Good morning, and welcome, everyone, to Medallion Financial's 2019 First 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 website at medallion.com. Before we begin the 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 day 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 joining our 2019 first 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. The first quarter was a busy and successful period at medallion. We completed a private placement of $30 million of senior unsecured notes that held an investment grade rating. It is evident that medallion losses have decreased greatly, and our consumer and commercial lending segments continue to be the focal points in 2019 and beyond. We're optimistic that the steps we took in 2018 will support our future growth and strategic initiatives. We continue to explore ways in which we can grow these segments over the long term and look forward to updating the market accordingly. With that I will now touch upon a few highlights in the quarter. The medallion portfolio continues to shrink. We ended the quarter with taxi medallion loans comprised of 14% of our net loans compared to 16% last quarter and 28% in the prior year period. Our net medallion portfolio now stands at just $140 million, a 56% decrease from the $319 million managed as of March 31, 2018. The medallion provision for loan losses was $5.3 million in the first quarter. When looking at the regulatory field, congestion pricing has been a topic of discussion this year that we are happy to briefly address. As the plan aims to decrease traffic in Manhattan's business -- busiest neighborhoods, we are hopeful that this will result in the increase in taxi usage and fares turning over more quickly due to the fact that a high toll to enter below 60th street will be implemented, therefore, making it unattractive for consumer vehicles to enter this zone. It was also reported…

Thank you, Andrew. Let me take you through some more of our first quarter highlights. Medallion Financial recorded net interest income of $22.3 million for the first quarter. Quarter after quarter, we continue to record a strong net interest margin and were particularly pleased this quarter as our net interest margin, which was 8.56% compared to 8.07% last quarter and 6.96% in the 2018 first quarter. The bank, as a stand-alone, recorded a 9.36% net interest margin, up from 9.08% in the first quarter of 2018. Net income for the first quarter was $1.2 million or $0.05 per share compared to a loss of $14.9 million or $0.62 per share in the prior year period. In the first quarter, the provision from medallion loan losses was $5.3 million. When looking at the total 2018 provisions for medallion loan losses recorded and the $62.7 million in the 2018 first quarter, when combined with Medallion Bank, we continue to see a downward trend for this metric in the medallion segment. Our medallion loan portfolio decreased to a net $140 million as of March 31, 2019, a 10% decrease from the $156 million we ended 2018 with, and the 56% decrease from the $319 million at the end of the 2018 first quarter. Earnings after taxes from the consumer and commercial side of the business were positive $6.6 million for the quarter. These segments are progressing forward with the consumer segments entering into a busy time of year as their pipeline grows. Loan delinquencies on the consumer side remain low, as loans delinquent over 90 days past due were 0.44% in the first quarter compared to 0.55% in the 2018 fourth quarter. The consumer loan portfolios average interest rate continues to stay consistent. This quarter, the average interest rate on the portfolio was…

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

[Operator Instructions] Our first question is from the line of Mike Grondahl with Northland Capital Markets.

Thanks guys on the progress. The first question, could you talk a little bit about operational trend with medallion, you got utilization pricing, maybe the value medallion at the end of March? And then just the $5.3 million provision was the lowest in a very long time. Do you have a little bit of sight line to that in 2Q and 3Q?

Thanks, Mike. Operationally, the business is stable in New York. I think there is a lot of positive feelings about congestion pricing, which will take effect probably in about January '20, '21 or so. So that's a big deal if it's implemented properly, which is a toll for all consumer cars and commercial cars going below 60th street. So even before that business has been stable now, fleets are getting there, there are cars out. Prices actually went up in Chicago. Chicago has been doing a little bit better than it has been in the past. So overall, I think there's some optimism in the industry that things are going to get better when congestion pricing again comes through. In terms of the $5.3 million. That was very positive for us. It's hard to predict honestly, the next couple of quarters or even a year or 2 out. It's been lumpy in the past but the lumps are a lot less now than they have been. So you could always have charge-offs or reserves coming down the pipe, but we don't think it will be near the levels that we've had in the past. And as you pointed out, I think there is a good light at the end of the tunnel here. The trends have been coming down substantially the last year or 2.

Got it. And the press release talked about a recovery for one of your larger medallion borrower. Anything to comment on that? Or just maybe the general pace of recovery and kind of the outlook for the rest of the year?

Right. And that one that you mentioned, that was very positive for us, but it actually did not come through as a recovery. We probably had recoveries of about $1 million or so this quarter. But the large ones aren't going to be shown until 2, 3 years down the path. So just to give you an example of how that one worked. We had a large borrower -- I'm just using rough numbers, let's say yield us $10 million and he's been delinquent for over a year. He made us loan current. He gave us additional collateral. He restructured the loan. So all very positive, but we don't actually take it into income until the loan is paid off. So it just points out I think that these guys are optimistic about the future of the business that they're willing to come up with old payments and additional collateral. Of course, we still have their personal guarantees on these loans. So it's another step in the right direction.

Do you have more of those in negotiation? Like, do you expect kind of a continued taste of these?

We do. The last few years, as you know, we've written off a lot of loans. So now, it's come -- we're coming to terms with many of the borrowers. So many of them are in. We're doing this on a daily basis. They're all not as large as that one, but we are in talks with several others. And I think the outcomes are going to be positive in those as well.

Okay, great. I'll jump back in the queue. Thanks.

Thank you.

Our next question is from the line of Scott Buck with B. Riley.

Hi, good morning guys. It looks like there's still negative contribution to NII coming from the medallion lending segment. When or if can we expect that side of the business to be breakeven in terms of that?

Yes, that's accurate, Scott. We're still losing some money there. The signs are positive, though, again, by these borrowers coming in and making good on some of their old payments that they owe us. So in a way, that's the $64,000 question, when do we get there? And it's hard to predict or pinpoint. I think it's very safe to say we were making a lot of progress and cutting the losses substantially. So the hope is by the end of the year that we should be close to that, but it's pretty hard to predict.

Sure. That's helpful. And then in terms of collection cost, it looks like there was a meaningful step down this quarter from the fourth quarter. Is it right to think of this level as the new run rate? Or is this just a lumpier line item that's going to kind of ebb and flow, and we'll have to kind of look out for that on a quarter-to-quarter basis?

The latter, as you point out, it's lumpy. We've been very successful, though. Whenever we spend a lot of time and effort on collections and going to court, if need be, we're in a very good position. We have good documentation, again, personal guarantees. So sometimes we have to go after the borrowers and try to seek personal assets, and therefore, you get that lumpiness because you don't know how far the court cases and effort will go. But for the most part, I think, again, it's moving in a positive direction. I think others hear about court cases or settlements that have been positive to us and the borrowers, therefore, act accordingly and are in a weaker position to negotiate with us. So I think trends are in the right direction there as well.

Great And last one. Where are you guys seeing demand on the consumer lending side? Is it broad-based momentum across the businesses, both home improvement and rec? Or is it really coming from 1 of the 2 products, or maybe some unique geographies?

It's coming from both, home improvement and RV and marine, but it's actually a little bit stronger in the RV and marine areas than home improvement. Home improvement, you have a little bit more competition there. So that business is still growing at a nice rate and the yields are 10%. But I think it's positive for us that the higher growth is coming from the RV and marine, where there is less competition than home improvement lending and those yields are 15%. And that pretax ROE is great for us. It's 40% or more. So that's where most of the growth is coming. It's from that higher yielding RV marine portfolio.

Thank. I appreciate the color guys.

Our next questions are from the line of Alex Twerdahl with Sandler O'Neill.

Hey good morning guys.

Hey good morning Alex.

So back to the borrower that you referenced in the press release that you settled early in the second quarter. Can you just give us a sense kind of from start to beginning of the negotiations, whether leading up them, defaulting or stopping to pay the loans? Or whenever the conversations to kind of restructures began, like how long did that whole process take?

I'll give you a general example. That one got involved with lawyers and courts, and therefore, don't want to talk too much about specifics there. But I'll just give you a general example of how a deal works. So for the most part, if somebody's current, or let's say, they're current in 2017 and January 1, 2018, they fall behind. The pattern is they fall behind 30, 60 days. You come, you bring them in, you talk to them about it, what's happening. You try to restructure the loan if need be or get them caught up in payments. And then if they don't pay, you have the ability to immediately go after the assets. So within a day, we could literally pick up the medallions. So sometimes we have to do that, and then you pick up the medallions. And the good part is that they all want the medallions back because they're earning a nice living from it, and they're still doing well. There's some good data out there that shows cab drivers are making about 50% more than Uber or Lyft drivers, for example. So they're making about $23 per hour versus other statistics show. Uber and Lyft drivers are making anywhere from $7 to $15 an hour. So they usually want their medallion back. We gave it to them if they make their loan current. If not, then we could put it up for auction. Sometimes they'll come to us in the auction process, and the one who negotiate new terms with us, but I guess the short answer is it takes about 6 months or so for a borrower to either make his loan current or for us to sell the medallion and then go after his personal assets.

Okay. So if it's 6 months to kind of go through that process and you can kind of pop to 10, I think, is what you call it, right? Repossess the medallion immediately. Why 2 to 3 years down the road for some of these large recoveries? Why can't it happen a little bit faster than that?

GAAP is the answer. So, for example, let's say a medallion borrower has a $600,000 loan and his -- and we're seeing the medallion is worth $180,000, and he is not current, we'll write the value down to $180,000. So we'll take a big hit. We'll take a $420,000 hit. Even though we've got personal assets, we don't count that in taking to account what the reserves will be. So even if he makes his loan current, we're not able to take that recovery back until the loan is paid off in full. So that's why I was saying it could take several years just because we hope that the loan will be paid off at the end of a 2 or 3 period if we restructured it. Sometimes, for example, in that case, we'll take that loan, again, $600,000. He bought a medallion for $1 million. We lent him $600,000. He was delinquent. Got down to $180,000 on our books after we took the reserve. We may say to him, if you pay us off after 3 years, we'll give you a 20% savings on the loan, and therefore, $120,000 savings. So he'll be incentivized to pay us off when the loan comes due. Now we mark this loan down again to $180,000 or everything above that, we'd be taking in as income when the loan is paid off.

Okay. So GAAP is G-A-A-P...

Exactly.

Okay. And then I know it's only been 2 months in the first quarter since we've seen some of the New York City congestion pricing in both medallion's and in Uber and Lyft. But have you heard anything from some of your borrowers in terms of kind of early sentiment, either positive-negative? And I know the first quarter is always seasonally a little bit lighter for farebox revenue, so it's not necessarily a perfect comparison. But what are drivers and medallion operators saying with respect to that specific piece of the new farebox?

We saw -- that's a good question. We pulled up some meter receipts from some of our customers over the last several months to look at how much they were bringing in literally daily. There's a lot of good information that we have access to, so we could look at the meters on a daily basis, see what the revenues are and there was about a 3% drop off when congestion pricing hit. Actually, it was less than I was thinking because usually, in the past when you have rate of fare increases, this sticker shock, like there wasn't anything, and we get a little bit disgruntled and maybe don't want to take it for a couple of days, then you realize you need the cabs again. So revenue only went down about 3%, which is a lot less than we thought, and then it actually bounced back up about a month or 2 after that. So March and April, it kind of bounced back up. So thankfully, it hasn't been much of an effect.

That's great to hear. Can you -- Larry, the reserve on the medallion portfolio at the end of the first quarter?

Total reserve?

Total reserve, it was about $26 million -- $25 million.

$25 million. Okay. And then of the provision that is not medallion-related, is it fair to say that's all consumer?

Yes.

Okay. And then maybe just kind of give us some commentary on what you're seeing in terms of loss rates on the consumer portfolio, in the first quarter?

I might say that's been positive. You always have a little bit of losses there, obviously, because the yields are so high. But losses are -- have been around 3% this time of year and then they get a little bit better in the summer months. So I'd say it's within the historical range of what's a typical.

Is that the loss rate of 3% a little bit higher in the first quarter? Is that just because residual values are a little bit weaker in the first quarter just because of seasonality?

Yes.

Seasonality, right. Fourth quarter -- the first quarter are usually the worst performance, and it gets better as the year goes on.

Okay. Great. And then just final question for me. You had a little bit of a tax benefit in the first quarter. Can you just tell us what drove that this quarter? And then what we should kind of be modeling for an overall tax rate for the rest of the year?

You want to try that?

Sure. It's primarily a function of the charge-offs and the reserves. We also had a tax benefit on a settlement with an ongoing state audit that was settled at the end of the first quarter. So we booked a $600,000 benefit there.

Okay. And then tax rate that we should be using for rest of the year?

25% is a good number to use.

Great. Thanks for taking my questions.

Sure.

Our next questions are from the line of Giuliano Bologna with BTIG.

Hi, thanks for taking my questions.

Good morning Giuliano.

Good morning. So taking a little bit -- the step on the medallion side of the business. Do you know how many counterparties you have left that are 5 million or above remaining?

Not off the top of my head. But I guess, there was 5 million to 10 million.

That makes sense. That worked. And is there any way of figuring out of what portion of the book has been settled or has reperformed?

In terms of the medallion loans?

Yes, that's right.

I'm not sure. I mean what percent of the portfolio is 30 days or less now. I was just going to look up some numbers.

And I guess while we -- while Larry is looking, it would be interesting to see. And then on the consumer side. In terms of kind of the areas for growth, you have laid some strategies for trying to grow consumer side of the business. What should we expect in terms of the magnitude of growth going through kind of the seasonally strong period in the middle of the year?

So let's go back up to your question number second is about a little under 4 million, that's 90 days past due for medallion. So that's a very positive number I think. And then you said, in terms of growth for the consumer loans?

That's right.

That business continues to do very well for us. We did have a charge by the way of about $1 million in the quarter for their preferred deal. So that's a non-recurring item. As you know, we looked at doing a preferred deal in January but ended up doing what we thought was a much more attractive offering, which is a parent company, private placement that had that investment grade rating and a 8.25% return. So to circle back to your question, that money, a lot of it is earmarked to go into the bank. And therefore, the bank is going to be able to I think really let loose a lot more than they've been able to in the past. The last couple of years, they were handcuffed. They were -- it was bouncing around 15% and now they are, as you know from the press release, 16.5% or more. So we're expecting pretty strong growth in the summer months, and we'll have the capital this time to let the bank reach their potential.

So that makes sense. Right now, you do have a lot of excess capital as a stand-alone and I'm assuming no capital has been pushed into the bank yet. But in terms of levering up that capital, how fast you think you can deploy if you were to introduce capital?

Right. So that's a good point. So the growth that you saw in the quarter was without that capital. The capital that we raised with the parent company did not get done until the last week of March. And as of March 31, none of it has gone into the bank yet. So we think that it's growing pretty well. They did $92 million or so in the first quarter. We should do better than that in the second quarter because again it's the summer -- summer month. So I think we'll be able to put most of this money to use in the next year.

Okay, I appreciate. Thanks for taking my questions.

Thank you.

Our next questions are from the line of Mike Grondahl with Northland Capital Markets.

Hi Andy, just a follow-up on the $30 million you raised. It sounds like a chunk of that is earmarked for the bank. What else do you plan on doing with that $30 million?

Yes, it's -- a good part of it earmarked to the bank. Other part of it is just general working capital, opportunistic-type investing. We, for example, would like to try to buy some of our debt back at a discount. Some of the banks had expressed an interest in that. They took reserves on our portfolio just like we took on our own. So even at a discount, they might be able to take a markup and a positive effect to their earnings by selling it to us. So the hope is to do one or more of those in the next couple of quarters. But there's also a lot of good opportunities in just the businesses that we're in. So I think, for the most part, it's staying in our lane and growing that RV and marine business. We're looking at other businesses too. But again, that has a 40% or so of pretax ROE, so there's not a lot of businesses that we're going to be able to surpass those returns from.

Got it. And could you talk about the $4.1 million gain in the quarter? Was that from paying some debt down? How was that generated?

Yes. So there was roughly $8 million of debt that we had, and we were able to purchase it for about $0.50 on the dollar. So we took a nice $4 million gain before taxes there. So that's the benefit of having this excess capital that we have now is to opportunistically take advantage of situations like that.

It is there -- is your $10 million, $20 million more of debt that you could maybe cancel at a discount? Or how big is that pool?

There's a positive and negative there. The positive is we paid our debt from $250 million down to $50 million or so ballpark for the last couple of years. So we don't have as much of debt outstanding as we did from the third-party banks. But -- so there's a pool of about $50 million left. I don't think we'd get big discounts from most of the lenders. Most of them are very happy with our performance and don't want us to buy it out of the discount. But there -- it could be selective deals here and there.

Got it. And then any new developments at the bank, new business line, personal lending? Anything close there, or is it still kind of just high level?

We're still looking at a couple of things at the bank. The strategic partnership business continues to be extremely profitable for Utah ILCs. Again, to me, a Utah ILC is one of, if not the best banking charter in the country. They haven't issued any since 2008. Walmart tried to get one. There's been a moratorium on them. There's been a couple of pending deals in the past for a significant premiums to book value, but they haven't gone through because they weren't -- not -- the previous administration was not open minded to change of controls, but this administration is, and this commissioner of the FDIC is. So we're out always talking to either potential investors in the bank or strategic partnerships interest in there. There's -- we were watching it closely because the OCC was thinking about issuing a national charter, and therefore, strategic partnerships might not be as valuable if these banks could get their own charter, but New York state sued and judged within the last 3 days, ruled in favor of New York state to let them go forward without lawsuit. So it seems people knew that was kind of coming, and therefore, interest in strategic partnerships being working with our bank and Utah has remained very strong. So yes, we're still looking at all those possibilities.

Got it. Thanks a lot guys.

Thank you.

Thank you. This concludes our question-and-answer session. I'd like to turn the floor back to Andrew Murstein for closing comments.

I just want to thank, everyone, for attending this mornings call. We're happy to follow up if your questions were not answered. To that end, please contact Investor Relations at 212-328-2176 or by email at investorrelations@medallion.com. Thanks, everybody, very much and have a great day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.