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Edited Transcript of MFIN earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 Medallion Financial Corp Earnings Call

New York Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Medallion Financial Corp earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew M. Murstein

Medallion Financial Corp. - President, COO & Non-Independent Director

* Larry D. Hall

Medallion Financial Corp. - Senior VP & CFO

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Conference Call Participants

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* Alexander Roberts Huxley Twerdahl

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

* Scott Christian Buck

B. Riley FBR, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome, everyone, to Medallion Financial's 2019 Third Quarter Earnings Call. By now everyone should have access to the earnings announcement, which was released prior to the 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 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.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [2]

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Good morning, everyone, and thank you for joining our 2019 third 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 are pleased with the third quarter results and hope to build on this momentum. It was a noteworthy one for the company as our core businesses continue to make headway, while our Medallion exposure diminishes substantially from where it stood even a year ago.

With that being said, let's begin with the Medallion portfolio. At the end of the third quarter, the net portfolio stood at $112 million, which represents 7% of total assets and 10% of the company's total net loans receivable. We saw 90-day delinquencies drop from $3.7 million at the end of the second quarter to $3.2 million at the end of the third quarter. We continue to take actions to bring our borrowers current.

Both Medallion Bank and Medallion Capital continue to add shareholder value. The consumer and commercial business segments recorded $27.5 million of net interest income for the third quarter and $77 million for the first 9 months of the year. Our consumer segments continue to grow as demand for the bank's products remain strong. In the 2019 9 months, Medallion Bank originated $351.8 million of recreational and home improvement loans compared to $333.4 million in the same period last year, including $125.3 million in the 2019 third quarter. As of September 30, our net consumer portfolio stood at $919 million, a 24% increase from the 2018 third quarter and has grown 21% year-to-date.

Medallion Bank's consumer loan charge-offs for the 2019 9 months as a percentage of the average loan portfolio continues to remain low, signifying the credit quality of the portfolio and the desire of the borrowers to maintain payments on the products we lend on. The bank recorded loss ratios of 2.3% for recreation and 0.2% for home improvement, with a blended rate of just 1.79%.

Last quarter, we announced the hiring of a senior executive who was the former president and CEO of another Utah-based ILC charter to build out the bank's strategic partnership program with financial technology companies. The bank continues to move forward on this path as we have had many productive conversations with potential partners. We look to have our first relationship up and running in the first or second quarter of 2020.

The bank recorded a Tier 1 leverage ratio of 15.91% at the end of the third quarter. The bank's efficiency ratio was once again well below the 50% that is generally regarded as the optimal bank ratio.

The commercial segment has grown its portfolio 26% over the last 2 quarters as cash from substantial early payoffs in the 2 quarters preceding that has been redeployed. Medallion Capital remains focused on sourcing deals to grow their pipeline and are well capitalized to do so.

In closing, to date, the company has net operating loss carryforwards, NOLs, of $87 million, which can be offset against future taxable income on future tax returns. These NOLs are a result of the Medallion write-offs we have had over the last several years.

I'll now turn the call over to Larry, who will give some additional highlights on the third quarter.

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [3]

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Thank you, Andrew.

Let me take you through some more of our third quarter highlights. Net income was $5 million or $0.20 per share compared to a net loss of $4.7 million or $0.19 per share in the prior year period and a net loss of $7.5 million or $0.31 per share in the 2019 second quarter. Cash flow from operations increased 13% to $21.8 million in the 2019 third quarter from $19.3 million in the second quarter and was up 35% from $16.1 million in the first quarter. Net income for our consumer and commercial segments was $10 million for the third quarter and $24.7 million for the 2019 9 months. The pipeline remains strong, and we expect continued growth in both segments as they move forward. Our net interest margin remained strong at 8.71% in the 2019 third quarter, slightly higher than what we reported in the first 2 quarters of this year, demonstrating the performance of the higher-yielding segments, while the lower-yielding Medallion segment continues to weigh in less on our net interest margin. Total capital at the bank was $180.3 million as of September 30, 2019.

In the third quarter, the provision for Medallion loan losses was $1.9 million compared to $8.2 million in the second quarter and $5.3 million in the first quarter of this year. Our Medallion loan portfolio decreased to a net $112 million as of September 30, 2019, an 8% decrease from the prior quarter and a 20% decrease from the first quarter. Loan delinquencies on the consumer side continue to remain low quarter-after-quarter as loans delinquent over 90 days past due were 0.51% compared to 0.44% in both the second and first quarters of this year. 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 14.67%.

Our commercial lending segment recorded net income of $986,000 in the third quarter compared to $147,000 in the second quarter of the year. For the first 9 months of the year, the commercial segment recorded $1.8 million of net income. The portfolio as of September 30, 2019, was $64.6 million compared to $60.4 million in the second quarter and $54.8 million (sic) [$51.2 million] in the first quarter of this year. The average interest yield was 11.09%, in line with the 11.02% recorded in the second quarter and down from 12.33% in the prior year period. The commercial lending segment remains well capitalized, and it continues to source opportunities and put its capital to use to grow its portfolio.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Alex Twerdahl with Sandler O'Neill.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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First off, if I could, just a couple housekeeping items. First off, Larry, a lot of small banks received a credit for their FDIC assessment in the third quarter. Did you guys receive that in the -- in Medallion Bank? And if so, how big was it?

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [3]

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We did. It was $224,000.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [4]

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Okay. And then it looked like sponsorship and race winnings were a lot higher than they were a year ago, and I know there's some seasonality to that in the third quarter. But was there anything else in there beyond seasonality that maybe would have made that a little bit higher than expected or potentially higher than it could be in the third quarter of next year?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [5]

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Yes. We've started receiving a lot of interest in the team when we signed some very large contracts. Our driver is Darrell Wallace. He's the only African-American driver in the last 50 years or so in NASCAR. And there's a lot of big corporations looking to spend diversity funds and sponsor drivers like ours, and thankfully, we've gotten a lot of interest recently. So we signed some large contracts. And they're year-by-year, but I think some of them should continue into next year as well.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [6]

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Okay. That's good. And will that make that line a little bit higher in the fourth quarter as well? Or is that still with a lot of seasonality in the third quarter?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [7]

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Yes. The season kind of ends mid-November, so not as much income in the fourth quarter, but the hope is when the race season kicks back off in February at Daytona, that will pick up again in the first quarter and then probably be high in the second and third quarter of 2020.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [8]

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Okay. Understood. And then the loss -- I'm sorry, the income attributable to noncontrolling interests, which is typically just the SBLF dividend at the bank, I believe, it seems like it was a bit elevated this quarter. Is there a reason for that?

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [9]

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The balance from the SBLF dividend to the total really represents the minority interest in the racing team for the most part.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [10]

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Okay. And then, Larry, you talked about that $87.4 million net operating loss carryforward. Does that effectively wipe out your tax expense for the foreseeable future?

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [11]

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Not the tax expense, but I mean, what it really represents is claims against future taxable income and payments that we might be making down the road to the IRS.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [12]

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So will that make your tax rate -- it won't make your tax rate go, but the 2% to 2.2% tax rate you had this quarter, that's not repeatable. The tax rate's going to go back up to kind of a 21% level?

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [13]

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Yes.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [14]

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And I think that works is you still report as if you're paying full corporate taxes at 28% or whatever your applicable tax rate is, but you actually don't have to pay the cash, so that's another way to hopefully build up cash for us.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [15]

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Okay. And then just final question from me. On the strategic partnership initiatives that you alluded to or that you talked about, Andy, and the target to kind of have some relationships in place by the first or second quarter of next year, is the goal kind of just to have like one relationship in place then and kind of build that and see how it goes? Or do you think we might see that actually kind of gain steam a lot faster than that?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [16]

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There's been a lot of interest. We've probably met with about a dozen-or-so potential partners. And then there's been some recent court rulings. The OCC was trying to roll out a fintech charter. A lot of states sued and won recently. So that probably helps our business and all the other people in the strategic partnership business, especially the Utah ILC banks that have, I think, again, a wonderful charter. The hope is to have 1 or 2 lined up in the first half of 2020. We probably don't want to rush into it. There's a lot of compliance-driven parts to that business, so we just want to make sure we go slow and steady.

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Operator [17]

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Our next question comes from Scott Buck with B. Riley FBR.

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [18]

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So obviously, benefited significantly in the quarter from the lower provisioning on the Medallion portfolio. Just wondering what kind of visibility you may have going forward over the next 12 months or so and whether this is the new run rate or we could expect a tick-up in the fourth quarter.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [19]

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It's very hard to predict. I mean the trends we've been very happy about. Obviously, it's been coming down substantially over the last couple of years. So -- and there could be some choppiness from time to time, a large borrower becomes delinquent, which is hard for us to forecast out. So we'll still have losses going forward from time to time. But again, I think we're very confident that the worst is behind us, and I think this quarter was evidence of that.

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [20]

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Great. And on the consumer lending side, could you tell us what origination volume was in the quarter and then how we should think about the seasonality of the consumer loan book as we go into what I imagine are slower fourth quarter and first quarter quarters?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [21]

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We're pulling up the numbers for the quarter, but it's a little seasonal. You'll probably see a slight dropoff in Q3 and 4. Number was $351.8 million of rec and home improvement loans for 9 months and $125.3 million for the quarter. So usually, the fourth quarter is slightly less than that, but the margin should also increase because as the more RV and marine lending with 15% rates go on our books and more 4% taxi loans kind of drop off, it helps our overall spread.

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [22]

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Right. That's helpful. And the last one, any kind of update on regulatory changes from the city or state of New York that could benefit the cab industry here over the next 12 months?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [23]

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Yes. I think there's a couple of things in the works. Yesterday, the city approved the Tesla Model 3 electric car, which is the first time, I believe, the City of New York ever approved an electric taxi. So that should save a lot of money for the drivers once they start buying those cars and putting them into service. And then you have congestion pricing for consumers starting in January 2021. That should be good for both e-hail companies and yellow cabs as less consumers and commercial cars use their cars in Midtown. So cars will -- taxis will -- the meter turns over faster, and the drivers make more money. So there's a couple of positive items, I think, ahead for us.

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Operator [24]

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Our next question comes from Mike Grondahl with Northland Securities.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [25]

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Congratulations on a clean quarter. A couple questions on the Medallion area, where you have the Medallions marked at the end of September. I think the last number we got out of you guys was like $169,000. But is there any update to that?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [26]

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Yes. We're still at that number. The sales have been consistent for the last 6 or 9 months or so. The business has -- Medallion prices have stabilized. The Medallion prices in Q3, the average was, I believe, $200,000, and the median was about $175,000 for Medallion. Again, we have them marked at $167,000...

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [27]

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$169,500.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [28]

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$169,000 -- $169,500 per Medallion.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [29]

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Got it. Okay. And any progress on collection? Some of the previously written-off stuff, how is that going?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [30]

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Somewhat positive. The business is pretty stable again right now. So current loans, once that -- we had a borrower who slipped beyond 30 days, as we mentioned in the release, and came back into being current. So Medallion current loans are probably 80%, 85% or so after that goes through. So the business seems to be okay, but we're cautiously optimistic about it.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [31]

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Got it. And that $17 million that became current after the quarter, did you have provision against that? Will that help 4Q? Or how should we think about that?

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Larry D. Hall, Medallion Financial Corp. - Senior VP & CFO [32]

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No. It was just in the 30-day bucket. It was just really a timing thing more than anything else. And the borrower brought everything current during October.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [33]

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Got it. Okay. And how are you guys feeling about general RV, boat and home improvement origination? $351 million is up over $333 million, but it's not up a ton. Would you guys have thought that would be up more? Or just where we are at the economy, you're happy with that? How do we think about it?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [34]

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Yes. We're pleased with that. It's still 20% plus growth year-over-year. So you want to be a little cautious with your underwriting. We could grow a lot faster than that if we wanted to, but we want to make sure that if and when a recession comes, we're well prepared for it. So we've been growing at a healthy rate, but nothing too aggressive.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [35]

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Got it. Got it. Andy, and in terms of the capital you raised, the sub-debt earlier in the year, where has all of that ended up within Medallion? Has some made it to the bank? Is it sitting at the holdco? How do -- how are you thinking about that?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [36]

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We haven't had a need to put it into the bank. Thankfully, because Medallion banks, Medallion loans have kind of tapered off, so if there were losses there, we were prepared to put them into the bank. So short term, we just paid down some debt, other general corporate purposes, but nothing else other than that.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [37]

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Got it. Got it. And any thoughts -- the bank has become really profitable. Any thoughts or need for the bank to pay a dividend next year?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [38]

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You're right. The bank actually had its best quarter ever, other than one quarter when we sold off $100 million plus of loans for about a $5 million profit. So the bank earned -- after tax is about $9.2 million for the quarter. It's in a position to pay a dividend. I think we're just going to watch growth and see if we have the ability to upstream the dividend to the parent company. As you know, and we just stated, the strategic partnership business, we don't know yet what to expect there. We're very bullish on it, but we don't know how much growth we're going to have, so we wanted to hold some capital into the bank too and wait and to see how that goes. But a dividend is inevitable, I believe, from the bank to upstreaming to the parent.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [39]

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And then lastly, is there any other debt that you guys have that you can pay down at a discount? Or what's kind of your outlook for that?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [40]

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There's opportunities from time to time. I believe a couple of quarters ago, we bought some debt back from a bank for about $0.50 on the dollar. So we've got some dry powder available if banks want to sell for that kind of discount. Most of them, I think, don't these days. They see that the company is doing well, so they might not want to. But if they do, we'd be ready to act on it.

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Operator [41]

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Thank you. Ladies and gentlemen, there are no further questions at this time. I'll turn it back to Mr. Murstein for closing remarks.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [42]

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Thank you, again, everybody. I want to say again how pleased we are with the quarter, and we're happy to follow up if you have any questions that weren't answered. To that end, please contact our Investor Relations Department at (212) 328-2176 or e-mail at InvestorRelations@medallion.com. Thanks again, and have a great day.

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Operator [43]

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Thank you. This concludes today's conference. All parties may disconnect. Have a great day.