Andrew Murstein – President Alvin Murstein – Chairman Larry Hall – Chief Financial Officer.

Analysts:.

Good day everyone, and welcome to the Medallion Financial First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to [indiscernible]. Please go ahead, sir..

Thank you, Yolanda, and good afternoon. By now everyone should have access to the earnings announcement, which was released prior to this call, which may also be found on the company's Web site 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 projects financial information that involve risks and uncertainties, and 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 [ph], and welcome everyone to Medallion Financial's first 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.

Beginning with this afternoon's call, we will be holding conference calls consistently after each quarterly earnings release. For the first call, we want to spend a few minutes focusing on the company on a higher level, and our strategic plans to continue to transformation of our company.

Larry will then take us through some brief financial highlights regarding our first quarter, and then we'll take some questions that analysts and investors have provided to us before the call. Let me provide everyone with a quick history of the company and our main operating segments.

True to our name, my grandfather started Medallion back in 1937, and our sole business for many years was originating, acquiring, and servicing medallion loans for taxicabs. We had significant success for a long time, and in 2002, in made the decision to begin diversifying our business lines.

Given our past lending success, a natural pursuit with the formation of Medallion Bank, and eventually, we acquired a consumer loan portfolio. Since then we've considerably ramped up the size of our consumer loan segment which underwrite loans for recreational vehicles, boats, and home improvements.

At the end of 2016, the portfolio reached over $700 million in receivables for the first time, and we have more than tripled the size of this portfolio in just the last five years. Perhaps most importantly, we have been prudent in underwriting these loans.

We typically see 90-plus day delinquency rates for these consumer loans of under 1% of receivables, and overall delinquency rates range between 1% and 3%. In concert with our diversification strategy in recent years, we've also been working to grow our Commercial Loans segment primarily through mezzanine lending at our Medallion Capital subsidiary.

Since we've increased our focus on mezzanine loans, the segment has generated consistent profitability, and we've been able to keep 90-day delinquencies to a minimum.

We've made consumer and mezzanine lending the primary focus of our strategy in recent years as a result of both their high profitability in the current environment in the medallion lending industry.

Due to increased competition in this space, medallion values over the last couple of years have significantly declined in most cities, and delinquencies have increased.

In past couple of years we formally commenced a process of reducing our exposure to medallion loans, and focused more and more on our growing consumer finance and mezzanine segments, and formalized that strategy earlier this year. That brings us to today.

While we acknowledge that it would take additional time before the medallion business will be contributing at the levels we expect, we are starting to make some necessary headway.

We have slowly, but effectively, reduced our exposure to medallion lending over the past couple of years, and now manage $485 million of medallion loans at the end of the first quarter 2017, a 23% reduction from the prior year. At Medallion Bank, medallion loans now comprise less than 22% of the bank's assets.

And we expect to reduce that further in the coming quarters. Furthermore, we took significant action in the fourth quarter of 2016 to write off a reserve for a large amount of our nonperforming loans.

We have now written off a reserve for over $100 million in medallion loans over the past several quarters, and thus are carrying them on our books at a significant discounts to par.

Importantly, we did this despite having personal guarantees associated with the loans and the medallions pledged as collateral, which implies there could be material recoveries in the future.

In the first quarter of 2017, we took additional chargeoffs, and began to address some of our larger delinquent accounts to bring them into current status as we ramped up our collection efforts.

The end result in the quarter due to our efforts was that total delinquencies actually improved from where they stood at the end of 2016, even after disregarding loans that have been charged off. To be clear, we have plenty of work left to do on this front, but the improvement in delinquencies for the first time, since 2014, is a very positive sign.

From a consumer lending perspective, we will continue to focus on growing our portfolio, as well as monetizing performing consumer loans when it can be accomplished at a premium or necessary to reinforce the bank's leverage ratio. In the first quarter, we sold $94 million of consumer loans, and recorded a gain of sale of $2.7 million.

We still ended the quarter with a sizable consumer loan portfolio of $642 million, and as I noted, we've more than tripled the size of our portfolio in just the last five years.

Most importantly, after two quarters, where the bank recorded a net decrease in net assets due to the large write-off of medallion loans, the bank returned to profitability in the first quarter despite over $10 million in write-downs from the medallion portfolio.

Notably, we generated over $17 million in operating income before taxes from our consumer division for the quarter. In time, we believe that as the medallion industry fully stabilizes, and so long as we continue our strong consumer performance, we will be able to more fully realize the bank's earnings power.

Finally, we also ended the quarter with the bank's capital ratio over 15%, which is very well capitalized and considerably higher than the vast majority of banks in the U.S.. I'll now turn the call over to Larry who will give some brief highlights regarding first quarter results..

Thank you, Andy. And let me take you through some first quarter highlights. In the first quarter, Medallion Financial recorded net increase in net assets resulting from operations of $1.1 million or $0.05 per diluted share, compared to $6.8 million or $0.28 per diluted share in the prior year period.

The decline in net interest income and net realized and unrealized gains was partially offset by a $2.3 million reduction of salary and benefits expense due to lower headcount and a reduction of bonuses from the prior year period.

At Medallion Bank, we generated first quarter net increase in net assets resulting from operations of $4.3 million, compared to $6.2 million in the prior year period. Net investment income before taxes was $17.2 million, an increase from $16.3 million in the prior year period.

At the bank, our consumer lending portfolio, as of March 31st, stood at $642 million. This is a reduction from $701 million at the end of last year due to the sale of performing loans that Andy just mentioned, and partially offset by ongoing portfolio growth.

The portfolio's average interest rate improved to 14.8%, versus 14.3% in the prior quarter, as the loans we sold were home improvement loans that have lower yields, thus enhancing the yield mix of our portfolio. 90-plus day delinquencies on the consumer portfolio stood at 0.37%, an improvement from 0.43% in the prior quarter.

The bank's medallion lending portfolio, as of March 31st, stood at $234 million, a 28% reduction from the prior year, and an 11% reduction from the last quarter alone. Medallion loans now represent just 22% of Medallion Bank's assets. The average interest rate improved slightly on a sequential basis to 3.82%.

90-plus day delinquencies were $17.9 million, a significant decline from $39 million on a sequential basis. Part of the decline is due to medallion write-offs of $10 million in the first quarter, and part was due to certain large delinquent accounts that were brought current during the quarter.

At Medallion Financial and our other subsidiaries, the medallion lending portfolio, as of March 31st, stood at $251 million, a 17% decline from the prior year, and a 6% decline sequentially. 90-plus day delinquencies, as of March 31, on a managed basis with Medallion Bank decreased by over $22 million for the quarter.

So combined, our total managed medallion loans as of March 31st were $485 million, 23% lower than $630 million as of the prior year. We expect to continue to reduce our exposure to medallion loans over time.

Our commercial loan portfolio, which is primarily made up of our mezzanine lending portfolio, stood at $74 million, an 11% reduction from the prior year period due to prepayments and maturing loans.

The average interest rate on commercial loans was 12.88%, a slight reduction from 13.05% in the prior quarter due to the aforementioned prepayments and maturities. As of March 31st, the bank's tier 1 capital to average assets leverage ratio was 15.2%. The bank has $114 million in cash on its balance sheet, and is well capitalized.

Medallion Financial had debt of $338 million as of March 31st, as decline from $349 million as of December 31st. With that, I'll now turn the call back to Andy..

Thanks Larry. When we announced today's call a few days ago, we asked for email questions from the investment community, and will now answer those questions..

Thanks Andy.

First question, for your proxy, can you explain the bonus compensation for the year despite the large decline in stock price and the large dividend cut in 2016?.

Sure. Well, as Medallion's largest shareholder, no one felt the effect of the stock decline and dividend cut more than I did personally, due in part to the stock's performance, my bonus was cut by approximately 60% from the prior year. And Alvin, our Chairman's, was cut by about 45%.

If we fall short on executing on our strategy in 2017 we'd expect that the Board will cut our discretionary bonuses further. We're working very hard to improve the value of our shares for both the near and long-term.

I'd also note, we firmly believe management and other insiders' ownership of 15% of Medallion's common stock aligns us with our shareholders. As we execute on our strategy we will benefit alongside our shareholders..

Okay, thanks Andy.

Next question, what is the status of the negotiations with respect to the sale of minority interest in Medallion Bank?.

Right. So we hired an investment bank in the first quarter of 2017 to explore options. So far we've seen solid interest from various sources and investment structures beyond the simple minority investment. When and if the definitive agreement is reached and signed, we'll announce it and provide additional details at that time..

Okay.

What is the carrying value for Medallion Bank as of March 31, 2017 on the balance sheet?.

Sure. Well, the bank's value was mark-to-market at $284 million as of March 31st. The valuation increased in the quarter due entirely to what the bank earned and also retained. And now, it's approximately $4.2 million..

Next question, what is the latest on your RIC BDC [ph] evaluation process [indiscernible] seeing the business light to simplify your structure [indiscernible] earnings going forward, potentially on mark value..

Larry, why don't you take that one?.

Sure. We have not made firm decision yet on whether to de-risk [indiscernible]. So we do not expect to be a risk for 2017, assuming that occurs we would be able to use losses outside of the bank to reduce our bank cashes due to filing of the consolidated tax return.

It is not permitted to consolidated tax paying entities like our bank and their tax returns but if we de-risk we would be able to do so. I would like to note that if we decide to de-risk we can still be a BDC.

De-risking and [indiscernible] companies that have a number of positive attributes, however if we went ahead and see shareholder approval to no longer be a BDC, it would be very difficult to reverse course to be ever want to return to risk BDC status again. We want to be absolutely certain that this is the right course of action from Medallion..

Next question, what is management's current view and near-term outlook for the Medallion markets in New York City and Chicago, are the reduced collateral values mentioned in the fourth quarter earnings release proving to be viable?.

Well, we believe the stabilization is beginning to occur in those markets in the next couple of quarters we will hopefully confirm that this is the case.

In New York for example, the City Council recently passed some new regulations to help Medallion owners including a large reduction in the Medallion transfer tax from 5% down to one half of 1% and they also changed the rule, so that there is now only one class to Medallion.

In the past, if you remember there were two, only driver Medallions and corporate Medallions which could be owned by either fleets or investors but now that they've simplified the classes that's beneficial to us as well as the industry as a whole as individuals can now actually sell their Medallions to fleets.

So the city of New York has been very supportive of the Medallion industry recently, in terms of sales which was the latter part of the question there were 19 sales roughly in Chicago in the first quarter, the average $64,000 which puts well with our current carrying value of about $60,000 there.

In New York, there are three sales, they were bit diversified one was a foreclosure at a value of 550 which was above our reduced valuation of 500,000 and the other two were sales, one was in a state at a below valuation [indiscernible] from a driver who retired and he had to leave the country..

Okay.

Next question, can you comment on the prospects for reinstating cash dividends in the near future?.

Well, we and the board evaluate our dividend policy each quarter, at this time we believe the best way to use our capital is to further help grow our profit of consumer lending segment, where we actually have pre-tax return on equity of over 50%. That and the other profitable business lines as well as reduce our debt exposure..

Okay.

Next question, what is limiting the company from aggressively buying back Medallion common stock, do you think that the company could actually buyback a substantial number of shares in 2017?.

Well as I just noted, we believe the best use of the capital right now is to grow our profitable segments and reduce our debt exposure, that said, we do have repurchase program in place and should we see further improvement in our business and in our capital positions, we would definitely consider going back into the market..

Next question, can you give any reasons for encouragement for anyone either thinking about buying Medallion stock or for current shareholders?.

Sure. While it's the market's job to determine valuation, we believe that we can focus on executing and producing sustained quarters that demonstrate stabilizing Medallion performance and we continue to reduce our exposure, while continuing to profitably increase our originations in consumer and mezzanine lending.

The market will hopefully begin valuing the company more appropriately. We See that we're trading at a large discount to book value so we do feel that there's a lot of upside if we execute our plan correctly and the first quarter is just a start but we have to continue to execute going forward and we working hard to do just that..

Thanks.

Next question, looking two to three years out what does management believe will be the percentage of revenue coming from the down financing?.

Difficult to predict exactly right now it's under a 20% as we look at in the future I think it will be under 10%..

Okay.

Next question, why did you still portion of your consumer loan portfolio in the first quarter, why didn't you just hold on the loan to collect 10% interest per year until maturity?.

Larry, you want to take that?.

Okay, the opportunity presented itself to enhance the bank's liquidity by selling some of our lower yielding performing home equipment loans and we acted upon that. We still have over $640 million of consumer loans in our portfolio and expect to grow the portfolio further in the coming quarters.

In addition loan demand remains strong through our consumer loans which should enable us to re-lend the proceed from the sale in a very rapid fashion..

Thanks.

Larry, next question, further you know that your mezzanine segment has a robust pipeline to grow that loan portfolio in 2017, can you expand on this?.

Sure, the Minneapolis based team is working well together for over 25 years. We are able to use a variety of sources to feed our pipeline. We believe the pipelines well positioned to help us grow the mezzanine segment this year.

The segment is a small part of our business but it provides us with the Solid source of profits in 2016 for example the segment earns slightly over $8 million for the company..

Okay.

The next question, can you update us on your current liquidity status in your relationship with your banks?.

Sure, we feel we've got a very good in open relationship with all of our warehouse lenders. We'll provide updates on any material extensions in due course we do story debt by $11 million in the first quarter and by over $60 million over the last two years and we will continue to work hard and reducing this amount throughout 2017..

Okay.

And pertaining to your collection efforts, how have you ramped up efforts this quarter on the Medallion?.

Well, we spent to foreclose on loans that are more than one 180 days past due and eventually collect on the collateral and or the personal guarantees remember every single one of our loans backed up with a personal guarantee.

As we did this quarter we would prefer to work with our accounts to bring them back in the current status but when that can't be accomplished we'll look to collect the benefit of our company and our shareholders..

And I have no other question from shareholders this time..

Okay, well, I'd like to thank everyone for attending this afternoon's call and we look forward to updating you further on our progress on our call next quarter while we try to get as many questions as we could in today we realize 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 via e-mail at investorrelations@medallion.com.

That will conclude the call. So thank you everyone and have a great afternoon..

And everyone that will conclude today's conference, thank you all for joining..