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Edited Transcript of MFIN earnings conference call or presentation 14-Aug-18 12:30pm GMT

Q2 2018 Medallion Financial Corp Earnings Call

New York Sep 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Medallion Financial Corp earnings conference call or presentation Tuesday, August 14, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew M. Murstein

Medallion Financial Corp. - President, COO & Non-Independent Director

* Larry D. Hall

Medallion Financial Corp. - Senior VP & CFO

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Presentation

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Operator [1]

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Good morning, and welcome, everyone, to Medallion Financial's 2018 Second Quarter 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.com.

Before we begin formal remarks, we need to remind everyone that matters discussed on this call included -- 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 and the statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission. Each forward-looking statements and projection of financial information made during this call is based on information available to us on the date of this call. We disclaim any obligation to forward -- or forward-looking statements unless required by law.

I would now like to introduce Andrew Murstein, President of Medallion Financial. Please go ahead, sir.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [2]

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Good morning, everyone, and welcome to our second 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.

Commencing with our second quarter, we now report as a bank holding company only for accounting purposes that consolidate our wholly owned or controlled subsidiaries, including Medallion Bank, presenting the company as one unit. We hope this has provided both our current and future shareholders a more transparent picture of our financial condition and results of operations.

We continue to emphasize our very successful consumer and commercial lending segments while closely monitoring our medallion loan exposure of the taxi medallion market.

Let's begin with the Medallion portfolio. This quarter, we took much lower charge-offs and reserves on delinquent medallion loans and foreclosed medallions. We are valuing New York City medallion collateral at a net of $181,000 and New York City wheelchair-accessible medallion collateral at $154,000. Overall, we recorded a provision for loan losses in the Medallion segment of $24.7 million in the quarter compared to $62.7 million in the 2018 first quarter.

As of June 30, 2018, there remains $250 million of net medallion loans, a $61 million reduction from the end of the 2018 first quarter and a $195 million reduction from the 2017 second quarter. The decline reflects the charge-offs of certain loans and their movement to loan collateral in process of foreclosure in addition to the netting of reserves against principal as of April 2, 2018, in connection with the change of reporting status.

The $258 million is the lowest level of medallion loans since the 2003 first quarter. Although the majority of the portfolio is performing, we continue to work with all of our borrowers and are hopeful for recoveries over the long term. 90-plus-day delinquencies as a percentage of the portfolio was 4.5%, the lowest since the 2015 fourth quarter, also reflecting the above.

It is evident that Medallion exposure, both the bank and Medallion Financial, continues to be reduced. In our opinion, we believe the New York City Mayor, speaker of the city council, city council members of the TLC are constantly looking for ways to support the taxi industry and will continue with their efforts until the playing field is leveled and fairness is brought to the industry. We hope prices have now stabilized, allowing for a more balanced operating environment.

For example, there have been more transactions over the last few months than the preceding 1.5 years. As we previously stated in a press release on August 8, we support the city council's legislative package that, among other things, will now cap the amount of for-hire vehicles as the TLC conducts a study of the impact of these vehicles that will also create a high-volume for-hire service license category, which the TLC will regulate.

In addition, the TLC will set a minimum wage that high-volume for-hire services pay their drivers. Speaking of the current holders of medallions, we believe this step will positively affect, not only the confidence of taxi drivers, but also the profitability and liquidity of the New York City medallion market.

Let's now turn to our profitable and growth segments. First, at the bank, our 2 consumer lending segments continue to prosper as they recorded net income before taxes of $11.1 million for the quarter. As of June 30, 2018, our net consumer portfolio stood at $791 million, a sequential increase of $74 million of the 2018 first quarter and over $107 million in 2018. This increase was, once again, led by solid originations in our RV and home improvement loans. Our team at Medallion Bank continues to underwrite these loans at a highly successful and diligent manner.

As of June 30, 2018, our net consumer portfolio stood at $791 million, a sequential increase of $74 million from the 2008 (sic) [2018] first quarter and over $107 million in 2018. This increase was, once again, led by solid originations in our RV and home improvement loans. Our team at Medallion Bank continues to underwrite these loans in a highly successful and diligent manner.

As I continue to state on these calls, the significant earnings that we have from our consumer lending segments are cash earnings while the losses that we record from Medallion lending are primarily attributed to noncash charge-offs and reserves. The overall cash flow at our bank remains strong as the consumer segments generated almost $27 million of interest income in the 2018 second quarter.

Now turning to the commercial lending segment. We reported net interest income of $1.7 million for the second quarter. Our commercial lending segment continues to produce for the company as we now have almost $80 million of loans that generate attractive yields.

In closing, our consumer and commercial segments continue to be the main focal points in regard to our strategic growth while we reduce our medallion exposure quarter-over-quarter.

I'll now turn the call over to Larry, who will give some brief highlights regarding second quarter results.

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [3]

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Thank you, Andy. Let me take you through some of our second quarter highlights.

In the quarter, Medallion Financial recorded net interest income of $24.7 million, which was mainly attributable to our consumer lending segment. As a result of the provision for loan losses in the company's medallion lending portfolio, the net loss was $14.6 million or $0.60 a share, a slight improvement from our first quarter results. Earnings from the consumer and commercial side of the business were a positive $8.9 million for the quarter.

As a commercial finance company that primarily conduct its operations as an industrial bank, we now follow the reporting convention of bank holding companies, including the presentation of our operating segment.

Our net consumer lending portfolio as of June 30, 2018, sits at $791 million, up from $717 million as of March 31, 2018. Every quarter, we continue to report low loan delinquencies as delinquencies over 90 days past due were 0.32% compared to 0.40% in the prior quarter. The portfolio's average interest rate was 14.8%, a slight increase from the 2017 second quarter and in line with the 14.86% we reported last quarter.

Our medallion loans decreased to a net of $258 million as of June 30, 2018. The average interest rate improved to 4.48% from 4.42% in the prior quarter. We took an additional $24.8 million provision for loan losses as a result of marking the collateral value of New York City medallions to a net of $181,000 and Chicago medallions to a net of $35,000.

Also included in the above was $6.7 million of a general reserve for loan losses against the non-Medallion Bank performing medallion loans in order to follow a consistent accounting methodology with Medallion Bank. We ended the 2018 second quarter with a large drop in medallion delinquencies.

Our commercial lending portfolio as of June 30, 2018, was $80 million. We recorded net interest income of $1.7 million for the 2018 second quarter. The average interest rate was 13.8%. The commercial lending segment is primarily made up of our mezzanine lending portfolio, which continues to deliver for the company.

Finally, we have also been in discussion with one of our lenders to make certain structural changes to our facility. If we are successful, we would be able to deconsolidate the trust that owns various medallion loans from our overall result, which would eliminate approximately $72 million of medallion exposure from our balance sheet and allow for the recapture of approximately $20 million in reserves associated with medallion loans that the company is not liable for. That would then further reduce our total Medallion exposure to $205 million, a 26% reduction from June 30, 2018. While we are hopeful we can accomplish this, there can be no guarantee that this restructuring closes and that we would achieve this positive result.

With that, I'll now turn the call back to Andy.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [4]

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Thanks, Larry. As we have on previous calls, we asked for e-mailed questions from the investment community, and we will now answer your questions.

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Questions and Answers

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Operator [1]

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The first question comes from Mike Grondahl of Northland Securities. Are you happy with the consumer portfolio? Do you plan on selling any consumer loans? Any changes in the competitive environment? What are you excited about for the rest of the year?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [2]

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Good questions, Mike. Thank you. Yes, we're very happy with the consumer portfolio. The business continues to grow very well at 30% or so per year. Their ROEs is exceptional. The margins are double or triple what most banks are earning. We're lending it 15% rates and borrowing at 2% rates. So it's an extremely profitable business that we're very happy with.

In terms of selling new loans -- consumer loans, that's always an option for us. We've been doing it opportunistically from time to time in the last several years, always at a nice premium. So if the offers come in and they're acceptable to us -- and a lot of banks are getting aggressive, I think, looking to grow by buying consumer loans. So it's possible that we can continue selling them at those large premiums.

I think the next one was any changes in the competitive environment. Thankfully, no. We're still the market leader there, no new entrants into the business.

What are you excited about for the rest of the year? A lot. The medallion losses, I believe, are coming to an end eventually. That we've been writing off a lot aggressively the last few years, taking very conservative positions. The key for us is just to get that medallion portfolio behind us and get it to a breakeven. The rest of our business is making $2 per share outside of the medallion business. So if we could just get the Medallion business to a breakeven, which I think we can, especially with the new regs that the City Council is passing, then we're going to be in great shape. So it's really as simple as that.

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Operator [3]

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The next set of questions comes from Alex Twerdahl of Sandler O'Neill. Can you talk a little bit about the accounting of the various loan portfolios? And how they were marked in consolidation for all loans marked to fair value? What is the size of the total interest rate mark and the total credit mark?

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [4]

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Thanks for that question, Alex. Back in the end of the first quarter, we took our final mark-to-market fair value adjustments against the investment portfolio of Medallion at the end of our life as an investment company. There is no marking to market or fair valuing during this quarter. What happened is that the fair values that we had as of March 31 were brought over at that level and became the opening balances on April 2, when we began our new life as a commercial finance company.

So to do the accounting properly, what we did was net those amounts instead of showing them gross so that the loan balances, the origination costs and the reserves were all netted to one new number that became the starting point for April 2.

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Operator [5]

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The last set of questions are from private investors. Where does the company stand with its share buyback policy? Is there any more interest in the purchasing of the bank or a portion? What's the status?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [6]

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We have no immediate plans for a buyback. We still want to grow market share on our consumer business, where the ROEs are over 30% and very impressive. So that's our focus, short term anyway.

In terms of our bank, we're working on a few things there. Our preference, as I've said prior, is not to sell a portion of the bank, as I believe there's just so much upside there. It's doing so well. There were a few capital initiatives we're working on, and we hope to be able to announce something actually in the next 30 or 60 days.

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Operator [7]

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I know in the past, you've marked-to-market your investment. Did you mark-to-market anything this quarter, like Medallion Bank, which may at least seems like the ILC charter is grandfathered in and extremely valuable.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [8]

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Yes. We feel the same way. This quarter and going forward, we do not have to mark-to-market our bank or other holdings anymore since we're no longer a RIC or a BDC.

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Operator [9]

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It seems that the City Council's new regulations were a game changer. Can you give us some more thoughts on that?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [10]

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I'd agree. My take is that over time, there's going to be a lot less vehicles on the road. The erosion on the taxi business in the last few years due to more and more Ubers will cease, and the market is likely to stabilize and recover. It's possible Uber will lose some cars and drivers to other black car companies and vice versa. But the size of the pie hasn't changed. So the taxi revenues should stabilize and hopefully, increase steadily over time.

Also, there is extra restrictions for companies with 10,000 or more cars. So it's more likely that Uber will lose cars to other companies and not the other way around.

And also, I think the most important thing is that a cap is a game changer for Medallion values, investors, owners, potential owners. They all look at the stability that's going to probably be happening in the market with this asset class and looking at it with an entirely new perspective. And I think it's going to pave the way for a comeback and more liquidity returning to the market over time. Within the last week or so, since the new laws were voted on, I've gotten at least a half a dozen calls from new investors looking at the space.

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Operator [11]

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Your consumer business continues to perform extremely well. Is it correct to state that the pretax ROE is actually about 50%? And if so, why is it so profitable?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [12]

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Yes. It's close to that. The business continues to be a bedrock of foundation for us, and it keeps growing at very impressive rates. We've been in this business for 15 years already, since 2003. The management has been doing it for 10-plus years before that. So we have a 25-year head start on the competition, so to speak. And we've become and I think we will continue to be the market leader here.

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Operator [13]

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I noticed that rates actually increased in your medallion portfolio, which is obviously a good sign. Do you ever see a day where that business actually starts making money or at least breakeven? If you can get to that point and your consumer business continues to perform as well as it does, your earnings would be -- look great.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [14]

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Yes. Rates have gone up for this quarter in the medallion side. There's obviously a lot less competition now. The key for us, as I stated before, is really just getting the taxi business to a breakeven. And if we can do that, we're going to be in great shape. Our other businesses, again, are making as much as $2 per share. So my hope is actually to get the business to be profitable in the not-too-distant future. I think we can do better eventually than just a breakeven business here.

I think it's very possible as we have a lot of good, stable medallion owners who are current, and we expect them to stay current. We can also collect on the delinquent customers, not just on the medallions again, but on the personal guarantees as well. And these new regs should go a long way. I think it's, again, going to be a very supportive measure that the city has taken to help the industry. So I think, as soon as we get the medallion losses behind us, which is almost upon us, we're going to be in great shape.

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Operator [15]

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I'd like to commend you for the quarter and for the new presentation of your financial statement. It's much cleaner and more transparent. Hopefully, it leads to more shareholders being interested. I have to ask though, why now? And why you didn't do this in prior quarters?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [16]

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You're right. We're trying to make it cleaner. I think there was still a little bit of noise in the quarter, but over time, and when you look through the Q, you'll be able to figure everything out a little bit better. But we're definitely moving in the right direction. We wish we could have done it earlier, but as a RIC and a BDC, we just weren't permitted to consolidate the bank. So this quarter and going forward, it's going to be much more transparent and easier to follow. And we hope that's going to attract a lot of new shareholders.

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Operator [17]

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There were no surprises with your book value for the quarter. As everyone understood, the bank was being carried at a premium. But how can you build up your tangible book value over time?

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [18]

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That's correct. There were basically no adjustments to the valuation of the bank or any of our other portfolio companies during the current quarter. The amounts that we had booked as of the March 31 quarter, the fair value for the bank and the other portfolio companies just came over and translated into a goodwill number. And that goodwill number is actually offset by some deferred tax liabilities that go against it that range from $35 million to $40 million to help reduce that amount.

So building up the tangible book value is basically going to happen, as Andy indicated, because of the profits we expect to get down the road from the superior earnings in the consumer and commercial parts of the business once the medallion business stabilizes.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [19]

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And just add to that, I think there is at least 3 ways, to Larry's point, that we're going to be able to add to tangible book.

One is as we're no longer a RIC and a BDC, we don't have to pass through the earnings anymore, so we can retain all the earnings, including those of the bank. And we expect there to be a lot of earnings. The bank's margins are double or triple with other banks are. Again, we're lending at 15% rates and building up a lot of income there. So that will be one way that we're able to do that.

Two, is by restructuring our trust facility. We've mentioned that in the press release, and there's also some disclosure in the Q. But if we're able to restructure the trust facility, I think we're going to bring in $20 million or more of tangible book value immediately when that's done.

And the third is we've done a good job. We need to do a little bit better job, I think, of just going after these delinquent borrowers and collecting on the personal guarantees. We've written off over $300 million of loans so far. So just by way of example, if we can collect 1/3 of that amount, that would mean $100 million of income that would come back in to our tangible book, which would be obviously very meaningful.

And we're hopeful that the new cap on the ride-hailing apps and the other regulations that were passed are going to strengthen the medallion market and thus, help us on those guarantees. So we're already seeing medallion owners who want to buy medallions and several have approached us in the last couple of days, some of our foreclosed medallions. So as we move that off our books as well, the book value will go up by even further of the company.

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Operator [20]

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I would now turn the call back over to Andrew Murstein for closing remarks.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [21]

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Well, thank you, this morning, again, everybody, for joining us. It's really a pleasure talking to everybody. We'd like to continue this dialogue in the days and weeks ahead, so feel free to call us at any time. We tried to answer as many questions as we could, but we realize that's impossible to do on a call, but we're available all day today. At any time you'd like to call us, (212) 328-2176 or e-mail at investorrelations@medallion.com. Thank you, everyone, and have a great day.

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Operator [22]

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Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.