Andrew Murstein - President Larry Hall - Chief Financial Officer.

Mike Grondahl - Northland Capital Markets Scott Buck - B Riley Alex Twerdahl - Sandler O'Neill.

Good morning and welcome everyone to Medallion Financial's 2018 Third 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 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 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 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 on 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. Please go ahead, sir..

Good morning, everyone and thank you for participating in our third quarter earnings call. Joining me on today's call is our Chairman, Alvin Murstein; CFO, Larry Hall and our Director of Investor Relations, Alex Arzeno.

As we stated on our last call, we now reported as a bank holding company only for accounting purposes and consolidate our wholly-owned or controlled subsidiaries including Medallion Bank. We now identify as a finance company that primarily can touch its operations as a bank.

We believe this provides both our current and future shareholders a more transparent picture of our financial condition and result of operations. Last quarter, we provided clarity in regard to one of our debt agreements.

We are pleased to state that a few days ago we were successful in achieving structural changes to this specific facility and going forward will deconsolidate the trust that owns various Medallion loans from our overall results.

Larry will go into greater detail, however, we look forward to reporting a positive earnings of tangible book value adjustment in excess of $20 million in the fourth quarter as a result of these changes. This was a noteworthy achievement for our company that we are delighted to make public in our third quarter press release.

We will first update everyone on the Medallion portfolio then turn to the more profitable and growing segments.

It is increasingly evident that the portfolio is beginning to stabilize as the provision from medallion loan losses was $13.3 million in the quarter down significantly from $24.8 million in the second quarter and $62.7 million in the first quarter when combined with Medallion bank.

To add to this, we valued our New York City Medallion collateral at a net of $181,000 and New York City wheelchair accessible Medallion collateral at $154,000 exactly the same values we reported last quarter in line with Q1.

As of September 30, 2018, there remain $236 million of net Medallion loans a 9% decrease from $258 million we reported last quarter and a 45% decrease from the $430 million reported in the 2017 third quarter. The decline reflects charge offs of certain loans, their movement -- took a loan collateral in process of foreclosure.

In addition to the netting of reserves, it gives principal as of April 2, 2018 in connection with the change in reporting status.

We are able to state that our Medallion portfolio is its lowest level since 2013's first quarter 90-plus day delinquencies as a percentage of the portfolio were 4.1% down to $10 million from $118 million at the 2017 third quarter.

Recovery still remain a priority and as previously indicated, we have written off a reserve for over $300 million of Medallion loans over the past several years. We are hopeful to collect as much in recoveries as possible especially as we pursue personal guarantees which we have on all of these loans.

Payments that are made on these charged off reserve loans are typically applied to principal including interest payments we receive on non-accrual loans.

Additionally, when a loan is restructured or when a collateral is sold on finance, we maintain the existing book value of the loan until a reasonable amount of payment history occurs or the loan is paid off at which point principal recoveries and interest income can begin to be recorded.

We feel we are making progress with collections and bringing loans back into our current status and we hope that will be evident in the future whether any of these recoveries occur.

Before turning to our other two segments, we want to commend once again both the City Council of New York, the Taxi and Limousine Commission as they continue to construct new legislation to support the taxi industry. There are numerous proposals currently pending with both parties and we do hold these new regulations will ultimately be approved.

If so that will go a long way towards leveling the playing field between ride share services and taxi medallion owners. For more details on these proposals, please refer to Slide 14 and 15 in our public PowerPoint on the Investor Relations home page of our Web site.

In addition, the TLC recently announced that they would waive what would be nearly $20 million of ancillary fees to Medallion owners once again demonstrating the city's commitment to support on the taxi cab industry as rideshare services are not subject to such fees. Now let us get into our more profitable and growing segments.

First of the bank, we sold $109.9 million of performing consumer loans for cash proceeds of $106.5 million and reported a gain on the sale of $2.9 million. This was the bank's fourth sale of loans originated in its consumer lending business and consisted primarily of home improvement and recreational vehicle installment loans.

These sales continue to provide the company a source of liquidity. As of September 30, 2018, our net consumer portfolio stood at $742 million. However, if you add it back the four sales over the last three years, our outstandings would have been over $1.1 billion.

Our consumer and commercial segments recorded net income before taxes of $13.2 million in the quarter, a 48% increase from the second quarter. This increases once again led by solid originations in our RV and home improvement businesses, while our commercial segment recorded $2 million of net interest income.

These segments continued to show steady growth. It's important to note that the significant earnings we are getting from our consumer and commercial lending segments are cash earnings, while the losses that we record from Medallion lending are primarily attributed to non-cash charge offs and reserves.

Finally and to provide some clarity, last month we filed a Form 8-K for the purpose of renewing our share repurchase program, which needs to be done every six months, once as a standalone letter to shareholders, once in the annual proxy statement. We simply want to keep this option open. Therefore, we'd take the time to renew it.

Right now it is not a strong priority with consumer loan returns being so high. However, we continue to evaluate it. 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 of our third quarter highlights. Once again, we wanted to quickly remind everyone that this is the second quarter, we now follow the reporting conventions of bank holding companies including the presentation of our operating segments.

In the quarter, Medallion Financial recorded net interest income of $24.3 million which was mainly attributable to our consumer lending segments. We are pleased that the strength of our net interest margin which was 7.94% one of the highest in the company's history has the increase in our yield is largely offsetting the increase in deposit costs.

As a result of the provision for loan losses in the company's Medallion lending portfolio, the net loss was $4.7 million or $0.19 per share a solid improvement from both our first and second quarter results. Earnings from the consumer and commercial side of the business were a positive $13.2 million for the quarter.

As Andrew mentioned, our net consumer lending portfolio as of September 30 stood at $742 million down from $791 million last quarter, when including $101 million sale of consumer loans, the portfolio would have had a 7% increase quarter-over-quarter.

We continue to report low loan delinquencies on the consumer side as delinquencies over 90 days past due were 0.45% compared to 0.32% in the prior quarter. The portfolio's average interest rate was 15.18% up from 14.47% in the 2017 third quarter and the 14.76% we reported last quarter.

Our Medallion loans decreased to a net $236 million as of September 30, the average interest rate was 4.35%, a minimal decrease from 4.38% in the 2017 quarter.

We provided an additional $13.3 million provision for loan losses including a $4.9 million increase in the general reserve as well as continued reserve increases for those loans moving past 90 days past due. Once again, we are happy to report we ended the 2018 third quarter with a large drop in Medallion delinquency.

Our commercial lending portfolio as of September 30, 2018, was $82.3 million. We recorded net interest income of $2.0 million for the 2018 third quarter compared to $1.7 million last quarter. The average interest rate was 13.9% in line with last quarter.

The commercial lending segment is primarily made up of our mezzanine lending portfolio, which is delivered solid profits for the company.

Lastly, as a result of the deconsolidation of the trust, the company will be able to eliminate more than $63.2 million of Medallion loans and loans in process of foreclosure from our balance sheet along with $98.5 million of debt and payables, the trust owes to the bank in the fourth quarter.

In addition, we will recapture approximately $8 million in reserves on the Medallion loans and recognize a gain of about $12 million on the deconsolidation. For this to occur, we settled our limited recourse guaranty through a $1.4 million note payable in installments over the next five years.

After taxes, the company incurred $6.6 million of losses in the trust for the third quarter, losses that will be recaptured in the fourth quarter as described above and which will not reoccur in any future quarters. With that, I'll now turn the call back to Andy..

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

Thank you. We will now be conducting a question-and answer-session. [Operator Instructions] Our first question comes from Mike Grondahl with Northland Capital Markets. Please go ahead..

Thanks, guys and congratulations on the steady progress.

First, with the medallion industry in New York, what do you kind of seeing in terms of fleet utilization and kind of your thought post the New York City Council some of their actions that you mentioned, your thoughts on medallion values over the next year or so?.

Thanks Mike. So we see a lot of transactions occurring in the industry now. I think the number of transactions have tripled or quadrupled from last year. So that's all a very positive sign. There's more liquidity coming into the market. We have new buyers, new hedge funds and investors looking at it.

You have a lot of existing fleets looking to expand their business, which is also positive. They're obviously making enough money on their current businesses that they have the ability to expand. Utilization remains high, it's over 90%.

I think the cap on Uber, the City Council passed a couple of months ago was a game changer for the industry, it showed that they're really behind the cab industry. So overall, I'm a little bit more optimistic now than I had been in the last several years on the direction of the industry..

Got it.

And then, the $13.3 million provision on the medallion side in the September quarter, what specifically drove that? Was that sort of aging and some of the medallion sort of continued to age? Or can you just speak to that a little bit?.

We took a general reserve of about $5 million or so and you've had a couple of accounts. It's not -- loans aren't going to zero; delinquencies aren't going to zero. Directionally, obviously, they're heading in the right direction from $60 million to $30 million to $15 million roughly over the last couple of quarters.

But you do have some fleet from time to time that get that 90-day bucket and therefore we have to take reserves on it. But the good news is, it's significantly less than it has been in the last six or nine months..

Got it. Maybe lastly just volumes in the RV boat, home improvement area for loan, are you still feeling good over the next six months to a year that that business can continue to grow.

And any update on credit?.

Yes. The business continues to be great for us. It's very high ROE, it's growing nicely per the data in the release, we can't really project into the future, but the last couple of quarters, I think kind of speak to themselves.

It's just a very strong business with very little new competition -- if any new competition, so the yields are still 15% plus and rising. So I think we're in very good shape there..

Great. I'll jump back in the queue. Thanks guys..

Thank you..

Thank you. Our next question comes back Scott Buck with B Riley. Please go ahead..

Good morning guys. I just want to talk a little bit about the cadence on some of the expense items. I know there was a fairly significant up tick in professional fees and collection fees in the quarter.

I was wondering if that has to do with seasonality or where they're kind of one-off items in the quarter that causes the elevated levels versus 2Q?.

I would say, it's more of off-items. We've definitely gotten a lot more aggressive with our customers though. With the borrowers who have been delinquent. So we've been going after them and their personal guarantees as we've been indicating to everybody we would. So I'm glad that we're finally doing that.

So we do have some expenses that eventually probably get paid back to us because the borrower is responsible for all of our legal expenses, but that's kind of the main part of the expense item increasing in the quarter..

Okay, helpful. And then, in terms of the loan sales, I mean you guys have been pretty successful selling out at a profit.

What's the go forward plan in terms of sale loans, I mean is there an opportunity here for this to become a larger piece of the P&L?.

I think we look at it opportunistically. There's no set plans to continue doing it or not to be honest. When we come to market it's a great liquidity source for us. We can never have too many options. We've learned through the years of liquidity, so if we could sell for premiums of 104, 105 or so I think it's a good option for us.

Long-term, it does make a little bit more sense for us to keep it on our balance sheet because the yields are so high. But it's nice to have a balance of being able to grow as well as sell off loans when we need to.

So we are going to keep the door open, but long-term, I think we'll probably focus a little bit more on retaining them on our balance sheet..

Great I appreciate it guys. Thank you..

Thank you..

Our next question comes from Alex Twerdahl with Sandler O'Neill. Please go ahead..

Hey, good morning guys..

Hi, Alex..

First off, I wonder if you could just comment on I think someone asked you early on the credit trends on the consumer business specifically net charge offs where they were during the quarter and how that compares to the historical range for charge offs on consumer loans?.

Nothing of significant, for us it's pretty much business as usual there, losses long-term have always been in this range. We haven't seen much if any of an up tick there. So we've really increased our credit profile over the last couple of years.

The last recession we came out very well in 2008 and 2009 or so and since that point as you know Alex, we had the home improvement lending group which has average FICO scores of 765 or so. So I feel our credit is a lot stronger today than it was pre and post recession last time, so we're confident in the direction of the losses being minimal..

Great. And then, a slight up tick in the yield on the consumer business during the third quarter.

Is that more driven by a mix shift or the type of loans or is that reflective of the rise in interest rates?.

That's mostly having to do with the mix of the portfolio, a little bit more emphasis on the RV and their prime growth quarter on the home improvement..

Okay.

And then I was wondering Larry if you could give us a little bit more clarity on what are the moving parts behind the margin, where this quarter versus last quarter?.

Sure. In this quarter we actually booked some of the loan premium amortizations from the restructuring on April 2nd. In the second quarter, we did not, in this quarter we did and it impacted the yield..

Okay.

So, is this -- level of this quarter is that can be reflective of what the go forward margin will look like or is this -- the bookings of the loan premium amortization that go away?.

It doesn't go away until the loan premium goes away, but it will probably be a little bit less in quarters going forward..

Okay, great. And then just a final question for me, I was wondering if you could give us any sort of commentary on the complexion of the medallion loans as they sit across the bank, the rest of the company Trust Three et cetera.

Is it very homogenous in terms of further distribution of the high LTV loans et cetera?.

Yes. It's pretty similar across all of the different subs and throughout the bank..

Thank you for taking my questions..

Thanks Alex..

Our next question comes from [Kenneth Ore with Core Value] [ph]. Please go ahead..

Hi, guys congratulations on the quarter. I just had a couple of questions.

When you had announced a preferred being done at the bank level and I have two parts to that; one is, do you think that we'll see something done this quarter -- in the fourth quarter; and two, once you do that you think you'll be able to hold on to the consumer loan portfolios rather than selling off $100 million at a time?.

Unfortunately we can't really talk much about that. We're in a quiet period so I just got a refer you to the press release that we put out.

In the past we spoke about the preferred offering is being something that many banks look to do and part of many banks growth strategies if they're successful doing it, I think it is very helpful to banks in general..

And with a 7 to 1 leverage or thereabouts, you'll be able to keep more of the loan portfolio or you still look at it opportunistically?.

We [indiscernible] offering this. Let's take that aside for a second. The preference is usually to keep the loans on our balance sheet with a 15% yield, you're making a lot more long-term, if you hold them on and you don't sell them.

So things like retained earnings or excess capital raising capital all leave you to the same conclusion, which is to hold the loans on balance sheet if you have the option..

Okay. And last question, then I'll go back in queue. You had extended your stock buyback program. And I was just wondering that after you see the medallion stabilize.

Do you think you'll be able to take advantage of the stock buyback program?.

Long-term we have to. In the past, we've done it, I think as high as $10 per share or there's no -- it's a different market then and it's a different company today, so I'm not drawing comparisons.

But yes, I mean I think long-term it should be part of us or any healthy companies strategic plan to buy back stock especially when they are trading for at or below book value..

Thank you. Congratulations again on the quarter..

Thank you, Kenny..

Next question comes from Mike Grondahl with Northland Capital Markets. Please go ahead..

Hi. Yes. Thanks.

Larry, do you have at the end of September, the amount of medallions at the bank and corporate just kind of breaking it out between those two buckets? And then, is there still roughly a general reserve of about 9% at the bank?.

I don't think I have that information close at hand. I mean there will be some more details provided in the Q, which will be going out at the end of business today..

Got it.

And then, maybe secondly, did you guys say earlier in the prepared remarks what the collections were for previously charged off medallions in 3Q or maybe what your goal is for 4Q?.

No. I don't believe it was in there. I could tell you that we're making good progress there, we don't have numbers, it could be in the Q as to Larry's point. But the word in the script but directionally we're making a lot of progress with collections..

Mike, again, I can tell you that the banks net medallion portfolio was $132 million at the end of the quarter..

That obviously is down significantly when we started the bank, [indiscernible] Medallion Bank back in 2003, it was probably 90% of the assets and thankfully we've continued to diversify away from there. So you're now talking about 12% down from 90%, so the bank's assets, medallion loans are now only about 12% and headed lower.

So again we're quite pleased with that direction..

Yes. For sure.

So if you had $132 million at the bank you must have had about $103 million at corporate that would equal the 235? And then, with the DZ situation that $63.2 million are those all at corporate?.

The loans and process of foreclosure that are actually in the trust itself..

Yes. So none of those are at the bank.

Correct?.

None of those at the bank..

Correct. So --.

I'm sorry, Larry say that again..

None of those with the bank, it's -- all at Trust Three event..

Okay.

But, I'm sorry, I didn't quite hear you, those are at the bank or not at the bank?.

Not at the bank. They're outside of their bank. They're in a separate trust, a separate subsidiary of the parent company..

That's okay. That's what I thought.

And then, maybe just lastly, Andy earnings power we've talked about over the last year, how are you feeling about that as you've worked through and made a lot of progress in 2018?.

Very good. The consumer business continues to have ROEs north of 40%, 50% before taxes, we're really reducing our medallion exposure, the consumer business as we've stated in press releases as before, our earn is much more as two dollars per share.

So the key for us is exactly what we've been doing which is minimal values on medallion losses and again that's been steadily progressing in the right direction. And then, if we can get that business to a break even and just have the consumer business and the mezz business.

The mezz business, we don't talk a lot about, but that's another great business line for us. The ROEs are north of 20% there, $40 million of equity, $10 million or so of earnings last year. So those are the businesses that are really going to carry us into the future and we're proud of how well they've done..

Got it. Maybe one last one for Larry. Larry, if I'm looking at your balance sheet in the press release on September 30, you have $160 million of short-term borrowing, I assume the $98.5 million related to DZ, is in that number? That's what it'll probably come out of.

Is that correct?.

That's a good assumption..

Okay, great. Thanks a lot guys..

Thank you..

Thank you. I would like to turn the floor over to Andrew for closing comments..

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 desk at 212-328-2176 or email at Investor Relations at medallion.com. Thanks everybody. And have a great day..

This concludes today's conference. Thank you for your participation..