Good morning, and welcome, everyone, to Medallion Financial’s 2019 Fourth Quarter and Year-End 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 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 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.

Please proceed sir,.

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.

2019 was a year in which we continued to build momentum for the future and, again, executed on the strategic initiatives we laid out as we shifted away from our Medallion lending segment to focus more on our highly profitable consumer and commercial lending segments.

To complement that transition, we set out to access the capital markets, and we’re successful in completing two transactions, an investment-grade rated private placement at Medallion Financial and an investment-grade rated initial public offering of perpetual preferred stock at Medallion Bank, raising over $82 million.

As a new public reporting company, moving forward, the bank will now publicly report their earnings in conjunction with the filing of their quarterly call reports. Next was to expand our activities at Medallion Bank by entering into new business lines.

Our initial project is to build on a strategic partnership program to take advantage of the rapidly evolving landscape with partnerships between banks and technology companies. We are in regular conversations with potential partners. We look forward to updating the market in the near term.

With that stated, let me touch on both our fourth quarter and full year highlights. Let’s begin with the Medallion portfolio. At the end of the fourth quarter, the net portfolio stood at $109 million, which represents 7% of total assets and 10% of the company’s total net loans receivable. Year-over-year, the loan portfolio was reduced 30%.

Loans 90 days or more past due dropped substantially from $16.7 million at the end of 2018 to $2.6 million at the end of 2019, which is just 2% of the total portfolio. At year-end, 86% of the portfolio was current. Medallion loans of the bank were 9% of their total assets at the end of 2019 compared to 15% at the end of 2018.

We continue to take actions to bring borrowers current and are making progress on our recovery efforts. On the legislative and regulatory front, we continue to see initiatives being taken to support the industry and regulating the companies that have been the cause of the increased congestion and constant traffic.

Within the last month, there has been a bit of news in regard to government entities and nonprofit and private partners to come together to create a debt purchase program for distressed medallion loan borrowers. We will be monitoring the situation carefully and are hopeful that a positive result will come out of these discussions.

This time next year, we expect congestion pricing to have taken effect in New York City as passenger cars and commercial vehicles will be charged a toll to enter Manhattan below 60th Street.

We remain hopeful this will result in more of a desire to take taxis rather than driving to Manhattan, ultimately allowing more fares and less traffic, which will cause the meter to turn over faster and potentially increase profits for the drivers. Now let’s turn over to the consumer and commercial lending segments.

The focus remains on these two segments as both Medallion Bank and Medallion Capital continued to perform well for the company. Net income from Medallion’s consumer and commercial segments totaled $7.2 million in the quarter and $31.9 million for the year.

Consumer originations were $443.5 million for the year, up from $408.5 million in 2018, showing steady growth. As of December 31, our net consumer portfolio stood at $940 million compared to $761.5 million at the end of 2018. Year-over-year, our net consumer loans grew 23%.

The company’s consumer loans charge-offs for the year as a percentage of the average loan portfolio continues to remain low. The company recorded loss ratios of 2.69% for the recreation and 0.37% for home improvement with a blended rate of 2.13%. As of December 31, 2019, the bank recorded a Tier 1 leverage ratio of 19.56%.

The bank’s efficiency ratio remains well below the 50% that is generally regarded as the optimal bank ratio. They were able to, again, show significant growth in 2019, which continues to be part of their 2020 strategy without taking undue risk.

The bank has built a solid foundation, and we are confident that disciplined focus and proven capabilities will keep them on target with their initiatives for 2020 and beyond. With more than $229 million of equity and consistent performance from their consumer lending segments, the bank is well positioned for asset growth and continued success.

The commercial segment grew its portfolio 11% year-over-year and reported net income of $2.2 million for 2019. Medallion Capital remains well capitalized to continue to grow their portfolio as they remain hard at work expanding in their targeted industries.

They have been able to expand their client base, and as a result, have experienced increased deal flow which will eventually lead to asset growth and greater profitability. We anticipate net portfolio growth again in 2020. I’ll now turn the call over to Larry, who will give some additional points on both the fourth quarter and year-end..

Thank you, Andrew. Let me take you through some more highlights. Net income was $2.8 million or $0.11 per share for the current quarter compared to net income of $9.2 million or $0.38 per share in the prior year quarter. Net income for our consumer and commercial lending segments totaled $7.2 million in the quarter and $31.9 million for the year.

The bank as a stand-alone legal entity recorded $9.2 million of net income in the fourth quarter and $23 million for the full year. This was the second straight quarter of net income of over $9 million and the most profitable six months since the bank was formed in 2003. As a result, the return on assets was 2.08% for 2019 compared to 0.54% for 2018.

We expect continued growth in both of these lending segments in 2020 as they remain well capitalized to do so. Our net interest margin remained strong at 8.82% in the 2019 fourth quarter, the highest for any quarter in 2019.

This is a reflection of the performance of the higher-yielding segments continuing to outweigh the lower-yielding Medallion segment.

In the fourth quarter, the provision for Medallion loan losses was a benefit of $3.4 million compared to provisions of $1.9 million in the third quarter, $8.2 million in the second quarter and $5.3 million in the first quarter of this year.

Our net Medallion loan portfolio decreased to $109 million As of December 31, 2019, a 22% decrease from the first quarter of this year. Loan delinquencies on the consumer side remained low throughout 2019.

Loans 90 days or more past due for the fourth quarter were 0.64% compared to 0.51% in the third quarter, and 0.44% in both the second and first quarters. Once again, the consumer loan portfolio’s average interest rate remains a constant in our reporting.

This quarter, the average interest rate on the portfolio was 14.54%, slightly higher than what we reported in the first three quarters of this year. Our commercial lending segment recorded net income of $366,000 in the fourth quarter and $2.2 million for the full year.

The portfolio, as of December 31, 2019, was $66.4 million compared to $64.6 million in the third quarter, $60.4 million in the second quarter and $54.8 million in the first quarter of this year. The average interest yield was 10.74% in the fourth quarter, slightly below what we had reported last quarter.

Net cash provided by operating activities was $64.9 million in 2019 compared to $66.6 million in 2018.

Lastly, the fourth quarter income tax provision included a charge of $1.5 million or $0.06 per share directly attributable to the change in the company’s effective state income tax rate and its impact on the deferred tax liability related to the goodwill and intangible assets associated with Medallion Bank.

With that, I’ll now turn the call back to Andrew..

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

[Operator Instructions] Our first question comes from Alex Twerdahl with Piper Sandler. Please proceed with your question..

Hi, good morning guys..

Good morning..

Good morning..

Just first off, is there anything other than the tax adjustment that you cited there, Larry, towards the end of the call that we would consider to be noncore and nonrecurring in any of the line items from the fourth quarter?.

No, not really..

We do have a charge for RPM for the NASCAR investment, which could be viewed that way, that, that had a loss for the quarter, I think, of about $2.8 million versus a profit in Q3 of about $2.6 million. But those are probably the two main items..

Okay.

Was that a write-down from RPM? Or was that just a loss?.

It was just a timing thing. I think they booked some – the season kind of ends in November or so. So they had the income that just got booked before the season ended kind of September, October..

There was a full quarter of sponsorship revenue in the third quarter. And in the fourth quarter, it was only a partial quarter because of season end. There is also a reversal of a little bit of sponsorship revenue that was recorded previously..

Okay. Understood. And then since you mentioned the DTL associated with the goodwill at Medallion Bank, do you happen to have the – where that stands at the end of the year.

Larry?.

The goodwill for the bank?.

No, the DTL associated with the goodwill for Medallion Bank, I think it was $44.3 million at the end of the third quarter?.

Right. That will be in the K, which should be filed shortly..

Okay, understood. And then the benefit, I think you cited a benefit of $3.4 million to the provision for the Medallion portfolio.

Can you just talk a little bit about some of the trends that you’re seeing in the Medallion portfolio that specifically drove that benefit? Was that the resolution of specific loans? Or was it a change in the carrying value of Medallion? Or what kind of led to that benefit?.

The biggest thing was improved performance in the Medallion arena, largely lower charge-offs that have been trending down over the last year or so. And as a result, some of the formulaic calculations we use for things like the general reserve have reduced meaningfully.

And as a result, we were able to reverse some of those general reserve previously provided provisions..

Understood. And is that something that is just an annual – or like an end of the year type of a cleanup thing? Or – based on what you just said, it wouldn’t be fair to expect additional provision releases or benefits for the next coming quarters..

Well, the formula gets tweaked every quarter based on actual historical results. So it’s possible that it could be different again. But this was probably the bulk of a catch-up reversal..

Okay. Great. And then it just looked from some of the data in the call report that the net charge-offs on the consumer book kicked up a little bit into the end of the year, kind of slightly above sort of the range that they’ve been trending.

Would you attribute that to seasonality or maybe some timing issues with the third quarter being a little bit lighter in terms of net charge-offs relative to the fourth quarter? Or do you think there’s anything that we should be thinking about with respect to the consumer business and changing potential loss trends going forward?.

I think it’s mainly seasonality. I think the business continues to perform very well. End of the year usually bolts and things, RVs, customers could fall behind a little bit on payments, but nothing that’s alarming..

Okay.

And then in order to generate the kind of pipelines that the business has right now, has there been any need to change underwriting or credit standards?.

No, they’ve been pretty consistent..

And then just based on the fact that you guys raised capital at the bank and obviously have a pretty significant amount of capital at the bank right now, we should expect that consumer business to grow at somewhere in the same range that we saw in 2019?.

Yes. I think we’re optimistic. We’ve been probably growing at about 20% per year for the last, I don’t know, five or 10 years or so. We have the opportunity to possibly enhance our home improvement lending growth. We’ve seen a lot of strong deal flow there. So the hope is to have that increase at a high level..

Fantastic. Thanks for taking my questions..

Thank you, Alex..

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

Hey, guys. First, just a couple of follow-up on the Medallion stuff.

What is the general reserve today? And can you talk a little bit about where you valued Medallion at year-end and kind of what utilization looks like?.

167, net..

The – we’ve been very consistent with the methodology for Medallion reserves for many years now. Basically, we are writing down Medallions if it’s delinquent 90 days or more to the value of the Medallion, which is about 167. So that’s unchanged from the prior quarter. On top of that, we have a general reserve on all performing loans.

Larry is looking through the numbers now. That’s about....

$3.9 million..

$3.9 million. The general reserve is about 20-something percent..

The overall reserve for Medallion, yes, $21 million..

It is about 20 – a little over 20% is the general reserve..

Got it. Got it.

And how is utilization?.

Our business has been pretty stable for the whole year. The drivers are doing okay. I wouldn’t say it’s an upturn yet. I think there’s a lot of hope that the business is going to get much stronger. You mentioned things like congestion pricing, which could be happening a year from now.

There’s a lot of talk about a taxi bailout fund where the regulators want to help the industry. There’s a lot of focus from regulatory standpoint to get this industry back on its feet and continue to have it improve. So the hope is some of those items come through, but nothing is guaranteed.

So we’re pretty much through most of the issues that we’ve had through the years, thankfully. The future of the company still will be the consumer and commercial growth..

Got it.

And Andy, any collections in the fourth quarter tied to the Medallion stuff you’ve written off?.

That’s been showing a little bit more promise than in quarters past. I don’t know if we have the numbers handy right now. Larry is going to look through it..

$1.3 million..

So about $1.3 million was collected in the fourth quarter. I know there’s a lot of other negotiations going on with borrowers. So the hope is those trends continue in a positive direction..

Okay. And then another question. The bank made $9.2 million. But overall, the company did $2.8 million.

So can you kind of just bridge us from what you say, the $9 million at the bank and then only $2.8 million overall? Like what are the offsets? What are the drags you’re still dealing with?.

I’d say, in this quarter, there’s four main elements. Some will be consistently there. Hopefully, some are just one-offs.

So the debt payments, for example, so the parent company raises debt in the public markets or from its banks and sometimes drops the money into the bank as equity, so the bank gets the benefit of no interest cost, if this is equity, but the parent company has the obligation of paying debt service.

So that’s partially why the bank’s earnings are higher than the parent company’s earnings. Second is corporate overhead. Management in New York that oversees the bank and loan servicing and other items, a lot of the corporate overhead that’s put on our incomes and balance statements at the parent, not at the bank.

And then the other two could be one-offs. That’s the tax of $1.5 million for the quarter that Larry mentioned before, and then the RPAC, which was there, RPM, Richard Petty Motorsports, NASCAR investment, which this quarter had a loss again of about $2.8 million as opposed to the third quarter that had a profit of $4.6 million [ph]..

Got it.

And do you think in 2020, those are going to converge? How do you think about those going forward?.

Well, you’ll always have some component of the first two, the corporate overhead and the debt payments. But the hope is they do converge more. For example, Medallion Capital had an okay quarter. Last year, 2018, they probably made $8 million or so and the year before they may have made $10 million or $12 million.

I think there were only about $2-and-change million for this year. So we’re very optimistic about that group. They’ve got very strong deal flow. That’s the group that, Mike, as you know, is based near you in Minnesota. So they’re seeing very, very strong loan demand now.

So the hope is that continues to grow and continues to be additive to our bottom line..

Got it. Lastly, you’ve been looking for some fintech partners, some assets to grow that bank.

Is that something we – I mean, is there an announcement in the first half of 2020? What’s the next things we should listen for or watch for?.

Yes, we’re optimistic about that area of the company. We’ve been talking about this since we did our first hire in about June or July of last year. The hope is to announce our first partnership within the next 60 days or so. And many of the banks that are in this space now, their numbers are public on the FDIC’s website.

Their ROEs are all well north after taxes of 20%, some as high as 40%. So it has extremely high profit margins. And the fintech sector continues to have an interest in investing in banks and buying banks. There was a deal announced within the last week, I believe, with Lending Club who’s buying a bank, Radius.

And we looked at their numbers, and not that this has anything to do with our bank valuation at all, but they probably paid 30 times earnings, trailing earnings for that bank. So again, ours is completely different than that. I don’t want to draw any parallels between the two.

But there is a lot of interest in this sector, and we hope this business line gets started for us within the next 60 days..

Got it. That’s helpful. Thank you..

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

Yes, good morning guys.

So Andrew, understanding that Medallion loans are now 10% of the overall loan book, can you still give us a little bit of color of what you see the outlook there for 2020, 2021, just in terms of the industry?.

I think everybody is optimistic about the direction of the industry in the Medallion space. Our losses have clearly come down substantially over the last couple of years. A couple of quarters ago, I think the losses were as high as $60 million, then dropped to $30 million, then dropped to $15 million.

So we’re really making a lot of improvements in that space, again, with all the efforts by the politicians and the regulators to help the industry. They’re trying to help the owner drivers, who all of us, I think, feel bad for that they lost a lot of their nest egg.

And frankly, it’s a result of just the e-tail companies and those being unregulated in several cities and eventually the cities starting to regulate them. But they’ve taken away a lot of the business through the years.

But the hope is that as those companies try to get the profitability of Lyft and Ubers and start raising rates as they’ve been doing, the cab industry will continue to improve. So I think all signs show that the industry should improve, and we’re certainly keeping our fingers crossed that it does..

Great.

On the commercial side, can you give a little more color on the pipeline and remind us what kind of capacity you may have there?.

So I think they’re at about, Larry could double check, but $60-something million probably of assets. Their typical business model there is about a $3 million loan at a 12% rate with equity kickers. They’re up to $72 million now. So every dollar of equity that we invest in there, we could leverage either 1:1 or 2:1 depending upon the terms of that.

The SBA grants us 10-year money at about 3.9%, I think, is the current rate. So our hope is that group – as you know, we don’t really give forecasts or estimates, but the hope is that group grows at least 20% this year. And it could be very additive to the bottom line if they close some of these deals. There’s no guarantees that they will.

But again, the pipeline looks very strong..

Great.

In terms of some of the, call it, nonstrategic businesses like RPAC, I mean, how should we think about these going forward? I mean, have you given any consideration to maybe further simplifying the business and divesting or selling these assets?.

Yes, we realize it’s a noncore business for us. It’s kind of a legacy investment from our regulated investment company, business development company holding days. So the value in sports franchises have been dramatic the last 10 years or so. So we’re thankful.

I mean it’s not typical to say you’re thankful to breakeven, but it’s very nice that a sports investment breaks even. Most sports teams lose lots of money and the appreciation play is over time. So we think this should be sold eventually. Again, it’s not a core part of our business. We’re trying to get new sponsorship into the team.

There’s a lot of interest. It’s the only African-American driver in the sport in 50 years. So the hope is that if we start increasing our sponsorships that we probably sell it, but there’s no time line to do it, but we’re definitely keeping our eye on – open right now to sell the team if the right offer comes along..

Great. And last one for me, more of a logistics question.

Going forward, will you guys look to move your own reporting or align your own reporting with the bank, just to get a little bit of consistency?.

Yes. Over time, we expect to get our press releases out roughly at the same time that the bank does, which typically is going to be about 30 days after the end of the quarter, at the time that they file their call reports.

And then with the 10-Ks and the 10-Qs, we expect that they’ll sort of get synonymous as well, although we’ll probably continue to file a little bit in advance of them for the next couple of quarters..

Perfect. Thank you guys..

Thank you..

At this time, I would like to turn the call back over to Mr. for closing remarks..

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 department at 212-328-2176. You’re always free to contact me directly as well, 212-328-2101 or e-mail investorrelations@medallion.com. Thank you all, and have a great day..

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