Garrett Edson - ICR Andrew Murstein - President and Chief Operating Officer Larry Hall - Senior Vice President and Chief Financial Officer.

Analysts:.

Good Morning, and welcome, everyone, to Medallion Financial's Third Quarter 2017 Earnings Call. I will now turn the call over to Garrett Edson at ICR..

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 third 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.

Before we begin our remarks, on behalf of Medallion and all our Board, we want to again express our deepest condolences to the family of our long time Board member, Stanley Kreitman, who recently passed away. Stanley joined our Board in 1996 and he provided us with considerable value and insight throughout his tenure with us. He will be deeply missed.

I will now take you through some highlights of our third quarter. The story was similar but improved from what we've been seeing in recent quarters. Another strong performance by our core Consumer and Mezzanine Lending segments, offset by the Medallion Lending segment at the bank and Medallion Financial.

However, we did not need to take as much write-offs and reserves in the third quarter as we were required to in the second quarter. Thus, our bottom line improved substantially. At our Consumer Lending business at Medallion Bank, we continued to steadily grow our portfolio.

As of September 30, our consumer portfolio stood at $787 million of net receivables, a $57 million increase sequentially. During the quarter, we saw a nice mix of originations between our higher-yielding RV & Marine loans and our prime credit 10% yield in home improvement loans.

Importantly, we continued to focus squarely on our underwriting when 90-plus day delinquencies were only 0.4% of receivables. We remain extremely pleased with the performance of our consumer team.

Thanks, once again, to our Consumer segment, we generated $19 million in pretax operating income at the bank and a pretax ROE over 50% in the third quarter from the consumer division, bringing us to over $53 million of pretax income thus far in 2017.

As we continue to reduce our exposure to Medallion loans, the earnings power of the Consumer segment should become more and more apparent over time.

The excellent performance of our consumer loans were partially offset, as of previous quarters, by the bank's Medallion Lending which saw us take $5 million in additional unrealized depreciation and write-downs, due mainly to our further reducing the estimated value of New York City unrestricted Medallion collateral to a net value of $359,000 as of September 30.

That amount is actually below the average sales price for October Medallion sales that was just released. That said, even accounting for the depreciation and write-downs, we still generated $5 million in earnings at the bank for the quarter. We are still progressing and steadily reducing our Medallion exposure at both the bank and Medallion Financial.

As of September 30, the Company managed $430 million of Medallion loans, a $23 million reduction on June 30 and a 27% reduction from the prior year. On a cumulative combined basis, we have reserved or charged-off over $171 million of Medallion loans.

Also in the third quarter, we began to see some recoveries from more collections efforts and that continued into October. In October, we also sold seven of our repossessed Medallions to a fleet operator for $450,000 per Medallion.

While we continue to work closely with our delinquent accounts in order to attempt to bring them back into current status, we noted previously that we will pursue collections efforts as necessary, based on personal guarantees and the Medallions pledged as collateral.

To be clear, the expect achieving significant recoveries from charged-off loan, which will be the gradual process overtime but we are beginning to see some positive results from our recovery efforts.

In terms of our current Medallion portfolio composition at Medallion Bank, Medallion loans now comprise 20% of the bank's net investment portfolio and the portfolio of the bank is 83% current as of September 30 and generating positive cash flow.

The bank's Medallion portfolio is continuing to hold its own in a challenging environment and we expect, excluding any potential future consumer loan asset sales that we should dip below the 20% threshold by the end of the fourth quarter.

Finally, as discussed in yesterday's press release, our Board of Directors has authorized management to commence the process to converge from a BDC to a non-investment company. We have been considering this step for some time and yesterday's announcement puts us on a path toward becoming a non-investment company.

We expect to provide more information about the process in the weeks and months ahead, as the process will require several different steps to be completed. Overall, it was a positive and newsworthy quarter at Medallion from both an operational and strategic perspective.

Furthermore, from a cash flow perspective, the bank continues to do extremely well, with substantial cash earnings from its consumer lending division partially offset with paper losses to increase Medallion write-offs and reserves. I'll now turn the call over to Larry who will give some brief highlights regarding the third quarter results..

Thank you, Andy. And let me take you through some third quarter highlights. In the third quarter, Medallion Financial recorded a net increase in net assets resulting from operations of $0.6 million or $0.03 per share compared to a net increase in net assets resulting from operations of $5 million or $0.21 per diluted share in the prior-year period.

A decline in net interest income and net realized and unrealized gains was partially offset by a $1.3 million distribution of dividend income from controlled subsidiaries related to tax benefits received.

At Medallion Bank, we generated a third quarter net increase in net assets resulting from operations of $5.2 million compared to a loss of $0.3 million in the prior-year period. The difference was primarily due to recording $5.4 million in reserves and charge-offs on non-performing loans, compared to $15.5 million in the prior year quarter.

Net investment income before taxes was $19 million, a 10% increase from $17.3 million in the prior-year period. At the bank, our net consumer lending portfolio as of September 30 stood at $787 million, a significant increase from $730 million as of June 30.

The portfolio's average interest rate was 14.5%, comparable with the prior year quarter as rising receivables from higher yielding RV loans, coupled with 10% yield in home improvement loans that have an average FICO score of over 760. 90-plus day delinquencies on the consumer portfolio stood at 0.41%, an increase from 0.30% in the prior quarter.

The bank's net Medallion Lending portfolio as of September 30 stood at $205 million, a 31% reduction from the prior year and a 6% reduction sequentially. Medallion loans represent just 20% of Medallion Bank's net investment portfolio compared to 29% as of September 30, 2016.

The average interest rate improved to 4.32% from 3.91% in the prior year quarter, as we continue to be able to refinance existing loans at higher rates. 90-plus day delinquencies were $19.6 million, a decrease from $22.6 million on a sequential basis.

We incurred $5.6 million in unrealized depreciation as a result of marking the collateral value of New York City Medallions, down to $359,000 net of sales cost from the previous amount of $411,000 as well as $0.4 million in charge-offs from non-performing loans.

At Medallion Financial and our other subsidiaries, the net Medallion Lending portfolio as of September 30 stood at $225 million, a 22% decline from the prior year and a 4% decline sequentially as we continue to steadily lower our exposure. 90-plus day delinquencies, as, of September 30 were $98 million versus $90 million in the prior quarter.

On a managed basis with Medallion Bank, 90-plus day delinquencies were $118 million, up from $112 million in the prior quarter. Reserves and charge-offs on the Medallion portfolio at Medallion Financial and our other subsidiaries in the quarter was $12.1 million.

Combined, our total managed net Medallion loans as of September 30 were $430 million, 27% lower than $587 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 $83 million, a 2% increase from the prior-year period, as an increase in mezzanine loan receivables was partially offset by a decline in other secured commercial loans in the portfolio.

The average interest rate on commercial loans was 12.91%, a reduction from 13.07% in the prior year quarter due to recent originations of mezzanine loans at a slightly lower yield than our historical average. As of September 30, the bank's Tier 1 capital to average asset leverage ratio was 15.4%.

The bank has $32 million in cash on its balance sheet as of September 30 and remains well-capitalized. Medallion Financial had debt of $330 million as of September 30, a decline from $333 million as of June 30. We remain current and believe we are in good terms with all of our warehouse lenders and appreciate their continuing support of Medallion.

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

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

Thanks, Andy. First question.

While understanding why it may be difficult to put loans on non-accrual at Medallion Bank, why not take a significant write-down on Medallion loan receivables as your peers have done? Or place the parent company's portfolio on non-accrual?.

Well, we note again that we already have written-off our reserves to over $170 million in Medallion loans thus far. With respect to the parent company, the loans are performing and generating cash flow. We'd expect to continue to record them as such.

If they become delinquent for an extended period, we'll reserve for them and write them off, if necessary, as we've been doing. With respect to the bank, the Medallion portfolio there is 83% current and generating cash flow.

So we feel the portfolio there is performing as well as to be expected in this environment and particularly compared to other portfolios..

Okay. Our next question.

Can you give us a sense of how you're using the collateral you have from Medallion loans? Are you realizing significant recoveries? And are you using the collateral instead as negotiating posture with borrowers to get more advantageous terms and bring loans current?.

Right. We began to see recoveries in the third quarter and although we provided financing to help complete the deal, we took it as a positive that we sold seven repossessed medallions last month, actually at a price of $450,000 per medallion to a high net worth borrower.

As I noted, we expect to achieve additional recoveries and will likely be a gradual process. While we don't comment on negotiations with borrowers specifically, we always try to first work with our borrowers to bring them current. That's the ideal scenario for everyone involved.

Pursuing recoveries are a last resort for us but it's a lever that we have and can continue to pursue, given the return to shareholders. As a reminder, we also have personal guarantees in virtually all of the loans, so we'll pursue our rights to the fullest extent of the law when necessary..

either a sale for cash to an alternative credit manager or third party receivable collection firm, the portion of Medallion portfolio that already has been charged-off; and perhaps, the performing Medallion loan portfolio to allow the cash proceeds to be used to enhance liquidity and for share repurchases; an update on your efforts to monetize the minority interest in Medallion Bank to private equity and/or strategic investors; or considering to go private transactions for all of Medallion Financial?.

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

Okay, sure. If we're receiving appropriate value for the charge-offs portfolio at any performing loan, we would certainly consider a sale to enhance liquidity and de-risk the balance sheet. Keep in mind that the ability to generate recoveries must be appropriately valued as well.

That said, we believe that no one is more experienced or better at collecting this unique asset class than we are.

Regarding the bank, there is nothing new to report and while we remain ready if the right opportunity warrants action with the bank continuing to perform well and the consumer segment becoming a greater and greater portion of the overall business and having generated over $50 million thus far in 2017, we're content with where we stand.

And we are not interested in selling a majority stake in the bank at this time as we continue to feel there is significant upside there. In terms of the go private transaction, as you just saw, we are commencing the DBDC process and that is where we expect to focus on in the near term.

However, we would rule out a go private transaction further into the future..

Thanks, Larry. Next question. You talked in a previous call about potentially working with hedge funds.

What level are they currently involved with you?.

Right. Well, we've been approached by many funds, given our status is the most experienced Medallion lender and collector that's out there.

So right now, we have nothing specific to announce on our side, other than we've started to talk with certain hedge funds where we think we can mutually benefit and where we'd be the servicer in any portfolio that they purchased in order to keep it off of our balance sheet. We'd also receive a success fee in those scenarios.

As you may have seen in September, hedge funds have started to purchase foreclosed medallions in New York and we wouldn't be surprised to see additional purchases in the future. There's a lot of funds looking out there for good assets.

Whenever you see a new investor-based investing and fresh capital coming in, it can only be very helpful, in our opinion..

What is the status of the share buyback?.

We recently renewed our share repurchase program as we needed to do so to prevent its expiration, and to provide us the opportunity to act on it in the future.

That said, as we talked about on previous calls, we have not repurchased any shares thus far this year and currently expect to allocate our capital to growing our business and reducing our overall debt..

Thanks, Larry. Next question. Great quarter. Can you give us an update on the New York City Medallion market? It appears a lot of effort is now being made by the mayor to help the Medallion entry in New York City.

Do you foresee new regulations being passed?.

Well, actually, both the mayor who, as everyone knows, was handily reelected last night as well as many city council members have been very receptive to ideas about helping the industry and creating more of a level-playing field.

There are several measures being discussed and proposed now that will be helpful, including granting additional Medallion to Medallion owners and congestion pricing and several others.

It's hard to predict what will and won't pass but we're cautiously optimistic that most, if not all the new measures being discussed will be very helpful to Medallion owners and lenders..

Okay. Next question.

90-plus day delinquencies at Medallion Financial are much higher than delinquencies at Medallion Bank, why is that? And what are the underwriting control procedure at Financial versus the Bank that could cause the variation?.

Right. What I was going to add was that loan portfolios are actually pretty similar. However, last year, for example, the Bank wrote-off all of the Medallion loans that were more than 180 days delinquent, and that was regardless of the amount of the loan and the strength of the guarantor.

Thus, items like that can come into play as bank requirements can be different than non-bank requirements..

Okay. Next question.

What is the timing of the DBDC process?.

I'll take that, Andy. There are a lot of elements to the process and procedures that we need to go through, including but not limited to regulatory, lender and shareholder approval. Our goal though is to get this accomplished in the first half of 2018..

Thanks, Larry. Next question.

Can you comment more on the consumer lending segment's strength of bank? And more specifically, cash flow from the segment versus reportable earnings?.

Sure. Consumer lending continues to do wonderfully for us and importantly, it's all cash flow generation. As a reminder, the bank also continues to reserve very conservatively on its Medallion portfolio. So thus, not only did the bank report a very highly profitable quarter but their cash flow is actually even greater than their reportable earnings..

Okay. Next question.

What is the current market outlook for New York and Chicago in terms of medallions, and how your delinquency is trending?.

Well, the New York market is somewhat solid and we're encouraged by the recent sales figures that we just saw that just came out for October. Chicago, still a little weak, so our delinquencies in that market will probably jump around a bit. On the delinquency front, we did see a rise in the quarter of delinquencies in the 61 to 90-day bucket.

But we're working on those loans strenuously to bring them back to current status, and we're hopeful we'll be successful..

Okay. Next question.

How does your Medallion valuation compare to other banks?.

Well, we reviewed other banks' and credit unions' valuations that are published as well as spoke to several that don't publish their numbers, and our numbers appear to be pretty much in the middle.

Again, though our portfolio appears to be in much better shape than many of theirs, they also came into the market and aggressively grew their portfolio from 2010 to 2014 or so, at the same time that we were reducing our exposure and focusing on our more profitable consumer lending area..

Okay. And the final question today. It looks like your Medallion yields have increased.

How are you accomplishing this? Also, in what ways are you currently reducing your Medallion portfolio?.

Yes, that's true. Yields have been improving as we are currently better situated to be able to raise rates when loans come due. Also, we've noted on repeated occasions, we're focused on shrinking the portfolio and we can accomplish that in a number of ways. One, most of the loans are amortizing.

Every time there's a monthly payment, the balances are shrinking. Two, we reserved or written-off a substantial amount in the prior years and have been to do this and still be profitable due to the strong earnings in our consumer lending and our mez group, which is having another fabulous year.

And three, while it's not the norm, we are receiving some full pay unless entirely when the borrower has the fund in..

Okay. That is all the questions for today. End of Q&A.

Great. I'd like to thank everyone for attending this morning's call. We look forward to updating you further on our progress in the future. While we try to get in as many questions as we could, we realize that there are others and we're happy to follow-up if your question was not answered.

To that end, please contact Investor Relations at 212-328-2176 or by email at investorrelations@medallion.com. Thanks, everyone, and have a great day..

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..