MFIN Medallion Financial

Andrew Murstein President & COO
Larry Hall SVP & CFO
Alex Twerdahl Piper Sandler & Co.
Stephen Moss B. Riley Securities
Michael Grondahl Northland Capital Markets
Call transcript

Good morning, and welcome everyone to Medallion Financial's 2021 First 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

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 risk 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 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 Mr. Andrew Murstein, President of Medallion Financial. Thank you, sir.

You may begin.

Andrew Murstein

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 Murstein; and our CFO, Larry Hall.

As the result show, we are pleased that we continued the momentum from a strong fourth quarter into the first quarter of 2021.

Let's quickly touch upon the Medallion segment, 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 slowly beginning to open up, we have begun experiencing an uptick in demand for medallions in New York City. The company left New York City Medallion values unchanged from the prior quarter, while slightly adjusting some smaller taxi 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 loss in the 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 in December 2020 and the 2021 first quarter.

Our efforts will continue to be on recovering as much as possible while we remain hopeful ridership will increase in 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 in the second and third quarters. COVID-related payment deferrals were largely resolved last quarter. Loan volume continues to remain robust, resulting in the recreational and home improvement 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 now represents 93% of total gross loan receivables as of March 31, 2021. In March of this year, the bank executed a non-binding term sheet with another potential fintech partner, which should be active in the next 30 days. We remain optimistic that the program at Medallion Bank will grow this year and we will see an increase in volume from our 2 partners as the economy begins to stabilize.

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. The mezzanine portfolio performance is slowly recovering. The full recovery by the end of the year, the deal flow is a strong as we have seen in the 20-plus years that 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 in 2021 compared to $4.3 million a year ago, which was lower, in part, due to provisions we took as a result of COVID-19. Medallion Bank closed the first quarter with an 18.03% Tier 1 leverage ratio and $228.6 million of total capital. Including loan collateral in the process of foreclosure and owned Chicago medallion assets, total Medallion exposure comprised 4% of our total assets as of March 31, 2021, compared to 9% at March 31, 2020.

So with that, I will now turn the call over to Larry, who will provide additional highlights on the first quarter.

Larry Hall

Thank you, Andrew. Net income was $8.4 million or $0.34 per share compared to a net loss of $13.6 million or $0.56 per share in the prior year quarter. Net interest income was $28.7 million in 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 as 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 in the 2020 first quarter.

As Andrew previously discussed, New York City Medallion values stayed the same from last quarter and stands at $79,500 net. The Company's net medallion lending portfolio exclusive of loan collateral in the process of foreclosure was $11.2 million as of March 31, 2021, compared to $96.2 million at March 31, 2020, an 88% decrease. Total provision for loan losses was $3 million in the 2021 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 in the medallion lending segment, while recording a $3.6 million provision for recreation and a $450,000 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 in a 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 14.42% we recorded in the 2020 quarter, as we remain cautious and more selective on the loans we chose to underwrite as well as experienced faster growth in our home improvement lending business, which has lower yields than recreation lending, but lower 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 2021 compared to $4.3 million a year ago, while net interest income for the 2021 first quarter was $31.4 million compared to $27.4 million in the 2020 first quarter, a 15% increase.

Our commercial lending segment recorded net income of $337,000 in the first quarter and $155,000 in the same period last year. The net commercial lending portfolio was $58.9 million at the end of the first quarter compared to $68.3 million in the same period last year, reflecting the early pay off 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 12.65% compared to 13.05% a year ago. With that, I'll now turn the call back to Andrew.

Andrew Murstein

Thank you, Larry. Operator, we can now begin the Q&A portion of the Call.


[Operator Instructions].

Our first question comes from the line of Alex Twerdahl with Piper Sandler.

Alex Twerdahl

It was great to see the decline in expenses led by both salaries as well as professional expenses. I was wondering, if you could elaborate a little bit more on what drove those decreases? And then, I think in your - in the release, it says that you're taking steps that you hope will produce long-term value for shareholders. I was wondering, if you can elaborate a little bit more on what those steps might be.

Andrew Murstein

Sure. Thank you, Alex. We're continuing to focus on cost cutting, I think that's what management wants and I know, that's what we want and what shareholders want as well, so we - as discussed prior, we furloughed a lot of people and then ended up letting them go a couple of months ago. We've been consolidating our offices.

We have other - taken other cost measures, so the trends are definitely heading exactly where we want. We're probably a little bit ahead of schedule in that regard. Legal, last year was kind of high, so that was a little bit abnormal a year ago period, so this quarter, it was more in line with expectations.

So over time, I think, you're going to see these trends continue.

I think, we're going to continue to save money and operate as lean as possible.

Alex Twerdahl

So would you say that the first quarter for some of those items that are not as seasonal is a pretty good indicator of the starting point for the remainder of the year, there's nothing in there that's kind of non-core, non-recurring that's going to reverse in the second quarter?

Andrew Murstein

It could a little bit choppy. It's not going to be a direct line downward from time-to-time, for example, with legal, if we take measures to try to collect on loans that are past due, you could see that number go up, but the general trend will be where it is and continue to hopefully lower over time.

In terms of the second point on the strategic plan and building value for shareholders, we're really focused on our core lines of business, some of the other lines, the non-core lines well across we sold off. We're looking at doing something now with RPM. The ARK, we'll be selling off as well, so there's just a lot of value in our consumer line of business. That's - we've been doing great. The ROEs are north of 25%, so that's where the focus is going to be. It's continued to grow the bank.

As you saw in the last two quarters or so, the bank earned about $14.5 million on average per quarter.

So that's a great run rate of over $50 million per year and I think, they can grow from that.

So I think, we're in a very good place right now.

Alex Twerdahl

Great. And then, Larry, you touched on 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 those yields shaking out over time? Can you just remind us, there is really no correlation between those yields and any benchmark interest rate correct?

Larry Hall

Yes, correct. I mean, they're probably going to stay pretty consistent with what we reported this quarter.

As the credit quality aspect continues to improve and the yields come down a little bit from that. We're also having lower borrowing costs and so the net interest margins are likely to remain real strong.

Alex Twerdahl

Got it. Are you seeing any additional competition in that space?

Larry Hall


Alex Twerdahl

Okay. And then you guys raised about $85 million in senior notes, even 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 is?

Andrew Murstein

Yeah, we're very pleased with how that deal win was oversubscribed. There has been thankfully a lot of interest in our company. We really turned the ship around the last few years.

So our cost of money has been going down. The publicly-traded debt was, I think about 9%. They are traded under MFINL and that was we targeted as you pointed out. We replaced that with money at about 7.25% 7.50% or so. We received an investment-grade rating on that and other - the rest of money will probably go to pay down some more banks, if not all of the banks over time. We'd like to start growing Medallion Capital, that was a big profit center for us years ago. They've been a little slow in the last few years really because of our issues, because we didn't have lots of capital to give them but now, we're in a much better position.

So the mezzanine group, which is out of Minneapolis, in the past, we have done really well with that. We probably averaged 17% returns. And as you know, there is no guarantee of the future, but we want to put more money into that. We want to put more money into our bank, where need be. The bank returns should be even higher than that, so probably, just to stick with our knitting and really what turned us around are those lines of business and that's what we want to focus on to grow.

Alex Twerdahl

Perfect. And just a final question from me. The million dollars that you released or that you had a provision benefit for in the medallion loan, what exactly drove that provision benefit?

Larry Hall

Just the mechanics. Good recoveries that we got, the lower need to be booking any provisions and the fact that the New York market stayed flat and it's been a long time since we haven't had an adjustment on that market in a quarter.

Alex Twerdahl

What were - do you have the level of recoveries handy?

Larry Hall

It was about $1 million.


Our next question comes from the line of Steve Moss with B. Riley Securities.

Stephen Moss

Maybe just following up on the margin here to start. I hear you 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?

Andrew Murstein

I think, we could increase the margins. I mean, the margins are just terrific. 9.1% or so, 9.18% for banks is really exceptional.

So we continue to focus on growing that, that's the goal. The medallion loans, as those roll off, that's been holding that margin down. Those rates are 3% or so and cost of funds has been coming down as I just noted. The investment grade rated debt was lower than the public debt that we had. Brokered CDs, we're now borrowing at about 20 basis points and the average CD on our bank books is about 1.6%.

So the goal is and I think it's very achievable, is to actually increase net interest margins.

Stephen Moss

All right, and then in terms of just tying up the loan growth here. Appreciate the color in terms of the pipelines remaining strong.

So do you think about a double-digit growth rate for recreation and call it high-20s or low-30s percent for home improvement about fair?

Andrew Murstein

Yes, we grew, I think, rec by 11% year-over-year and home improvement by 33%.

So our goals every year are to beat the prior year, so even if we came in at where we were, the 11% and 33%, that's extremely strong growth. In this market, banks are struggling to show asset growth and we are growing our minds of business by 33% per year, but we never rest on our laurels and the hope is to beat those hurdles.

Stephen Moss

Okay. And then just on the fintech side of things here in terms of just any updated thoughts with regard to the new partners just how - as you've gone over the last couple of months working with them, any update in terms of expectations and volumes?

Andrew Murstein

That's an interesting business line for us for those that don't know, that's the model where the fintech company send us loans to our bank in Utah. We fund it, they buy the loans back within the day or so.

So there's no balance sheet risk to us.

We are earning fee income on it.

You have the float for a couple of days before they buy it back.

So it should be a very profitable business over time. We need time to really get it ramped up. We're not expecting much contribution in 2021 and I think, it's more a 2022 event. But there is also an opportunity for us to invest in these fintech companies.

You'll see in our public filings, we have an investment in a company called Upgrade and we're expecting a great return from that.

So there's really many ways that we could explore growing in this business, whether it's working with the strategic partners and booking their loans or even investing in some of them.

I think, it's going to be a big growth area for us in 2022 and beyond.


Our final question comes the line of Mike Grondahl with Northland Securities.

Michael Grondahl

First question, the stimulus clearly helped delinquencies and charge-offs in kind of the consumer bank. What should we think of as a normal provision for that business? I think, you guys said it was about $4 million overall in the quarter.

Larry Hall

The reserving levels are real strong compared to what loss rates have actually been and what the delinquency trends indicate.

So I think, for the quarter, we were at about 3.45% for 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.

Andrew Murstein

Just to add to that, the loss rates have been a lot less than that, so the 3.45% reserve, the actual losses there have been 1.35% and the home improvement, Larry stated with the reserve of 1.57%. The actual losses have only been 0.3%.

Michael Grondahl

Got it. Yes, the coverage looks good clearly.

Secondly, Andy, I think you said, your current brokered CD rates are 20 basis points, but the average, 1.6% on your books, what's the dollar volume that you can shift to that lower rate?

Andrew Murstein

Sure. When they roll off, obviously, I'm not sure, the average life of the CDs, but it's definitely going to happen because we don't go out too long on the CDs.

I think, the average life is probably 2 years or so or maybe even less than that.

So we've got a lot of legacy CDs when rates were higher on our books some 2 years ago. When COVID hit, a lot of banks like us took on a lot of CDs at kind of high rates in retrospect, everybody was nervous about the market and banks loaded up with CDs.

So those were at 1.5% to 2% rates, but if you look at our money today, 1 and 2 year money, it's between 10 and 20 basis points.

So I'd say every quarter, you're going to see an improvement in that.

Michael Grondahl

Got it. And is there about $500 million, $600 million - just a dollar amount that can get adjusted down? Do you have a rough estimate there?

Andrew Murstein


Larry Hall

It's $1 billion of CDs.

So if they're rolling off over 2 years, it's a pretty large number every month. I mean, basically all the net new growth is going to be at the current low rates 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.

Michael Grondahl

Good, good.

Okay. And then, you guys talked a little bit about the yield 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 in underwriting. Can you give us an example of how you were kind of more selective?

Andrew Murstein

Sure. Yes, we - when we started this business, the consumer FICO scores were about 600 or so and today, they are at 660, so we've been really raising them over time by being selective. Home improvement, we don't even have around when we started the bank in 2003 - and so that was about 7-or-so years ago that we started that and average FICO scores there are 760.

So we really have a much 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 in the business, but even with that, even if our yields came down a little, which they may not come down at all. But if they did, I think the cost of funds would more than offset that.

Michael Grondahl

Got it. And just lastly, what was your investment in Upgrade and what do you think that is worth today?

Andrew Murstein

We invested about $250,000 maybe 5 years ago or so and there has been an explosion of the values of companies - fintech companies.

So their plans - I would think probably to go public in the next year or 2, but it's a very well run company.

Our investment is worth many times that I wouldn't to be surprised if it was worth 30x what we paid for it. It's hard to value private companies, but the plan for us there is probably just to sell off our position over time also. It's another non-core business to own, interest like that we'd rather really be more on the strategic partnership side, where we're getting the fee income, but the plan would probably be to sell off the position over the next 12 months or so.


And with that ladies and gentlemen, we reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. Murstein for any closing remarks.

Andrew Murstein

I 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 end, please contact our Investor Relations department at 212-328-2176 or email at 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.