Q2 2021 Medallion Financial Corp Earnings Call
Yeah.
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Thank you for standing by this is the conference call operator.
Welcome to the medallion financial second quarter 2021 earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
The presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then 1 when the telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and there.
I would now like to turn the conference over to Ken Cooper with Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to the medallion Financial's second quarter earnings call. Joining me today are Andrew Burstein, President and Chief operating Officer, and Larry <unk>, Chief Financial Officer certain statements made during the call today constitute forward looking statements made pursuant to and within the meaning of the safe Harbor provisions of the private Securities litigation.
The format of 1995 as amended.
Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the earnings press release issued earlier and in our filings with the SEC. The forward looking statements made today are as of the date of this call and you do not undertake any obligation.
The update these forward looking statements with that let me turn the call over to Andrew Andrew.
Thank you Ken and good morning, everyone.
Over the last several quarters, we have truly transformed the company into a very profitable business with several strong segments, namely recreational and home improvement lending. This.
This resulted in strong bottom line performance from medallion financial driven by record breaking the quarterly net income by our largest subsidiary of medallion Bank.
We believe we are just starting to hit our stride as evidenced by our third straight quarter of strong top and bottom line performance.
Our growth strategy of investing in our consumer loan business continues to deliver for US we had a number of achievements during the quarter net.
Net income was $10.3 million net interest income grew 5% to 37.4 million based on our strong net interest margin of 8.84%. This is well above when compare to our peers.
We grew our gross consumer loan portfolio of 17% year over year to 1.3 billion.
This included nearly 30% growth in our home of proven segment as that market remains active and very robust.
Kept our credit quality standards high and our low losses low a low.
Loan loss provision was at historic lows.
Our growth strategy is straightforward with 3 main initiatives, 1 grow our consumer lending businesses.
To reaccelerate growth of our commercial lending business and 3 become a leaner more focused organization.
As it relates to growing our consumer lending business as we continue to execute those businesses are managed at our medallion bank subsidiary in Salt Lake City, and our team there continues to do a great job delivering an roe of over 25% for the quarter.
The loan origination volume stayed strong and helped deliver growth rates consistent with the first quarter our.
Our net recreation of loan portfolio grew nearly 13% on our net home improvement portfolio grew over 30% combine the consumer portfolio grew over 17% to $1.2 billion and now represents 94% of our net consolidated total loans.
We believe this trend can continue the biggest driver for this is debt. We believe there is still a significant demand driving the industry's our consumer businesses serve today.
We see similar strength in the home improvement market.
Sweet spots within home improvement continues to be new swimming pool installations siding and windows and replacement roofs.
All of these are good prospects for continued growth down the road we.
We don't know how long this will last but we're taking it 1 quarter at a time as I indicated earlier home improvement is our fastest growing business segment.
1 item I would like to point out is the levels of loan losses in the consumer lending business have been historically low over the past quarter.
We attribute this to solid borrower payment activity and increased recoveries of prior loan losses, Larry will discuss this more shortly.
Our number 2 of growth initiative is in our commercial lending business. The model for our commercial lending business has proven the focus within our commercial business is on helping small businesses get up and running we.
We saw a bump in the second quarter of new business as we had $11 million of originations the.
Positive to what we have seen recently is really showing how good our credit evaluation process is a we are receiving timely principal payments from our existing borrowers and b more importantly, we've had virtually no change of commercial loans default levels.
Our number of 3 grocery initiative is to become a leaner and more focused organization.
We're attacking this on 2 fronts. The first is on the P&L front, we continue to look at reducing operating costs.
The other Francis to divest non core assets and redeploy that cash in a matter, which aligns with shareholder value.
This ends we advanced the strategy in the quarter by retaining and divest from bank to help advise and assist us the strategic alternatives for some of our non core assets.
Due to the sensitive nature of these potential transactions, we do not intend to discuss any transaction individually as.
As we complete transactions, we will of course keep you updated.
With that I will now turn the call over to Larry who will provide additional financial highlights in the quarter.
Thank you Andy we had another very strong quarter and experienced strong top line growth. We delivered improved net income EPS and strong cash generation.
Maintaining a solid balance sheet and continue to manage our risk profile I'd like to update you on several key topics.
First is aimed to Andy mentioned, we had another quarter of low loan loss activity in our consumer lending segment total.
Total provision for loan losses of $700000 benefit as compared to a $3 million expense in the 2021 per quarter.
This was driven by reductions in the losses in the portfolio and solid recovery efforts as well.
We believe loan losses, and recoveries will ultimately start to normalize in the coming quarters, which will cause the loan loss provision to rise back of our typical range.
Ideally the normalization of our loan loss provision will be partially offset by the continued growth of net interest income.
We had several nonrecurring items in the quarter.
This included a gain on extinguishment of debt of $2.9 million.
This was related to the settlement of the bank borrowings with several of our lenders.
We also had an asset accounts gain on the sale of approximately 44% of our investment in the Fintech company called upgrade of $2.4 million.
Upgraded the Fintech company that we made a small $250000 of investment.
We will also explore making similar investments in similar company in the future.
Lastly, we recorded a $1.6 million valuation allowance within our tax provision and the specifically related to 1 of our non core investments.
Moving to some other financial highlights.
We continued to show strength of net interest income and net interest margin.
Salaries and benefits increased sequentially from $5.7 million of the first quarter, the $7.9 million in the second quarter. This was driven primarily by accruing incentive compensation related to our performance year to date.
Net cash provided by operating activities increased nearly 41% quarter over quarter to $23.4 million from.
From $16.6 million in the 2022nd quarter.
We continued to generate strong cash flow primarily in medallion bank.
Moving to a review of our growth segments. The consumer loan portfolio's average interest rate was $13.1 4%. This quarter. This compared to 14, 4% from last year's second quarter and reflects the market rate decline and our efforts to remain competitive, particularly in recreation lending.
The home improvement lending segment again outpaced the growth of our recreation lending segment, the latter of which has a much larger base both of showing growth and producing low charge offs of delinquencies.
Net income from the company's consumer and commercial lending segments increased to $16.2 million.
For the quarter compared to $9 million a year ago.
Net interest income for the 2021 second quarter was $29.5 million compared to $26.8 million in the 2022nd quarter of 10.
10% increase.
The net commercial lending portfolio of $66.2 million at the end of the second quarter compared to $55.6 million at the end of the first quarter.
This growth was driven by a strong quarter of loan originations.
The average interest yield was $12.6 9%.
Per the 13, 8% of a year ago.
This is a strong yield and when combined with virtually no write offs for loan losses are primarily reasons why investing in the growth of this segment is a key growth initiative for us.
Lastly, a quick update on the medallion lending segment during the quarter, we collected $2.4 million of principal payments and $3.2 million related to the collateral we saw low medallion values triggered by the low market sales in Chicago, which resulted in the $2.4 million write down in.
In addition, we had the write off of medallion loans premium of $1.5 million.
The company's net medallion lending portfolio of $5.8 million as of June 30, plus we had $48.2 million of loan collateral in the process of the foreclosure.
With that I'll now turn the call back to Andrew.
Thanks, Larry a couple of more items to mention within the past year, we have launched 2 strategic partnerships within our medallion bank subsidiary.
These are loan origination programs with select Phanteks operating within healthcare lending niches.
With the relationships of this type we receive of loan origination fee plus interest between the origination date of the date. The loan is ultimately sold which is generally 2 to 5 days. This incremental revenue is high margin for US. We continue to believe that this will be of very good business segment over the long term.
I want to take a moment of thank all of our team members banking partners vendors and shareholders.
Performance would not be possible without the efforts of each of you.
We are seeing the results of our hard work over many years pay off and we're excited to strive to keep our profitable growth growing.
Larry and I are now happy to take your questions.
We will now begin the question and answer session.
To join the question queue.
Chris Star then 1 on your telephone keypad.
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We will pause for a moment as callers join the queue.
Okay.
The first question comes from Steve Moss from B Riley of Securities. Please go ahead.
Good morning.
Good morning, Steve.
Good morning, Andrew maybe just starting with the the expense.
Dynamics this quarter is a little bit elevated from last quarter and it sounds like Theres, probably some 1 time items just kind of curious.
The drivers of expenses and how to think about that into the third quarter.
Yes.
I think that if you look at the year to date expense number is pretty comparable to what it was a year ago and even though there was some choppiness with things like legal.
And salaries of the overall expense load other probably remain at that roughly $17 million level.
Okay.
Okay.
And then in terms of just the.
The loan growth here it looks.
There is very strong for the quarter.
Just wondering if there's a little bit backend weighted just on the timing and just.
You guys sound very optimistic about third quarter trends.
A little more color as to how you're thinking about that.
We think of loan growth should continue we're in very good niches.
It's probably been accelerated growth due to the pandemic with people traveling less less.
Lastly, airplanes in hotels. So these are really like little self quarantine the units that we finance, whether it's a boat and RV.
The improvement lending many people, obviously staying home so right now it looks like we're at the right place at the right time.
Okay Alright.
Alright.
Well Thats all from me. Thank you very much.
Thank you.
The next question comes from Alex <unk>.
From Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, good morning.
First question from me.
The non core assets that you referred to that you are exploring strategic alternatives for is that referring to exclusively medallions in medallion loans.
We're really looking at everything we've made on after the last couple of years to really focus more and more on our bank where the returns are so high.
The the return on equity and our Rec lending is over 30%. So it's a great use of our efforts and proceeds to put money into that area of continuing to grow so the.
The largest ones left and really the only non core assets left or of medallion loans and all of our NASCAR investment. So we're really looking at both of those things to divest both of them potentially over time, we're not going to sort of sell if the prices of right. We want to do what's best for the shareholders in time it right. So it's really.
The opportunistic on our part when the REIT proposal comes along for either we'll pull the trigger.
Great what about the the gain that you had in the fin Tech this quarter other more investments like that that are still on the balance sheet that could potentially be unlocked over the next couple of quarters of years.
We hope so.
That was a big win for US we invested at about 10 of share non of 10 cents a share and we sold some stock recently off of $3.80 ourselves of 38 times alright.
Of our investment and there are not that good obviously, but in the past we've been very successful with medallion capital with our mezzanine group they have a portfolio of about 25 companies.
And the our model has been lending at about 12% rates about $3 million in taking warrants.
We're options and companies and they've been very successful over time, that's been a bit choppy, it's hard to predict when you're going to hit the next homerun, but hopefully in their portfolio of something will come through and then and the strategic partnership program and our bank that's of great feeder system for us because these fintech companies come to the bank.
Looking to pay us fee income by sending us the loans when we book them and then they buy them back in.
We move very cautiously with them. It takes us about 6 months of due diligence on companies, but we kind of have a first look so when these companies come to us and they want to enter into the strategic partnerships with us. The natural question for us is going to be should reinvest in them can we find the next upgrade and hopefully we do.
Great and then just keeping on the theme of the of the.
The the strategic partnerships.
When do you think that these 2 relationships you have the.
So far going to translate to some.
Some something that we can see in the P&L in terms of our earnings.
Unlike most fintech companies that take years to be profitable and then give value to billions of dollars of valuation we're profitable already in this area the volume still light.
Building, it's going to continue to build but we're already operating on a profit there. So right now we have 2 partnerships in place.
The hope is to get a third signed up within the next 3 months or so.
Got it and then can you talk a little bit about the capacity that medallion bank has for these types of loans.
Certainly the the economic seem pretty pretty rewarding, but in terms of the ability to sort of process the flows.
What.
What's the capacity at the.
What kind of goes into it.
It's very compliance driven so what you need to do is really build a good compliance department, which they've done the really hired great people at the bank in Salt Lake and then each new deal is immediately accretive because you have the right procedures in place. So we've already invested in that infrastructure and again are already profitable but.
We can quickly grow.
Of the REIT players come in contact with US we can go from 2 to.
5 or 6 over the next couple of years very easily.
Would there be like of flow agreement with with those.
Partners that they would basically you agreed to take on a certain amount of there of.
The loan generation or percentage or how would that arrangement actually with the partnership actually work.
You usually get all of their production so.
Not the these are the numbers, but let's say of Fintech companies generating $300 million of year of loans. It would come to US we would book it we would charge of about 75 basis points or so as the fee and then the rates we've been very cautious here too, we're not doing anything with rates above 36%.
Net other banks are doing deals at 100% interest rates, but we're not.
So right now we're not holding any of the paper. So we're just getting the fee income. So in that case, you are getting the 75 basis points of the bank is buying it back 2 days the Fintech partners buying it back from our bank 2 days later or so so you have the flow for 2 days, but we could certainly start holding some of the paper if we feel comfortable with the partner.
So it's very possible to build a large portfolio quickly here, if we like the credit quality coming in and we want to hold say 10 or 20% of the paper that they are sending us and not sell it all back to them.
And then final question from me when I look at the charge offs in the second quarter. It looks like it was about $10 million or so of.
I presume mostly related to medallion loans did you actually have some loan disposition this quarter that drove those charge offs are.
Or was there a change in the valuation level or something else, we should think of.
There was actually a settlement with the none of the large institutional borrowers that we had and yet pretty much all of the charge offs related to medallion lending.
Great. Thanks for taking my questions.
Thanks, Alex.
The next question comes from Mike Grondahl from Northland Securities. Please go ahead.
Hey, guys. Thanks.
Could you give us the <unk>.
Net charge offs by category.
Just so we can kind of have those.
Okay.
For the quarter it was.
The $10.9 million from our guidance.
About 300000 per home improvement.
And it was a net recovery position of 500000 in the recreation area.
That's great that's great.
Thanks, Larry and Hey, Larry I think you mentioned in your prepared remarks.
Debt yields were down a little bit in the RV consumer space, just the competitive environment, a little bit there could you just go into a little bit more detail kind of what youre seeing competitively.
Okay.
Yeah.
I'd say the there is not new competition. There I think we've just been raising our standards over time.
The home improvement lending for example, whereas the FICO scores of about 7.6 days. So that's a plus quality paper yet we're getting yields of 9 per center, so which is really wonderful given that credit quality.
And the wreck.
We've been raising the FICO scores.
We're probably at about 60.70, or so years ago, we were probably of 600, so we're kind of getting a R. R.
Our best credits funded because we're getting so much volume coming in we're able to choose.
And of just elected to really go for the better credits in the meantime, which of.
Slightly lower range correct, yes.
Got it got it.
And then you had debt debt settlement gain how much of that was actually settled.
I think we had about $31 million over the first 6 months of the year.
So we paid off all of our bank debt since the <unk>.
The number 30 substantially all Theres still 700000.
Yes.
Got it got it.
Is all from me thanks, guys.
Thanks, Mike.
This concludes the question answer session I would like to turn the conference back over to Andrew <unk> for any closing remarks.
I want to thank everyone for attending this morning's call certainly an exciting time from medallion as always if you have additional questions from needs. Please do not hesitate the contact our Investor Relations Department of 212328 to $1.76 or via email at Investor.
<unk> at medallion Dot com.
Thanks, and have a great day everybody.
Yes.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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