Good morning, and welcome, everyone, to Medallion Financial’s 2020 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 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 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 obligations to update our forward-looking statements unless required by law. I would now like to introduce Andrew Murstein, President of Medallion Financial..

Good morning, everyone, and thank you for participating in our 2020 First Quarter Earnings Call. Joining me on today’s call is our CFO, Larry Hall; and our Director of Investor Relations, Alex Arzeno. Been an eventful start to the year, but we hope everyone is safe and your families are well during this tumultuous time we are in.

My grandfather bought his first medallion in the 1930s, we have overcome a lot, including, but not limited to, a World War, 9/11, the Great recession and more recently and to a lesser extent, the headwinds we have been experiencing over the last few years in regard to the taxi medallion industry.

We have not only survived these hardships, but also thrive, leaning on our experienced management teams both here in New York City and across our other lending segments and have always come out stronger after persevering through.

We’ll continue to push forward and to tackle all obstacles, and we remain optimistic about the future of this company and our country. Past crises, we want to reassure you that the management team at Medallion Financial remains dedicated to guiding the company through these unnerving times.

That being said, let’s jump right into the Medallion portfolio. Company’s net medallion lending portfolio, excluding loan collateral in the process of foreclosure at the end of the first quarter was $96.2 million. Looking at Medallion Bank on a stand-alone basis, their net medallion assets were just 6.2% of their total assets.

Net collateral value in New York City market dropped significantly from 167,000 at the end of 2019 to 124,500 at the end of the first quarter, a 25% reduction. It’s clear the industry has recently been gravely impacted by COVID-19 and it has basically shut down New York City, leaving the streets nearly empty and most cabs in their garages.

It is too early to speak to the long-term impacts this virus will have on the industry. But as always, we will continue to monitor news flow and any developments about aid from the U.S. and/or New York State and city.

Company took several steps at the end of the first quarter to ensure we continue to deliver on our strategy of growing both our consumer and commercial segments. Medallion Bank had a strong start to the year before the potential future impact of COVID-19 caused the bank to increase consumer loan loss reserves.

Additionally, the company as a whole, rolled down the collateral value of New York City medallions, reflecting the transaction activity in the quarter, all of which led to a small net loss of $436,000 for the bank in the first quarter.

Net income from Medallion’s consumer and commercial segments totaled $4.3 million in the quarter compared to $7 million in 2019. Consumer originations were $103.1 million for the first quarter, up from $90.3 million in the same period of 2019.

Though it is too early to predict how our consumer originations will look for the rest of the year, we remain optimistic that bank is well positioned to handle this disruption.

For example, the governors of New Jersey, New York and Connecticut recently announced that marinas and boat yards will be allowed to open for personal use following social distancing protocols. Warmer month’s upon us and millions of Americans eager to get out and travel, yet potentially avoiding hotels and airplanes.

We’re hoping this will result in more consumers exploring the purchase of a boat or RV as a preferred leisure activity. In addition, as a result of the current economic environment, opportunities to capture market share have presented themselves as other lenders have pulled back from the marketplace.

March 31, our net consumer lending portfolio was $965.3 million compared to $940 million at the end of 2019 and $792.2 million at March 31. The company recorded loss ratios of 3.65% for recreational and 1.03% for home improvement compared to 3.4% and 0.35% in the year ago period.

As a result of a successful preferred stock offering by Medallion Bank in December 2019, the bank remains well capitalized with $224 million in capital and a Tier 1 leverage ratio of 18.78% as of March 31. Medallion Bank was able to close on their first strategic partnership program in the first quarter.

Platform is up and running, and we are providing updates on the progress and our future partners in our quarterly earnings reports. Net commercial lending portfolio was $64.9 million as of March 31, a 27% increase from the first quarter of 2019.

Medallion Capital has been communicating with their capital partners who have been accommodating as the portfolio of companies have taken the appropriate steps to ensure we have the liquidity to overcome the current economic slowdown, still remain focused on growing their portfolio and expanding in the targeted industries and have the capital to deliver on their strategy.

Lastly, we took a charge of $3.5 million pretax related to a non-core sports equity investment in the first quarter. We took the step to proactively move away from our legacy non-core-related assets, given the continued growth and earnings potential in our consumer and commercial segments.

Now I’ll turn the call over to Larry, who will give some additional points on the first quarter..

Thank you, Andrew. Let me take you through some more highlights on the quarter. Net loss was $13.6 million or $0.56 per share for the current quarter compared to net income of $1.2 million or $0.05 per share in the prior year quarter.

Net income from Medallion’s consumer and commercial segments and commercial segment was $4.3 million for the first quarter compared to $7 million in the 2019 first quarter. Our net interest margin remained strong at 8.80% in the 2020 quarter, a minimal drop from the 8.83% we recorded in the 2019 fourth quarter.

This once again speaks to the performance of the higher-yielding segment that will continue to outweigh the lower-yielding Medallion segment.

Total provision for loan losses was $16.5 million in the quarter due to the increase in the reserve percentages on the consumer portfolio, along with the decline in the New York City medallion values compared to $13.3 million in the 2019 first quarter.

Of the $16.5 million, $4.4 million was related to the medallion loan portfolio, while $12.1 million was related to the consumer loan portfolio. Excluding loan collateral in the process of foreclosure, our net medallion loan portfolio decreased to $96.2 million as of March 31, 2020, a 31% decrease from the 2019 first quarter.

When including loan collateral in the process of foreclosure, the company’s net medallion assets were $141 million or 9% of total assets as of March 31, 2020, compared to $189 million or 13%, a year ago.

Loan delinquencies on the consumer side did not raise any alarms in the first quarter and were in line with what was reported at the end of the year as well as in the first quarter of 2019.

Consumer loan delinquencies, 90 days or more past due were $5.4 million or 0.56% of total gross loans as of March 31, 2020, compared to $6 million or 0.64% at year-end and $3.4 million or 0.44% a year ago. The consumer loan portfolio’s average interest rate remains high.

This quarter, the average interest rate on the portfolio was 14.42% compared to 14.54% at the end of 2019 and 14.94% in the same period last year. Our commercial lending segment recorded net income of $155,000 in the first quarter.

The portfolio as of March 31, 2020, was $64.9 million compared to $66.4 million at the end of 2019 and $51.2 million in the 2019 first quarter. The average interest yield was 10.04% in the quarter compared to 13.56% in the year ago period.

Net cash provided by operating activities was $15.2 million in the quarter compared to $11.1 million in the 2019 first quarter. With that, I’ll now turn the call back to Andrew..

Thanks, Larry. Operator, we can now begin the Q&A portion of the call..

[Operator Instructions] The first question today comes from Alex Twerdahl of Piper Sandler. Please proceed with your question..

Good morning, guys.

Can you hear me?.

Yes, good morning..

First question I had, just looking through the press release last night, you guys cited some cost-cutting measures that you’ve initiated in the month of April.

I was wondering if you can give us a little bit more color on what those could potentially entail?.

Yes. That was primarily in New York in the medallion area and operations. We’ve got about 42 people or so there, and we furloughed about 1/3, about 14 people. And it’s in an area that we’ve been reducing our concentration in the medallion, obviously, the last five or so years.

So I think it was a little overdue, but it’s a nice step in the right direction..

But furloughed means that they’re furloughed until the end of the crisis or indefinitely?.

I think we have to play it by year a little bit, see what type of things were eligible from the government in terms of the PPP programs or some of the other ones that are out there. There’s a Main Street Lending Program, there’s a Primary Corporate Credit Facility Program.

So depending upon how those go and how the outlook for the company is, then we make the decision if it’s going to be permanent or not. The hope is, it’s temporary and that things get better and money gets made available to us, but we have to keep our options open..

Understood. And then just looking at the P&L, you wrote down one of your sports franchises this quarter. And then my understanding is that the NASCAR season is essentially canceled for the rest of the year.

So could you help us understand just kind of how we should be thinking about things like the sponsorship and race winnings as well as the race team related expenses for the remainder of 2020?.

Sure. I could tell you, I’m not a NASCAR fan because actually they just announced yesterday that they’re opening up and so they’re going to be the first sport to start. They’re starting – thinking about two weeks, May 14 or so at Darlington. But these are investments that have been non-core to us.

These shareholders have been looking us to trim costs, which we’ve done, as we just said, I think they’ve wanted to see these investments sold and us focus on our core profitable lines of business, which is exactly what we’re doing in the RV, marine and home improvement lending area. The write-off that we had was in the La Crosse area.

So we’re pretty much done with that investment by the end of the year. And NASCAR, we’ll keep our options open if we can get a nice offer to sell it, we’d certainly entertain that..

Okay.

But then in terms of the P&L implications, if they reopen in – sometime in the second quarter, maybe we can see the third quarter look a little bit more like the third quarter of 2019?.

Yes, in terms of....

In terms of the – yes, in terms of the race winnings and the expenses..

Yes. I mean the La Crosse investment has not been profitable. That’s why we’re divesting in that. We’ve been losing probably about $1.5 million a year on that. The NASCAR investment has been either breakeven or profitable over the last couple of years. So that’s not eating into any of our capital. We’re not feeding that with new money.

The hope is it continues to be somewhat profitable, which is unusual for sports teams, sports teams usually build up a lot of appreciation value, but their money pits sometimes. But this one, NASCAR has a very good business model compared to other sports. So we don’t expect any more losses there..

And La Crosse, you wrote it down, but is it actually moving off balance sheet, that $1.5 million of expenses? Will those go away?.

Yes. So basically, we took the hit this quarter. We don’t expect to have any more losses for the balance of the year. We estimated what the liquidation costs or the sale cost were to divest it and took it all in the quarter.

So we wrote off the full investment, which was $1 million and change, plus the operating expenses to run it for the balance of the year also got taken in the quarter. So hopefully, that’s all behind us now..

Great. And then just another one from me. Larry, you talked about the loss content and the rec and the home improvement portfolio.

Can you tell us where those reserves stood at the end of the first quarter? And kind of what sort of assumptions go into those reserves given the current environment?.

Sure. The recreation reserves were about $22.3 million, 41% of the total, and the home improvement reserves were about $3.5 million or 7% of the total, and the balance of $28.3 million was in medallions, 52% of the total. The ratios went up slightly, just like we did in 2008 and 2009.

We’ve anticipated potential issues with borrowers, and we’ve increased the reserves somewhat. The loss rates haven’t really increased a lot, the delinquencies haven’t really increased a lot to this point, but we wanted to be smart about it and take a first step just in case things worsen..

Understood. All right, thanks for taking my questions..

The next question is from Scott Buck of B. Riley FBR. Please proceed with your question..

Good morning, guys. Just a few quick ones. Can you remind us what charge-off activity looked like in the consumer loan book back in 2008, 2008? I seem to remember it being pretty strong, but I wanted to check..

Yes. I think everybody can get hopefully comfortable that in the last recession, which was a lot deeper and longer than what we’re in now. Of course, no one knows what we’re in now exactly. But losses were very predictable. When we went into that business in 2004, we bought the company from Leucadia.

And management had told us that loan losses would average about 3%. And when times are good, they get down to about 2%, when times are bad, they’ll triple and go up to about 6%, and that’s almost exactly what happened in the last recession. I think we peaked at about 6.1%. And the loan losses actually got lower over time.

I think we were down to 1.7% or so. So it was profitable throughout every single quarter in the last recession. And when the yields are 14%, 15%, there’s plenty of margin for error. So the hope is that whatever environment we’re now is not as bad as the last one, and we’ll continue to be very profitable there..

Great.

And what are the typical credit scores for rec and home improvement?.

Rec is about 670 or so. And home improvement is about 760, and that’s actually a good point. The last recession that we were in, the credit scores were lower than that. They were probably about 630 or so, and there was no home improvement area of our bank in the last recession. We didn’t get into that business until about 2012 or so.

So we think the portfolio today is a lot stronger than it was back in 2008 and 2009 and again, did not have any losses in that period back in 2008 or 2009..

Great. That’s really helpful.

If I can turn to the mezz business, I’m curious whether or not that group is seeing a plethora of new opportunities just given the disruption in markets and valuation and people that are looking to raise capital? I’m wondering if you guys would be willing to extend a little more credit to that business and see what it can do in this kind of environment?.

Yes. So cautiously, though, I think those guys have been great as well. I mean, they’ve been in this business for over 30 years, in the mezz business. So they’ve seen their cycles as well and always come out very strong. Of the 25-or-so portfolio companies we have, only one of them went on non-accrual this quarter.

And their deal flow looks very strong until there’s a lot of need for capital out there, obviously, as you can see from the PPP programs getting oversubscribed. So that division also was profitable in the quarter, and we’re hopeful that’s going to continue..

Great. And last one for me.

Given the current environment in New York City, I wonder if you think this stoppage or shutdown spurs the state or city to finally provide some sort of monetary relief to the medallion owners and cab drivers?.

It would certainly be nice. It’s long overdue, frankly. It’s frustrating how the government could help companies, airlines and cargo companies and others and not help many of these cab drivers who are struggling. So they’ve been looking at it for many years. I think it’s got everybody’s attention.

And the hope is that they have the support that other companies in this country have been getting. So we’ll keep our fingers crossed..

Okay, appreciated guys. Thank you..

I’ll be reading some questions on behalf of Mike Grondahl of Northland Securities..

The first question is in three parts.

Why is 130,000 the right number of New York taxis? Any payments principle since year end? And any balances collected on loans written off?.

Larry, why don’t you take those?.

The 130,000, just like in past quarters, that’s basically the median transaction value of sales in the medallion business during the first quarter, and that’s consistent with the methodology we’ve used in the past. Cash receipts, we’ve received about $3.8 million in the quarter on foreclosed and other loan, medallion-related assets.

And what was the third part?.

Any balances collected on loans written off?.

Yes. There were some recoveries, not a tremendous amount, about $0.5 million..

The next question is, how has April gone on consumer business, originations, delinquencies, forbearance request granted?.

So I’ll take that. That’s actually been a very bright spot for the company. I think we’re all cautiously optimistic on how that’s been going. There’s no guarantees it will continue. But April’s numbers have looked very good. The applications are actually up from last year.

So yesterday alone, for example, in the rec area, we received over 1,000 applications in. And home improvement is also up. So I think rec applications are probably up about 10%, and home improvement are actually up in April over last year, almost 50%. So I don’t know if it’s a trend again, I want to be cautiously optimistic.

But it could be that in the RV and marine area, a lot of people are not willing to travel. They don’t want to take airplanes, they don’t want to go to hotels, they want to get away. And the RV and marine market is kind of like a self-quarantined toy in a way.

I mean the boats are anyway you get out and you’re just with your family and you’re on your own. And RVs are great, again, quarantining measures to be along with your family or your loved one. So the hope is that those continue and delinquencies so far have gone up very little.

So applications are up a lot, and we’ll see how it plays out for the rest of the quarter..

The next question, commercial lending? Please talk about exposures to industries and impairments?.

There’s not been a lot of impairments there. Again, there’s only one company that’s on non-accrual of the 25-or-so portfolio companies that they have. Their average size loan there, again, is about $3 million, and the yields are about 12% or so. There’s no geographic or industry concentration, and it’s pretty much spread all around the country..

And the next question, what did you pay on deposits during March quarter? And what is the rate today?.

Larry?.

The average interest cost and deposits in the quarter wasn’t much changed from a year ago. It went up from about 2.35% to about 2.52%. So not much change..

And I’ll add. I think it’s going to be dropping. Well, I know it’s going to be dropping. I see where the CD rates are today.

So the hope is – the bank pulled down a lot of money in March, I think, just to be cautious, February and March, when liquidity around the country was tight for everybody, and those rates were again higher and rates today are a lot lower.

So the hope is when these CDs roll off, we took in a lot of 30-, 60-, 90-day CDs, so they’ll be rolling off quickly, and they’ll be rolling off at much lower rates that will be – we’ll put them on our books. So hopefully, that will add to our net interest income in future quarters..

There are no additional questions at this time. I’d like to turn the call back to Andrew Murstein for closing remarks..

Well, we just want to thank everyone again for attending this morning’s call. We’re happy to follow up if your questions were not answered. To that end, please contact Investor Relations at (212) 328-2176 or e-mail at investorrelations@medallion.com. Thanks, everyone, and have a great day..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation..