy.
It was about a million dollars.
Perfect well, thanks, a lot for taking my questions sure. Thanks, Alex.
Our next question comes from the line of Steve Moss with B Riley Securities. Please proceed with your question.
Good morning, good morning.
Maybe just following up on the margin here to start you know and.
And here you are in terms of the mix shift in terms of where yields are heading and funding cost coming down do you think more or less basically margin hold steady or a little bit further expansion.
For the remainder of the year.
I think we.
We could increase the margins I mean, the margins are just terrific and $9 one or <unk>.
And so my board and one 8%.
Thanks is really exceptional so.
We continue to.
Focus on growing that that's the goal.
And the medallion loans as those roll off that's been holding that margin down those rates were 3% or so.
And cost of funds has been coming down as I. Just noted you know the.
Investment grade rated debt was lower than the public debt that we had brokerage Cds went out barring at about 20 basis points and the average C. D. On our bank books is about one 6%. So the goal is and I think is very achievable is to actually increase net interest margins.
Alright, Thanks for that and then in terms of just tighten up the loan growth here.
And I appreciate the color in terms of pipelines remains strong. So we continue to think about a double digit growth rate for recreation and call. It you know.
High Twenty's or low 30% prefer home improvement.
About fair.
We grew I think.
And by 11% year over year and Hmm.
Home improvement by 33%, so our goals every year or two.
Beat the prior year, so even if he came in and where we where do you live in and around 33%. That's extremely strong growth and this market banks are struggling to Joe asset growth and we're growing our lines of business by 33% per year. So.
But we never rest on our laurels and and the hope is to beat those hurdles.
Okay.
And then just on the Fintech.
Side of things here in terms of just any.
Any updated thoughts and <unk>.
With regard to the new partners and just how you know as you've gone over the last couple months working with them and any update in terms of expectations and and volumes.
And that's an interesting business line for US you know for those that don't know that's the model, where the fintech companies send us loans to our bank in Utah, We fund it day by the loans back within a day or so so there is no balance sheet risk to us we're earning fee income on it you have the flowed for a couple of days before they buy it back.
So it should be and very profitable business over time.
And the time to really get it ramped up we're not expecting much contribution in 2020, one and I think it's more in 2020 two event, but theres also an opportunity for us to invest and these fintech companies and Youll.
Youll see on our public filings, we have and investment and a company called upgrade and we're expecting a great return from that so there's really many ways that we could.
Florida grown and this business, whether it's working with strategic partners and booking on their loans or even investing and some of them I think it's gonna be a big growth area for us and 2022 and beyond.
Great. Thank you very much I appreciate all the color. Thank.
Thank you.
Our final question comes on line of Mike Grondahl with Northland Securities. Please proceed with your question.
Yeah.
Hey, Thanks, guys and congratulations.
First question.
The stimulus clearly helped to delinquencies and charge offs and kind of the consumer bank.
And what should we think of us and normal provision for that business. I think you guys said it was about $4 million overall.
In the quarter.
On the reserving levels are you on a real strong compared to you know what loss rates are actually band and what the delinquency trends indicate so I think for the quarter. We were at about 3.45% for our direct business and 1.57% for the home improvement business and I wouldn't imagine those are.
Likely to change anytime soon unless the loss rates accelerate which they certainly have not done.
Yeah, just to add to that day, the lost rates had been a lot less and that sort of the three and four of 5%.
<unk> the actual losses, there I've been on 1.35% and the home of proven to Larry stated with a reserve of 1.57%.
The real losses have only been 0.3%.
Got it yes, the coverage looks good and clearly.
And secondly, Andy I think you said your current brokered CD rates are 20 basis points, but they average 1.6.
On your books, what's the dollar volume that you can shift to that lower rate.
Sure.
And when they roll off obviously I'm not sure the average life of the Cds.
It's definitely going to happen because we don't go out too long on the Cds I think the average life.
Two years or so for.
Rich.
And maybe even less than that.
And so we've got a lot of legacy Cds when rates were higher on our books from two years ago.
And when COVID-19 hit a lot of banks like US took on a lot of Cds out of kind of high rates and retrospect, everybody was nervous about the market and banks loaded up with C. D and so those were a 1.5% to 2% rates, but if you look at our money today, you know what one and two year money is between 10 and 20 basis.
Points.
So I'd say every quarter youre going to see and improvement in that.
Got it and is there are about 500 million 600, and not just the dollar amount that can get adjusted down.
Do you have a rough estimate there.
Well there isn't there's a billion dollars of Cds So yes.
Yes, everyone on and off over two years, it's a it's a pretty large number every month and they basically all of the net new growth is going to be at the current low rate and then everything that rolls over from the existing portfolio is going to be at those rates as well so.
Over the course of the year that number.
The rate should drop quite a bit.
Good good Okay, and then hey, you guys talked a little bit about.
The yields on consumer were down a little bit some of that was home improvement mix, but you also said you were a little bit more selective and underwriting.
Can you give us an example of how you were kind of more selective.
Sure Yep, we when we started this business the consumer FICO scores were about 600 or so.
And today there are 660, so we've been really raising them over time and being selective.
And our home improvement and we don't even have around when we started the bank and 2003.
And so that was about seven or so years ago, we started that and average FICO scores. There are 760 so.
And we really have a much improved.
Improved credit quality than we did years ago.
And the yields have been very strong over that whole time period, there's a little bit of new competition and the business, but even with that.
And you know, even if our yields came down a little which they may not come down and law, but if they did I think the cost of funds would more than offset that.
Got it and and just lastly.
Yes.
What was your investment and upgrade and what do you think that is worth today.
And we invested about $250000.
And maybe five years ago or so.
And you know there's been an explosion of the values of companies Fintech companies. So they're their plans I would think it would probably be to go public and the next year or two but it's.
It's a very well run company.
Our investment is worth many times that I wouldn't be surprised if it was worth 30 times, what we paid for it.
It's hard to value private companies, but.
And the plan for US there is probably just as sell off our position over time also a it's another non core.
On a business to.
On interest like that we'd rather really be more on the strategic partnership side, where we're getting the fee income, but the plan and would probably be to sell off the position over the next 12 months or so.
Got it okay. Thank you.
And with that ladies and gentlemen, or we stay on the Bart question and answer session and now I would like to turn the call back over to Mr. Murphy for any closing remarks.
And just wanted to thank everyone for attending this morning's call. We're happy to follow up if your questions were not answered to that and please contact our Investor Relations Department at 212328 to $1, seven and six or email and Investor relations at medallion Dot com.
Thanks, everybody and have a great day.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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