Good morning. Welcome everyone, to Medallion Financial's 2019 Second Quarter Earnings Call. By now everyone should have access to the earnings announcement, which was released prior to this call and which also may be found on the company's website at medallion.com.

Before we begin the formal remarks, we need to remind everyone that matters discussed on this call include forward-looking statements or projected financial information that involves risks and uncertainties that may cause the company's actual results to differ materially from those projected in such forward-looking statements and projected financial information.

These statements are not guarantees of future performance and, therefore, undue reliance should not be placed upon them. For further information on factors that could impact the company and the statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission.

These forward-looking statement and projection of financial information made during this call is based on information available to us as of this date of this call. We disclaim any obligation to update our forward-looking statements unless required by law. I would now like to introduce your host today; Andrew Murstein, President of Medallion Financial.

Please proceed sir..

Good morning, everyone, and thank you for joining our 2019 second quarter 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.

We continue our forward progress in regards to managing the medallion portfolio, as it currently stands at the lowest level since 1996, the year the company went public. We ended the quarter with a net portfolio of just 121 million, a 53% decrease from the 2018 second quarter, and a 14% decrease from the 2019 first quarter.

At the end of the quarter, the total net Medallion portfolio comprised 12% of the company's total net loans and 8% of the company's total assets.

The provision for Medallion loan losses have been greatly reduced when comparing the first six months of 2019 to 2018, and we are hopeful that provisions we report in the upcoming quarters are manageable as the portfolio continues to run off.

The losses that we record from Medallion lending are primarily attributed to non-cash charge offs, while the significant earnings being produced by our consumer and commercial lending segments quarter-after-quarter are cash earnings.

As we recorded 23.2 million of net interest income for the second quarter, and 45.5 million for the first half of the year, we are on track to have approximately 100 million in net interest income for all of 2019. Turning now to our consumer and commercial lending segments, both Medallion Bank and Medallion Capital continue to thrive.

This quarter we highlighted our consumer loan originations in the press release as a way to demonstrate not only the demand for the bank's product, but its growth as well.

In the first six months of the year Medallion Bank originated 226.5 million of recreational vehicle and home improvement loans compared to 217.9 million in the same period last year. As of June 30th, our net consumer portfolio stood at 863 million, a 9% increase from the 792 million recorded in the first quarter of this year.

Medallion Bank's consumer charge-offs of 2019 six months as a percentage of the average loan portfolio was 2.43% for recreational and 0.26% for home improvement. Very good numbers that demonstrates the strength and credit quality of these portfolios.

The company is working hard exploring other products that will complement the bank's consumer portfolio and enhance the bank's path forward. Part of this process was the recent hire of John Taylor, the former President and CEO of First Electronic Bank, another Utah based ILC charter.

He came onboard to build up the bank's strategic partnership program with financial technology companies, and we'll look to develop those relationships and area he has extensive experience in managing. The commercial segment grew their portfolio 18% quarter-over-quarter. They continue to source deals to grow their pipeline and remain well capitalized.

In closing, the bank's recorded a Tier 1 leverage ratio of 15.96% at the end of the second quarter. In addition, for the six months ending June 30, 2019, the bank recorded a 35% efficiency ratio, which is a way to measure the bank's ability to maximize profits by maintaining a low cost operation environment.

The bank's efficiency ratio continues to be well below the 50% that is generally regarded as the optimal bank ratio. I'll now turn the call over to Larry who will give some additional highlights on the second quarter. .

Thank you, Andy. Let me take you through some more of our second quarter highlights. The net loss for the second quarter was $7.5 million or $0.31 per share, compared to a net loss of $14.6 million or $0.60 per share in the prior year period.

Cash flow from operations increased to $19.3 million in the 2019 second quarter from $16.1 million in the first quarter, a 20% increase. Net income after taxes for our Consumer and Commercial segments was $7.7 million for the second quarter, and $14.7 million for the 2019 first half.

The pipeline continues to grow in both segments as we enter the second half of the year. Our net interest margin remains at a high 8.46% in the 2019 second quarter, comparable to both last quarter and a year ago quarter, reflecting the yields of 15.53%, 9.46% and 11.71% for the recreation, home improvement in commercial lending segment.

Total capital at the bank, including both Tier 1 and Tier 2 capital was $185 million as of June 30, 2019. In the second quarter, the provision for Medallion loan losses was $8.2 million, compared to $5.3 million in the 2019 first quarter, and $24.8 million in the prior year period.

Our Medallion loan portfolio decreased to a net $121 million as of June 30, 2019. A 14% decrease from the 140 million we ended the first quarter with and a 53% decrease from the $258 million at the end of the 2018 second quarter.

Loan delinquencies on the consumer side remain low as loans delinquent over 90 days past due was 0.44% in both the second and first quarters of this year. The consumer loan portfolios average interest rate remains a constant in our reporting.

This quarter the average interest rate on the portfolio was 14.82%, a slight decrease from the 14.94% in the 2019 first quarter, however, up slightly from the 14.76% in the prior year period. Our commercial lending segment recorded net income of $141,000 for the second quarter of the year, and $801,000 for the first six months of the year.

The portfolio as of June 30, 2019 was $60.4 million, compared to $51.2 million in the previous quarter. The average interest rate was 13.75% in line with the 13.94% recorded in the first quarter and the 14.38% in the prior year period.

The commercial lending segment remains well capitalized and was able to grow its portfolio in the second quarter as they continue to source opportunities and put their capital to use.

We expect strong loan demand in the coming quarters in both our commercial and consumer segments that will support the current total yield on the company's total portfolio of 11.67%. With that, I'll now turn the call back to Andrew. .

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

Thank you. At this time we will conduct a question and answer session. [Operator instructions] Our first question comes from Jeffrey Kitsis with Sandler O'Neill. Please proceed with your question..

Good morning. In your prepared remarks, you mentioned the hiring of John Taylor as the SVP, Strategic Partnerships, and then in the earnings release, you said that you're already in discussions with a few strong and well known potential partners.

Can you please expand on these partnerships? What can we expect from this initiative? And how quickly can we expect this initiative to ramp-up?.

Sure, Jeff. So the strategic partnership program has been working very well for Utah, ILCs, I'd say it's probably the preferable charter that most FinTech companies have been working with now for several years. And it's partly because of the regulations that are permitted in Utah, you can export Utah State law at all 50 states.

So it's kind of one stop shopping for the FinTech companies. John had a number of accounts at his prior bank, at First Electronic and before that he was at CIT. So it's a very profitable business if done correctly.

Call reports can be brought up if anyone wanted to take a look and banks like WebBank and Southeast Bank and Fin Law is and First Electronic and others. Cross River is another one that's very active in this space and their ROEs are all significant, not that we'll hit those numbers, but their ROEs are all north of about 30%.

So our hope is to have something in place. Typically takes about six months to vet somebody and pick a partner and start. John started in July. So the hope is by January or so we'll hit the ground running with a partner in place..

And then moving on to provision. You mentioned in the prepared remarks that you're hopeful in provisions in upcoming quarters are manageable.

Is there a way to forecast provisioning related to Medallion ones?.

It’s a good question. And it's honestly kind of hard to forecast it. The loss have been lumpy and we were taking two steps forward and one step back from time-to-time, but you know, directionally we're very pleased with where this is heading. I mean, we're down to only $120 million or so of Medallion loans, up from a peak of 650 million or so.

So, you know, we've significantly cut it. The losses have been going down. From time-to-time again, you will have an increase last quarter, like we did this quarter. But we don't think we're going to have many more of those. We're confident that the next several quarters into next year, the losses are going to continue to decrease. .

And then last question. It was nice to see expenses coming lower than expected. But even after excluding onetime charges, core expenses have kind of bounced around from quarter to-quarter.

Can you give us some insight into how you think about the expense level? Is there full-year your target? And how should we think about seasonality from quarter-to-quarter?.

It could jump around, like you pointed out, that is correct, partly it comes down to some of our borrowers if they want to fall behind, not that they want to, but if they do fall behind, we have to litigate. The expenses could jump up and then you know usually pays for itself though we're usually successful in our endeavours there.

So, I'd say, if you looked at an average over the last four to six quarters, that's probably where it'll continue to be, but some quarters like this quarter could be low, if there's no litigation expense..

Our next question comes from Mike Grondahl with Northland Capital. Please proceed with your question..

Yes. Thank you. Andrew, could you talk a little bit more specifically about loan demand? And is that year-over-year you're seeing strength or sequential strength? Just kind of go into a little bit more detail there..

Yes, that's a good point, Mike. If you cut into the core business, which for us is the RV, marine, home improvement lending, mezzanine lending, and you kind of look past it the choppiness and the medallion business, which were again exiting. There's a lot of potential for all of our lines of business, and they're all doing quite well.

So with even growing at 20% or so per year, we think will continue that the returns evolve in north of 20%. We're blending as you know, it's 10% in the home improvement areas, 15% in the RV and marine area, and that's continuing. So we're bullish on the future and the demand, there's still a lot of room to grow there.

And we think we're going to execute on the plan to the balance of this year and into next year..

Seasonally with the RV boat and home improvement, is the sprig the peak? Is this summer peak? How do we think about that seasonality?.

Actually, a lot gets done in the spring and summer months, obviously for boats and things, but one of our new lines of business, for example is cargo finance, where you're hitting little mini hauler to your cars and that's not as seasonal. And that's been growing nicely. I think it's up to us 11% of our consumer portfolio now.

So for the most part, the boats and RV, these are spring and summer, but some of these other elements, they call them improvement lending in the cargo that's a year round business..

Got it got it.

And then any update on medallion recovery, anything to call out really the last 90 to 100 days?.

Nothing on the last 90 years or 120, we've seen some of our larger customers come in for settlement discussion. So we're hopeful, you know, that'll get put into place. I think people are generally somewhat bullish on the industry now. Now, there's a lot of hedge funds looking in.

There was an auction recently that we believe a hedge fund in New York bought medallions. So, there's a lot of people looking at this space. Some of them have started pulling the trigger and buying the medallions.

There's good hope that congestion pricing when it takes effect in January 2021 in New York, which will be for consumer cars and commercial vehicles that have been a boost both to Uber Lyft and the Yellow cabs.

And then we believe that Uber, and Lyft has started to raise prices, they have very large losses and profitability probabilities probably starts with them raising prices. So therefore there's more of an inflow from there to Yellow cabs as those prices start to escalate.

So I think there's a sentiment in the industry now that there's some upside to the medallion prices and several of our fleet owners are looking to expand and buy more medallions..

Got it.

And maybe lastly, have you broken out are you broke, break out what you're doing with this $30 million or sub debt that you raised?.

We're kind of looking at it up opportunistically. I'd say we haven't put any money into the bank yet, but we potentially could. The bank is you've seen in the earnings release, they've been doing a great job of building retained earnings and their capital without that extra money.

So that went up to I think over 16% or so they're the capital tier one ratio for the bank. We use some last quarter to buy back some debt, which we spoke about. We were able to take over $4 million gain. We hope to pay down some other debt in the coming weeks as well. So we're printing it, we think the good news..

Our next question comes from Scott Buck with B. Riley. Please proceed with your question..

I was hoping, if you could provide a little bit more color on current Medallion valuations. Is there appears to be a little bit of dislocation between, what we're seeing in the auction markets, and then what kind of the monthly transfer data tells us.

I think it's caused some volatility in the stock here over the last four or five weeks, so any additional color, you can provide there would be helpful?.

So, Medallion prices continue that honestly be all over the place. Cash deals are coming down as low as 110, finance deals are getting done as high as 300,000.

The average for the second quarter, including the auction and prices, which were low, the ones that were sold a couple of weeks ago, at option, I think from 110,000 to 130,000, those were the all cash deals that were sold to some hedge funds. If you look at the whole quarter with that lower price for the auction, the average was about 185,000.

So you know, pretty consistent I think with prior quarters, were carrying Medallions at 169,000, we're carrying or ways which are really accessible at about 147,000. So we think we're right in line with where the market is..

Second, what's the typical lag on increased credit collection expenses versus when the recoveries generally will occur?.

Saying for the quarter or two, you'll see something good done. A lot of these recoveries are not being shown, we mentioned and I think on a prior call, where a borrower will come in, he'll settle with us he'll make this loan current will give us extra collateral, he'll pay back interest. But we don't take it in as recovery.

Because once you write it off under gap, you're not permitted to take it back in the income until the loan is paid-off. So we still say we're going to have significant recoveries, but they're down the road, these loans won't be paid-off, for one, two, three years from now.

The hope is other lenders start coming back into the market and more liquidity gets into place and therefore more loans could be paid-off. And it's happened many other times and many other cycles after 9/11 all the lenders left. And then they came back in a couple of years later.

So the earnings are stable in the industry now and usually that's the first step before lenders start coming in. And the hope is some of the new lenders will be coming in an existing lenders will start financing and stepping up next year..

Last one, just in terms of continued run down in the Medallion portfolio took it from 14% loan book to 12% of loan book.

Is that a safe assumption as the conversion rate declined going forward over the next few quarters are there opportunities for around, kind of larger exposure reduction?.

I think it's probably, step-by-step as you as you've been seeing the last couple of years by now. So, we keep knocking it down bit-by-bit. As a very manageable level, as you pointed out, it's 12% of loan settings 8% of total assets. So, the whole business can continue to chip away at each quarter.

All we need to do is get that business close to a breakeven and then the cream of will really rise to the top in our consumer and mezz business was continues to do very well. So that's where we're headed..

Thank you. Our next question comes from Giuliano Bologna with BTIG. Please proceed with your question..

I guess I turn into a couple different questions. If I start off on the Medallion side, it looks like the bank charge offs $10.2 million.

And the total reduction in net Medallions was about just under $19 million, just sense of how much of that reduction was from pay downs or recoveries versus charge off in the period?.

We don't know the exact amount I mean, most of the loans or principal payments. So, they are being paid down quarter by quarter, we have very few interest only loans. So, we may have some more breakout in the queue, but we don't have it as of yet..

And then jumping over to the strategic partnership side.

From a strategy perspective, would you be looking to hold any loans on balance sheet or portion of the partner originations on your balance sheet?.

I think we should look at that. Originally, the plan is to hold very little. It will depend upon, the 15% tier one ratio or where we're at that time. I think over time, the plan would be to hold some loans.

I mean, they're very high rates that we can hold some paper is, you know north of 16% rates on our books, it'll be nice added income, in addition to the fee income that will be getting.

So the plan is probably just to start slow, hold very little, if any, in the first year, see how it's performing to minimize our credit risk, and then probably start holding some paper in year too, if we feel comfortable in the quality of the paper..

That makes sense. And one other quick one, it looks likea slight reduction in the 90 plus delinquent Medallion loans. We saw significant drop in the 30 days delinquent balances.

Is there anything we can read into that going forward into the next quarter is your credit there, your charge off portion of the 90 plus days but if slower inflows going in two quartersfrom now..

Yes, it's true. I mean, last quarter, we were high levels and led to a large right off for reserve that we had in this quarter, we took a $5 million. So hit on a large Medallion bar or otherwise there would have been even better. The last would have been even more improved from where it was last year. But we have various few of those large fleets left.

So the trend right now is good. In the last quarter, we were high 90 days and I have 30 days. And it dropped significantly now. So the hope is that it will continue to the next quarter or two..

Thank you. At this time, I would like to turn the call back over to Mr. Andrew Murstein for closing comments..

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

We're available today all week anytime to answer any additional questions and wanted to thank everyone again for today's call. Thank you..

Thank you. This does conclude today's teleconference. You may disconnect your lines, and have a great day..