Medallion Financial Corp. (MFIN) Q4 2017 Earnings Report, Transcript and Summary

Greeting and welcome to Medallion Financial Fourth Quarter and Full-Year 2017 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Garrett Edson.

Thank you, and good morning. 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.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. For further information on factors that could impact the company in 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 fourth 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. We are very pleased with our fourth quarter results. 2017 was a year of successfully executing on the continued transformation of Medallion. After a challenging 2016, we sharply focused on our consumer lending and mezzanine financing segments and with our continued success and material preferability we were pleased that we were able to capably manage the ongoing loses at our Medallion portfolio. 2017 demonstrated that we are moving in the right direction. As we have said, we understand that our efforts will take time, but much progress is being made. At the bank, our consumer lending segment had a record-breaking year both from an originations and profit generating standpoint. For the year, our consumer segment originated over 431 million in loans and our teams consistent and prudent underwriting of those loans help lead the bank to generate 2017 net investment income before taxes of $71.5 million. In the fourth quarter alone, the bank generated net investment income before taxes of $18.5 million. In addition, we were able to sell $221 million worth of performing consumer loans at a premium during the year, generating additional liquidity and gains of sale for the bank. As of December 31, our consumer portfolio stood at 683.5 million of net receivables, a reduction due to the December sale of $127 million of performing loans. During the fourth quarter, we continue to see a solid mix of originations between our very high yielding RV & Marine loans and our high yielding prime credit home improvement loans. We continue to focus squarely on our underwriting where 90-plus day delinquencies were only 0.6% of receivables as of the end of the year. In hindsight, our decision to start and build Medallion Bank 15 years ago back in 2003, in order to diversify our assets, was absolutely crucial for our company to be able to withstand the challenges we faced and positioning ourselves for long-term success. I’m proud of the entire team with the bank and believe its best days are still ahead. The continued strong performance of our consumer loans was partially offset by the bank's medallion portfolio, which saw us take approximately 16 million in additional unrealized depreciation and charge-offs due to our further reducing the estimated values of New York City and Chicago Medallions as of December 31. We particularly want to note that during the quarter we made a change to the length of time alone as characterized as delinquent before being fully or partially charged off. Previously, the bank charged off loans after 180 days of delinquency. During the fourth quarter, we shortened the time period at both the bank and the Medallion Financial to 120 days of delinquency before partially or fully charging off the loan. We believe the new short of period is a more accurate and conservative treatment for delinquent loans in the current Medallion markets. Of course, though, we still are actively and vigorously pursuing recoveries. Our Medallion exposure of both the bank and Medallion Financial continues to steadily decline. As of December 31, the company managed $388 million of Medallion loans, a $42 million reduction through September 30, and 27% reduction from the prior year. On cumulative combined basis, we have now reserved or charged-off over $200 million of medallion loans. In terms of our current Medallion portfolio composition at Medallion Bank, Medallion loans comprise 20% of the bank's net investment portfolio as the portfolio at the bank is generating positive cash flow. If we have not sold the performance consumer loans in December, the Medallion portfolio would only be 17% of the bank's portfolio. We’re pleased that the bank's Medallion portfolio is continuing to hold this on in a challenging environment and we expect excluding any potential future consumer loan asset sales that the percentage will continue to decline in subsequent quarters. Furthermore, the special meeting for shareholders to vote on whether the company should converge from a BDC to a non-investment company is scheduled for March 7. So, overall, 2017, saw Medallion moving in the right direction as we continue to focus on our key drivers. Our bank continues to perform very well from a cash perspective, driven by cash earnings from its consumer lending division, and partially offset with paper losses through our Medallion charge-offs and reserves. Meanwhile, our mezzanine lending division continues to generate strong results with the division increasing its net increase in net assets resulting from operations by 46%. If we continue to reduce our medallion lending exposure as we expect, we are optimistic that we will be in position to generate even greater long-term consistent profitable growth. I’ll now turn the call over to Larry who will give us some brief highlights regarding the fourth quarter results.

Thank you, Andy and let me take you through some of our fourth quarter highlights. In the fourth quarter, Medallion financial recorded a net increase in net assets resulting from operations of $3.3 million or $0.14 per share, compared to a net increase in net assets resulting from operations of $7.1 million or $0.29 per diluted share in the prior year period. Our fourth quarter 2017 results included $47.5 million in charge-offs, which was offset by $31.4 million in unrealized depreciation, primarily due to the reversal of previous depreciation realized on the charged-off loans. Both, mostly related to Medallion loans. The quarter also included an income tax benefit related to the reduction of our deferred tax liability as a result of the reduction in corporate tax rates recently signed into law. At Medallion Bank, we incurred a net loss of $6.7 million in the fourth quarter compared to a net loss of $12.9 million in the prior year period. The difference was primarily due to recording $17.1 million in reserves and charge-offs on nonperforming loans. Net investment income before taxes was $18.5 million, a 6% increase from $17.4 million in the prior year period. At the bank, our net consumer lending portfolio as of December 31 stood at $684 million, a reduction from $787 million as of September 30, due to the sale in December of $127 million of performing consumer loans at a premium. The portfolio's average interest rate was 15% an increase from 14.3% in the prior year quarter as the product mix shifted towards higher yielding RV loans with the majority of the loans sold in the quarter, consisting of lower yielding home improvement loans. 90-plus day delinquencies on the consumer portfolio stood at 0.57%, an increase from 0.41% in the prior quarter. The bank's net medallion lending portfolio as of December 31 stood at $180 million. A 31% reduction from the prior year and a 13% reduction sequentially. Medallion loans represent just 20% of medallion bank's net investment portfolio, compared to 26% as of December 31, 2016. The average interest rate improved to 4.3% from 3.96% in the prior year quarter as we continue to be able to refinance existing loans at higher rates. 90-plus day delinquencies were $12.2 million, a decrease from $19.6 million on a sequential basis. We wrote down $3.1 million of our repossessed inventory and took an additional $2.5 million of provision for bad debt as a result of marking the collateral value of New York City Medallion to a net of $315,000, handicap accessible to $268,000, and Chicago Medallions to $47,000. We also took $5.2 million in charge-offs from nonperforming loans. At Medallion Financial and our other subsidiaries, the net Medallion lending portfolio as of December 31 stood at $208 million, a 22% decline from the prior year and a 7% decline sequentially as we continue to steadily lower our exposure. 90-plus day delinquencies as of December 31 were $60 million versus $98 million in the prior quarter. On a managed basis with Medallion Bank, 90-plus day delinquency were $72 million, down from $118 million in the prior quarter. Combined our total net managed Medallion loans as of December 31 were $388 million, 27% lower than $520 million as of the prior year. We will continue to steadily reduce our exposure to Medallion loans in the quarters ahead. Our net commercial loan portfolio, which is primarily made up of our mezzanine lending portfolio stood at $90 million, an 8% increase from the prior year period as we saw an increase in mezzanine loans in the quarter. The average interest rate on commercial loans was 12.02%, a reduction from 13.05% in the prior year quarter. The bank had $110 million in cash on its balance sheet as of December 31, partially reflecting the proceeds from the loan sale yet to be deployed, and remains well capitalized. Medallion Financial had debt of $328 million as of December 31, a decline from $330 million as of September 30. We believe we are in good terms with all of our warehouse lenders and appreciate their continuing support of medallion. With that, I’ll now turn the call back to Andy.

Thanks Larry. As we have on previous calls, we asked for email questions, I will now answer those questions.

Hi guys, think you very much. The first batch of questions comes from Mike Grondahl of Northland Securities.

First, what trends did you observe with New York City Medallions utilization valuation over the last six months?

Well prices have covered a wide range honestly. There have been cash deals for as little as 170,000 and of finance deals as much as about $600,000. As far as utilization rates, we’ve seen those improved considerably since August. In fact, several of our fleet customers told us that they have gone from about 75% or so occupancy rate to over 90%.

Next question, do you have any more plans currently to fill any more consumer loans?

We are open minded about selling only if we can continue to sell for a significant premium. Otherwise, we are content holding them on our balance sheet given their high yields and contribution to our bottom line.

And the next question, please provide an update on funding and any near-term debt facilities?

Well, I think we are in a very good position with all of our warehouse lenders. The DZ facility, which is our largest facility, they have been a great partner for us for nearly a decade. We will continue to work closely with them and renew our facility hopefully.

And final question, with the March 7 proxy vote to consolidate the bank, how will the bank be valued upon consolidation?

If we DBDC, we will consolidate the bank at fair value. Goodwill will be carried over and booked to the portion at fair value in excess of book value, which will then be evaluated annually.

Okay, thanks. And next set of questions are from private investors.

What is the us status of the share repurchase program? How many shares if anywhere repurchased and at average price over the last quarter?

There were no shares repurchased in the fourth quarter. As we’ve talked about on previous calls we are prioritizing our capital allocation towards growing our business and reducing our overall debt.

What is the status of the DBDC process?

The vote is scheduled for March 7, and we expect to update the investment community further after it has taken place.

Is Medallion Bank in compliance with the Tier 1 leverage ratio and what is the ratio?

On December 31, the ratio was 14.5% and that was partially due to the one-time $7 million deferred tax asset reduction that we incurred, but by January 31 of this year the ratio had returned above the 15% threshold.

Thank you, Andy. Next question, when does the company intend to reinstitute the common share dividend?

The status of the dividend is reviewed each quarter by the board, should the board decide to make a change in the current status, we would notify shareholders in due course. For now, with loan demand so strong in our consumer lending area, and a pre-tax ROE of over 50%, we believe we should gain continue to put excess fund back into the business to grow and increase our market share.

Thank you, Larry. Next question. How much unrestricted cash was there at the parent level at year-end 2017?

On a combined basis, including our bank, we had over $120 million of cash on hand as of December 31.

Okay. Have Medallion prices reached a bottom? Is the taxi business rebounding, and would you consider lending against taxi Medallions again?

Well we’re generally positive on the potential for prices to rise in the long-term. We’ve seen more cars getting on the road recently from fleets, and our focus remains though squarely on our profitable consumer lending in mezzanine business lines, while further reducing our Medallion exposure.

Thanks, Andy. Next question, your publicly traded debt has rebounded very nicely over the last 12 months going from a near 50% discounted par and now trading at a slight premium to par, do you have any plans to raise equity or debt at the parent or the bank level?

We have no plans right now to raise capital at this time and given the strength of our bank and its prospects, especially as it continues to reduce its Medallion exposure we could explore some type of capital raise at the bank level, but only if the cost of capital was very reasonable.

Next question, your consumer business is continuing to grow at a remarkable rate, do you expect it to continue to grow between 20% to 30%, excluding any receivable sales?

We’ve historically grown at that level over the past few years, and feel we will continue to see plenty of deal flow to reach that level of growth. Consumer lending has performed extremely well for us.

And the next question, given the growth of your consumer lending business, what is the actual quality of these loans?

Well the losses have been very low here, especially given the yields. And historically, we’ve averaged about 3% of losses in RV & Marine and only about 1% in home improvement lending. We have been RV & Marine then there is now for 15 or more years, and we’ve seen how well it performs during the various economic cycles and have been quite pleased with the performance.

Next question, no bank values have continued to increase, especially given the interest rate environment in new lower tax rate. How much did you rate-up the value of Medallion Bank during the quarter?

That’s correct, bank values have increased and remain very strong in this environment. That said though, we still kept the value of Medallion Bank unchanged from the prior quarter.

Next question with congestion pricing being discussed by New York City, New York State would that be good for you as less cars on the road mean taxis can get around faster and pick up more fares, is that accurate?

Conceptually, yes. Less cars on the road would mean more fares. The cabs make more money when the meter turns over faster, the charges started at about $2.80 and then pick up about $0.50 or so. So, thus you really want an initial 2.80 charge as frequently as possible, so it could be a very beneficial thing.

Thanks Andy. Next question, recently saw a new analyst start covering the company, which is great to see, is there an opportunity to go into additional coverage?

Well, the company is transformation and full swing. We are planning to be more visible to the Street in the coming year and well analyst coverage is obviously out of our control. Yes, we are hopeful that we will be able to procure additional coverage given our asset size in the ongoing strong performance of our bank.

And the next question, how does your Medallion valuation compare to other banks out there?

We appear to be pretty much in line with the other banks in terms of valuation as of year-end December 31. We’d also note that Medallion Bank has an additional 9% general reserve on all performing loans. So that’s addition to the specific reserves that it takes on its nonperforming loans.

Thank you, Andy, and the final question we have, we saw yesterday that there is a building crafted for passage by the City Council of New York that would put Uber and Lyft on a much more equal playing field in New York City, can you provide additional color on this and what is your belief that this bill will eventually pass?

Yes. That was a nice surprise that came out yesterday for us. Little too early to speculate on whether the bill will pass, but it certainly is an encouraging development for Medallions in New York City. Essentially as currently crafted, the bill would impose an additional $2,000 fee on each rideshare vehicle, and it would ensure all rideshare cars can only be attached to a single base rather than allowing them to respond to a dispatch from any base. So, we will continue to watch those developments closely and again hope it will be beneficial to us.

And at this time, I will turn the call back to you, Andy.

Well great. Well thanks everyone again for attending this morning's call and we look forward to updating you further on the progress in the future. While we tried to get in as many questions as we could, we realized 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 reach us at email at investor relations@medallion.com. Thanks everyone, and have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.