Good morning and welcome everyone to Medallion Financial's 2018 Fourth Quarter and Full Year 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 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 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..

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

This is the third quarter we reported as a bank holding company consolidation our wholly-owned or controlled subsidiaries including the databank Medallion Bank providing our current and future shareholders with the more transparent picture of our financial condition and results of operations.

Also, as a result of this change, we now present segment information in our quarterly filings. Additionally, we have noted certain financial metrics for the nine months reflecting just the bank holding company accounting model.

2018 was a year in which we executed on the strategic initiatives we laid out as we continued our transition away from our Medallion lending statement, the focus on the more profitable higher-yielding consumer and commercial segments. Over the last two quarters, we provided clarity in regard to our debt agreement with DZ Bank.

As a result of these structural changes finalized in November, we were able to record a gain to earnings intangible book value of $25.3 million before taxes and about $19.2 million after taxes in the fourth quarter, eliminated $63.2 million of Medallion loans and loan and process of foreclosure from our balance sheet and removed $98.5 million of debt and payables the Trust III owed to its lender.

With that stated, let us first update everyone on the Medallion portfolio. We ended the year with taxi medallion loans comprising 16% of our net loans, compared to 28% at the end of 2017. Our net medallion portfolio stood at 156 million as of December 31, 2018 versus 388 million managed as of December 31, 2017.

Quarter-over-quarter of the portfolio was reduced 34%, largely reflecting the deconsolidation of Trust III.

The provision for loan losses was reduced as well as we recorded 3.4 million in the fourth quarter, down from 13.3 million in the third quarter, 24.7 million in the second quarter and 62.7 million in the first quarter when combined with Medallion Bank and recorded as a non-cash valuation adjustments and realized losses charge-offs.

The provision for this quarter also reflects the reversal of $8.2 million of reserves as a result of the deconsolidation of Trust III, as described above. Once again, we want to reiterate that the losses that we recorded on the medallion portfolio primarily attributed to non-cash charge offs and reserves.

Our New York medallion values have been consistent over the last three quarters as we once again valued of nonperforming New York City medallion collateral at $181,000 and wheelchair accessible medallion collateral of $154,000. We saw stability in the medallion marketplace of 2018.

The TLC reported 810 total medallion transfers for the year compared to 117 in 2017, demonstrating greater liquidity and confidence in the market. We continue to manage our current portfolio and the recovery processes. We feel we are making progress and we will diligently pursue personal guarantees when necessary, which we have on all of these loans.

As stated last quarter payments that are made on these charge-offs and reserve loans are typically applied to principal including interest payments we receive in nonaccrual loans.

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

In total, we saw $12 million worth of principal payments on medallion loans during the fourth quarter. Turning now to our consumer and commercial lending segments. Medallion Bank had another great year as the Medallion Capital. both subsidiaries continue to add value quarter after quarter.

I am proud of the entire teams in both subsidiaries and commend them for the hard work put forth in 2018. Net income before taxes for our consumer and commercial segments was 41 million for nine months ending December 31st, and 11.2 million for the fourth quarter.

These segments continue to show steady growth and have been the earnings engine throughout the past several years. They continue to be the focus of the Company's future. We continue to explore initiatives to expand our commercial loan activity and believe the solid foundation that we have intact will also allow us to do so.

As of December 31, 2018, our net consumer portfolio stood at 762 million. However, if you add it back the four consumer loan sales over the last three years, our outstandings would have been over 1.2 billion non-factoring in any payments that might've been made on the sold loans.

I wanted to quickly highlight some key metrics on the two lending segments and Medallion Bank for the nine months ended December 31. When looking at our [rec] lending segment, we recorded an ROA of 5.48% and our ROE of over 22.6%, and at our home improvement segment, we recorded an ROA of 2.56% and ROE of over 11.3%.

Our strategy involved our home improvement and [rec] lending segments, is to grow market share and focus on brand management, content creation and targeted marketing campaigns. We are confident in our focus improving capabilities to support our initiatives of 2019 and beyond.

In closing, the bank recorded a Tier 1 capital leverage ratio to 15.85% at the end of 2018, compared to 14.50% at the end of 2017, demonstrating that the bank is well capitalized as it continues to progress forward. I'll now turn the call over to Larry who will give us some brief highlights regarding the fourth quarter and yearend results..

Thank you, Andy. Let me take you through some of our fourth quarter highlight while assessing on a few of our annual results. Medallion financial recorded net interest income of $23 million for the fourth quarter while Medallion Bank recorded $98.2 million for the 2018 full year.

We continue to be pleased with the strength of our net interest margin which was 8.07% for the quarter compared to 7.94% last quarter. The strong net margin at 8.19% recorded in the last nine months of the year is a result of the increase in this year of earnings asset for the consumer businesses.

Net interest income for the last nine months of the year was $72 million. Net income was $9.2 million or $0.38 per share for the quarter compared to a net loss of $4.7 million or $0.19 per share in the third quarter.

In the fourth quarter, the provision for medallion loan losses was $3.4 million, reflecting the reversal of $8.2 million of reserves as a result of the deconsolidation of Trust III.

When looking at the 2018 provision for medallion loan losses, we continue to see a downward trend as we reported $13.3 million in the third quarter, $24.7 million in the second quarter and $52.7 million in the first quarter when combined with Medallion Bank and recorded as non-cash valuation adjustments and realized losses charged-offs.

Our medallion loan portfolio decreased to a net $156 million as of December 31, a 34% decrease from the $236 million we recorded in the third quarter and a 60% decrease from the $388 million at the end of 2017, partially reflecting the deconsolidation of Trust III.

The average interest rate was 4.43% for the fourth quarter in line with the rates reported throughout 2018. Loans 90 days or more delinquent as a percentage of the portfolio were $15.7 million or 8.9% of gross medallion loan, compared to $71.9 million or 15.9% in 2017 fourth quarter on a combined basis with Medallion Bank.

Earnings after taxes from the consumer and commercial sides of the business were positive $8.2 million for the quarter while for the trailing nine months, it was $30.3 million. Quarter-after-quarter, we continue to report low loan delinquencies on the consumer side.

Loans delinquent over 90 days past due were 0.55% in the fourth quarter compared to 0.46% in the third quarter, 0.32% in the second quarter and 0.40% in the first quarter. The consumer loans portfolio's average interest rate continues to stay consistent.

This quarter the interest rate on the portfolio was 15.06% a slight decrease from the 15.18% in the third quarter. However, up from the 14.76% and 14.86% recorded in the second and first quarters of this year.

Our commercial lending segment continues to perform for the Company as we recorded net interest income of $1.8 million for the 2018 fourth quarter compared to $2 million in the third quarter and $1.6 million in the second quarter. The portfolio as of December 31st was $64.1 million compared to $82.5 million in the previous quarter.

The large decrease was due to the payoff with several large investments in the fourth quarter, which also included some gain from the redemption of the related equity stake. The average interest rate was 13.6% in line with the rates we have reported throughout 2018.

The commercial lending segment is primarily made up of our mezzanine lending portfolio, which has delivered solid profits for the Company. To conclude, and as stated in our press release, we continue to reduce our liabilities and are making great progress in strengthening our balance sheet.

We have reduced our bank provided medallion-related debt from 252 million at the end of 2015 to $60 million at yearend. With that, I'll now turn the call back to Andy..

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

[Operator Instructions] Our first question comes from Mike Grondahl with Northland Capital Markets. Please go ahead..

Could you talk a little bit about the utilization rate you are seeing in your medallion portfolio? And how you are thinking about some of the New York City regulations or proposals that look like maybe positive for the medallion industry?.

So in terms of utilization rates, meaning the fleet operators how many cars they are getting out, business continues to be solid. They are getting out most of the cars. There is a lot of competition obviously from the [EEL] companies, but the cabs are I’d say more than holding their own. The occupancy rates are over 90% for most of the fleet.

So, we are doing well and the evidence there is they are buying medallions, medallion transfers went up substantially in 2018. I think once it moved about 100 medallions being sold in 2017 to 800 or so in 2018. In terms of the New York City regs, you are correct, there is a lot of talk and proposals out there to help the industry.

The politicians are standing up for the business. The mayor and governor are both trying to help as much as they can. Some of the new proposals, there is a city councilman, I think its Ruben Diaz, who proposed a bailout fund for medallion owners much like the government did after the recession for banks back in 2008 or so.

So that would be extremely helpful, I don’t know if it will pass. There is no guarantees any of these things pass, but it shows that they're obviously making an effort to help.

Governor Cuomo also just proposed congestion pricing for consumer cars and commercial cars, which would take effect in 2020 and that also would be extremely helpful, if that passes. Less cars on the road mean that the taxis as well as the black cars can move around quicker, so it’s good for both taxis and black cars.

The meters, they make more money when the meters turnover quicker so when they not stuck in traffic. So, every single proposal that’s out there now is very beneficial to the industry..

And then, through the press release I read that you have 9.6 million of recovery. I think that’s a big step up from prior quarters.

Is that the beginning of new trend? Or could you just speak to that 9.6 million and kind of your outlook?.

It’s hard to tell, if it’s a trend. I think directionally yes, obviously, we are going to have recoveries. I don’t think they will that as high next quarter, but it is spotty. The good news is that a lot of delinquent customers are coming to the table. They don’t want to lose their medallions. They don’t want us to go after their personal guarantees.

So, they are coming up with payments to make their loans current or they are giving us extra collateral. They are paying their loans down. And when we litigate every time so far, we won, so these guys technically owe us the money, both corporately and personally, and we are on the right side of the law there.

So when pushed, we go to the math and we get the recovery. The hope is to workout fair deals with all the borrowers and then current and I think you'll see some more recoveries coming down later this year, but again it will be choppy. It’s very hard to predict the exact amounts..

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

This is actually Jeff Kitsis on for Alex this morning.

I was wondering, could you tell us how should we think about seasonality in sponsorship and race winnings?.

That also is kind of choppy, I mean, usually the rate season is from February to November, so you'll see a lot in Q2 and Q3 primarily then it slows down. The race team is operating at a breakeven though, so even though the revenues do spike up from time to time, expenses usually go hand in hand with that.

So -- but for the most part, it's on a quarter-by-quarter basis at a breakeven level..

And pushing to the question costs, what's the outlook for those? And will those continue to ramp-up in the near term?.

Well, which costs?.

Collection costs..

I don’t think they will ramp up as much as they did in this last quarter. They were a little bit higher than typical. Again, the good news is when we are spending the money we are collecting and recovering and winning judgments. So, it probably will not be as high in the next several quarters..

And how do you weigh uses of capital in Medallion Bank, so when considering growth at the bank versus dividend in capital up the holdco?.

Right now, the plan is to continue to hold it at the bank level. Their ROEs as you have seen in the release are extremely high. They are earning about over 30% pretax, 20% something after-tax, and their RV and Marine business. So, right now, the bank feels that they are best use of capital. There's a lot of runway still.

They are growing at over 20% per year. So with those ROEs and that type of growth, I think that’s the best way for us to use the capital in the meantime is to holding on the bank and continued to grow those divisions..

And last question for me.

What's the reserve for the medallion portfolio both general and specific?.

So, there is no specific reserves, the way that we handle that is, we're writing down the medallions to the laws of the medallion values, so that’s about $181,000 per medallion. In Chicago, I think we are down to I don’t know about 28,000 or so per medallion..

$28,000..

So, we’re at pretty conservative numbers there. On top of that, there are general reserve but that varies in the past it has been about….

15%..

15% or so, so right now, Larry is just pulling up some information..

The reserve in medallion loans at the end of the year was approximately 27.7 million..

Our next question comes from Scott Buck with B. Riley. Please go ahead..

Now that you have the Trust III structure behind you, I'm curious if there are any additional opportunities to excavate the wind down of the medallion loan portfolio? Or at this point, if we are just waiting on just the typical roll off schedule?.

There is opportunities, I mean long-term we have made a lot of progress as you can see. The medallion loan is really impressive. We went from 641 million three years ago, down to 156 million. So, in the last three years, we have decreased our exposure there by 76%.

There are other entities that we have like FreshStart, which are potential deconsolidation candidates like the Trust. There is no parent company guarantees there and we've already written off all of our equity. So, directionally, we are making a lot of very good progress there..

And on the consumer lending side, it looks like your Tier 1 leverage ratio gives you a little bit of runway here.

I mean, how are you thinking about growth in that business in 2019? And what's demand then like generally?.

We expect to grow at the same levels, if not more than last year, probably on balance sheet a lot more than last year in 2019 versus '18 because as you know we sold off loans. We don't plan on selling the loans off because to your point the capital level is -- well-capitalized banks I think are 6% or 8% we are down that.

So, we are one of the best capitalized banks probably in the top few percent in the country in terms of capital level. So we don’t think we will sell off any loans in 2019. If we get aggressive offers, obviously, we will look at it, if it’s selling for big premiums. But the plan would be to keep it on balance sheet.

Volume wise will be similar to where it was in 2018. But on balance sheet, we will be well above 2018 since we will be holding on the goal that that’s going them..

And then last one quickly.

On deposit cost, what are you seeing there in terms of any pressure? And what's the ability to pass any kind of rate hike on to consumers?.

We should keep the margins similar, but overall the margins will be improving, similar meaning that I think we expect one or two rate hikes in 2019, and we will be able to charge a little bit more to the customers, but the net interest margins will be increasing for us because the medallion portfolio is going to drag, its yielding 4.5%.

We have got these other wonderful businesses, yielding 15%. So as more of the medallion loans burn off as they will and the consumer business continues to grow as it has been, the net interest margin should increase in 2019. There are already at an extremely high level obviously, again probably double or triple the most banks are at.

But even at the current levels, I think they are going to increase in 2019..

Our next question comes from Giuliano Bologna with BTIG. Please go ahead..

I guess following up on the comment being here on the medallions portfolio.

Just to try to go through and look at the recoveries and potential on the recovery side, and the main reason why I bring that up is as I go through all the court dockets, it looks like medallion is one judgment of over $9 million so far in 2019 [indiscernible] that doesn’t have perfect correlation to getting recoveries in that period or the present ability to pay those judgments.

But how should we think about that and trend going forward?.

Yes, you have done a lot of good work and diligence on looking what's public on the Company, so that’s helpful. Yes, we are winning a lot of judgments. Again, the borrowers owe the money, a lot of them start off a little difficult and then we have to get judgments against them and they may end up settling.

So, we’ve written off over $300 million of loans and our goal is to get as much of that as possible even if we are talking about a fraction of that, it’s immensely profitable obviously it all flows to the bottom line when we get recoveries for loans that have been written off.

So, it won't be as high as it was this last quarter, but I think long-term it’s going to be more than it was as last quarter. Again, we have got hundreds of millions of dollars of judgments to go after. And so far, we've been very successful so we hope to continue with those trends..

And then, thinking about the remaining portfolio on the balance sheet.

Is there any sense of the percentage or the dollar amount of loans where you -- they are included in the 156 million that you have already entered into some sort of a restructuring agreement or reduced principal on?.

Yes, so the way that the accounting works is when a borrower is delinquent and that goes over 120 days, we write it down to the value of the medallions. Let say, you have see a $500,000 loan and we write it down because it's over 120 days delinquent to $181,000 or so. So, we take a huge reserve and write off.

If the borrower then comes in after we did have a judgment and he starts making his loan current, we don't increase the value, we still owe that at that 181,000. And in fact, recovery doesn't come in until the longest paid off in two or three years whatever the settlement terms were.

So a lot of the judgments that you see us entering into, and laws being made currently they are not even being reflected yet in our income statement per gap. So, they will as soon as those loans get paid off, but they are probably 2020 and '21 events..

And then just a quick one on the commercial side, did you guys disclose the amount of the gain on the commercial side?.

We don’t really have any gains this quarter from our – were you talking about the mezzanine lending?.

Yes, on that side yes..

Okay, yes, Larry will address that..

Yes, about half of the income for the quarter was from gains from the sales of the equality stakes related to some of the investments that were sold off..

Our next question comes from Henry Coffey with Wedbush. Please go ahead..

Maybe you can explain to me the dynamic between the bank and the holding company right now, and I know people asked, if you would be in the position to dividend capital to the holding company.

Is there any advantage to doing that? Or how do you -- when you think about your capital structure, normally, we look at companies and think about them as one consolidated entity, but obviously there's a different dynamic here?.

Well, I think the relationship is one of a father and a son where the son is growing up and is now doing extremely well and mature and strong off more cash than the father is. So, the bank is doing great. We started back in 2003 and went into consumer business, doing RV and Marine and home improvement lending.

It has own independent board of directors and it’s based as you know in Salt Lake. So, they look at everything independently of us and they paid dividend when they think its fit. We could ask them for but they, obviously, their own independent decisions to make and so far it’s been retained and that's the right decision to retain it.

So, no, short-term dividends expectations from them and I think eventually, we’ll stop paying the dividend again. In the past, they paid probably as much as $20 million a year after the parent company.

So, right now, they are just trying to capture market share, try to keep competitors out of the business as best as possible and try to grow that impressive ROE of north of 25%..

Would there be any advantages to getting a more sort of regular dividend from the bank to the holding company? Would that help with your financing? Do you need the money at the holding? Is there something you could do outside of the bank to grow the combined earnings or….

Yes, I think it’s probably still best used in the bank. I mean, if our parent company went out and raised capital, my recommendation will be to put more money into the bank with those ROEs. So, there is no immediate cash needs at the parent company, the parent company has nice revenue sources from Medallion Capital.

Medallion Capital was just brought up by Giuliano is our mezzanine group, where the dividend being up, I don’t know, $3 million to $5 million a year or so. So, there we have got a good source of income there. The parent company does charge the bank servicing fees of about $4 million to $5 million per year to service the loan portfolio.

So, we've got nice revenue sources coming up from several areas, but if we had more capital I would suggest to go into the bank to continue to grow..

The other thing we have talked about recent, and you sort of alluded to it already. There is obviously some sort of economic value to it, and I think anybody who goes to the airport can realize that when it takes 20 minutes to get a cab and God only knows how long to get into [indiscernible] car.

So, there is obviously some real economic value to the medallion and you’re seeing some more interest in the buying.

Is that coming from institutional capital or just old season well-to-do cab operators that see an opportunity? Or what is the economic transaction look like there?.

Yes, that's a good point. So, yes, there has always been need for a medallion right, no matter how good the technology is. You are on the street arranged you could go on your phone and call for an Uber and in five minutes or you can look to the sidewalk onto the street and get one in 3 seconds.

And then when you go to the airports, all of the airports are now set up where the cab line street right into the terminals and the holding areas for the black cars are literally 11 minute walks away from points LaGuardia. So, you always have a combination of street hails and airport business.

And a lot of investors and very smart investors see that, and are now coming into the business and buying medallions at very distressed level. So medallion prices went from a 1.3 million several years ago down to 185,000 or so today. So it’s been a huge drop, but the revenues and the earnings have not dropped by nearly as much as that.

So, the evidence for that is the amount of transfers. In 2017, you had 100 medallions sold and in 2018 it went up eight fold, up to 800, and that’s coming from both existing fleet operators who want to expand.

So, they are proving our point that business is solid, so they can expand and buy more cars and put more cars on the road as well as hedge funds and private equity firms who have been now buying medallions as well. So, there is a lot of demand for them right now..

And then, is there an opportunities in terms of cleaning up your own book of business to sort of an essence sell off that entity including maybe the recoveries where you just -- its kind of one and -- probably economically working through this loan by loan client by client is going to create the greatest return, but one and done transaction would really transform the business?.

Yes, we are open about both, I mean, almost every single medallion that we have foreclosed on we have lined up buyers for. So all of them are kind of looking for us, the preference would be all cash. If somebody came and paid north of $200,000 per medallion, I think, you sell it that way, we are selling them though for 225 in that range.

So a good numbers, even though again we are carrying them about 181, all cash deals are getting preference if someone comes in at a lower number. So, if we have to keep the moving amount and selling them off one by one, we will, there is large buyers that comes in and once do get our cash price we are open to that as well..

Our next question comes from Mike Grandal with Northland Capital Markets. Please go ahead..

What's the size of the FreshStart Trust that you could possibly deconsolidate? And what are the odds there with the timing?.

I think it’s about 30 million and change, Larry, is going to pull up the number. Here I just do that Mike as a potential, there is nothing definite happening there, but it’s another area that we are going to turn to and look at. Larry, is confirming, yes about 30 million or so..

And what would your best guess be the 156 million at yearend '18? What would you think that is at yearend '19?.

Which number?.

The 156 million..

The 156 million of medallion loans..

Right, what would it be end of '19..

Yes..

I think the goal would be to keep the rates going. The decrease is going which I think have been probably about 20% per year of decreases. Again from $641 million down to 156 million is probably 25% per year. So somewhere in that area would be our goal..

And a couple of quarters ago you talked a little bit about the third party medallion servicing opportunity, any of those in the market place?.

There are nothing eminent, we get close all the time from firms, private equity firms, and hedge firms, who want to buy portfolios whether it would be from us or from others. There are no natural servicers out there for them, but us there is no other company that has the expertise in this area like we do.

So, there is a lot of talk and we are always the first choice of potential buyers servicing deals, but so far nothing is stuck which is okay, our focus is really just to work on our own portfolio and these are the things formed to our lap and its incremental income is still a positive, but our goal is just to reduce our exposure in the meantime..

At the bank, could you maybe just comment on any interest from the third-party or any potential partnerships with third-party the online lenders?.

We continue to feel that the Utah industrial loan bank charter is the preeminent banking charter in the country. There is very few of them. They haven’t issued any new ones since 2008 or since Walmart I think applied for one.

It’s been a lot of talk about interest in the charters whether through acquisitions or through the noble applications from companies like lemon club and cabbage and non-deck and sofa and square. None of these entities have their own bank charters so they a lot of them partnered with Utah industrial loan banks.

So our goal is to expand our product line. I don’t think anything will happen short-term, but there's always interest from a lot of these fintech companies to point in with us and we are talking to a couple, but again nothing eminent..

And maybe just lastly, credit quality in consumer has continued to be really robust. I think delinquencies were even down year-over-year.

Just good underwriting, good economy, what would you call out on?.

Yes, I would say good management and underwriting and it’s not us. I would like to take some credit for it, but the Utah team just keeps knocking and cover up the ball. They have been doing this for 25 years even before we -- they used to work for Leucadia in their consumer area then we were fortunate enough to bring them on board about 15 years ago.

They learn as they go as we all do. They started doing great for us in 2003 and we were little bit nervous from 2007, once you know happen when the recession hit, and they laid out their plan and showed us what they expected the losses and reserves to go to, and they were spot-on on that.

And since that point as you pointed out, the losses and delinquencies have been extremely low and in fact, the next recession we are even better positioned than the last one for several reasons. Back in 2007 or so, the FICO scores were higher than where they are today.

I think they are about 620 back then and now we are averaging about 680 or so, plus on top of that we added home improvement lending, which has an average FICO score of 765. So you are talking about A quality, A plus quality paper. So, they have done a great job and we are positioned for any future recessions as well..

This concludes the question-and-answer session. I would like to turn the conference back over to Andrew Murstein President for any closing remarks..

Great. So, I just wanted to thank everyone for attending this morning's call. We are happy to follow up, if your question was not answered. To that end, please contact Investor Relations at 212-328- 2176, or via email at investorrelations@medallion.com. Thanks everybody 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..