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Edited Transcript of MFIN earnings conference call or presentation 6-Aug-19 1:00pm GMT

Q2 2019 Medallion Financial Corp Earnings Call

New York Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Medallion Financial Corp earnings conference call or presentation Tuesday, August 6, 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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* Giuliano Jude Anderes-Bologna

BTIG, LLC, Research Division - Director & Financials Analyst

* Jeffrey Scott Kitsis

Sandler O'Neill + Partners, L.P., Research Division - Associate

* 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. 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 formal remarks, we need to remind everyone that 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 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 your host today, Andrew Murstein, President of Financial -- of Medallion Financial. Please proceed, sir.

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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 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 regard 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 6 months of 2019 to 2018, and we are hopeful the 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 noncash 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 6 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 30, 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 for 2019 6 months as a percentage of the average loan portfolio were 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 on-board to build up the bank's strategic partnership program with financial technology companies and will look to develop those relationships, an 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 6 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'll give some additional highlights on the second quarter.

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

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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 the year ago quarter, reflecting the yields of 15.53%, 9.46% and 11.71% for the recreation, home improvement and commercial lending segments.

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 the 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 were 0.44% in both the second and first quarters of this year. The consumer loan portfolio's average interest rate remains a constant in our reporting. This quarter, the average interest rate on the portfolio was 14.82%, 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 6 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 segment 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.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [4]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeffrey Kitsis with Sandler O'Neill.

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Jeffrey Scott Kitsis, Sandler O'Neill + Partners, L.P., Research Division - Associate [2]

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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?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [3]

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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 to 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 could be brought up if anyone wanted to take a look at banks like WebBank and Southeast Bank and FinWise and First Electronic and others. Cross River is another one that's very active in the 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, it takes about 6 months to vet somebody and pick a partner and start. So the hope -- John started in July. So the hope is by January or so, we'll hit the ground running with a partner in place.

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Jeffrey Scott Kitsis, Sandler O'Neill + Partners, L.P., Research Division - Associate [4]

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That's helpful. And then moving on to provision. You mentioned in the prepared remarks that you're hopeful provisions in upcoming quarters are manageable. Is there a way to forecast provisioning related to Medallion loans?

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

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That's a good question. And it's honestly kind of hard to forecast it. The losses have been lumpy. We're taking 2 steps forward and 1 step back from time to time. But 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 we've significantly cut it. The losses have been going down. From time to time, again, you will have an increased loss 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.

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Jeffrey Scott Kitsis, Sandler O'Neill + Partners, L.P., Research Division - Associate [6]

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Okay. And then last question. It was nice to see expenses come in 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 a full year target? And how should we think about seasonality from quarter-to-quarter?

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

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It could jump around like you point out, that's correct. But 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 usually pays for itself, though, we're usually successful in our endeavors there. So I'd say if you looked at an average over the last 4 to 6 quarters, that's probably where it will continue to be, but some quarters like this quarter could be low if there's no litigation expenses.

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Operator [8]

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Our next question comes from Mike Grondahl with Northland Capital.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [9]

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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.

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [10]

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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 the choppiness in the Medallion business, which we're, again, exiting, there's a lot of good potential for all of our lines of business, and they're all doing quite well. So we've been even growing at 20% or so per year, we think we'll continue that. The returns have all been north of 20%. We're lending, as you know, at 10% in the home improvement area and 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 for the balance of this year and into next year.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [11]

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And seasonally, with the RV, boat and home improvement, is the spring the peak? Is the summer the peak? How do we think about that seasonality?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [12]

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I'd say, 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 hitching a little mini hauler to your cars and that's not as seasonal. And that's been growing nicely. I think it's up to 11% of our consumer portfolio now. So for the most part, the boats and RVs are spring and summer, but some of these other elements they call improvement lending and the cargo that's a year-round business.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [13]

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Got it. Got it. And then any update on Medallion recoveries? Anything to call out really the last 90 or 120 days?

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

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Nothing on the last 90 or 120. We're seeing some of our larger customers come in for settlement discussions. So we're hopeful that will get put into place. I think people are generally somewhat bullish on the industry 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 will be a boost both to Uber, Lyft and the Yellow Cabs. And then we believe that Uber and Lyft have started to raise prices. They have very large losses and their path to profitability 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 good sentiment in the industry now that there's some upside of the Medallion prices and several of our fleet owners are looking to expand and buy more Medallions.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [15]

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Got it. And then maybe lastly, have you broken out? Or can you break out what you're doing with the $30 million of sub debt that you raised?

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

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We're kind of looking at it opportunistically. I'd say, we haven't put any money into the bank yet, but we potentially could. The bank, as you've seen in the earnings release, they've been doing a great job of building retained earnings on their capital without that extra money. So that went up to, I think, over 16% or so, the capital Tier 1 ratio for the bank. We used some last quarter to buy back some debt, which we spoke about, we were able to pick up a $4 million gain. We hope to pay down some other debt in the coming weeks as well. So we're putting it, we think, to good use.

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Operator [17]

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

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

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I was hoping you could provide a little bit more color on current Medallion evaluations as 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. And I think it's caused some volatility in the stock here over the last 4, 5 weeks. So any additional color you can provide there would be helpful.

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

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Yes, that's a good point, Scott. So Medallion prices continue to honestly be all over the place. Cash deals are getting done as low as $110,000, finance deals are getting done as high as $300,000. The average for the second quarter including the auction prices, which were low, the ones that were sold a couple of weeks ago at auction, I think, for $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 pretty consistent, I think, with prior quarters. We're carrying Medallions at $169,000. We're carrying our [Waves] which are the wheelchair-accessible at about $147,000. So we think we're right in line with where the market is.

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

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

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

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I'd say a quarter or 2, you'll see something get done. A lot of these recoveries are not being shown. We mentioned that I think on a prior call, where a borrower will come in, he'll settle with us. He'll make his loan current, he'll give us extra collateral, he'll pay back interest. But we don't take it in as a recovery because once you write it off under GAAP, you're not permitted to take it back into income until the loan is paid off. So we still think we're going to have significant recoveries, but they're down the road. These loans won't be paid off for 1, 2, 3 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 in 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 new lenders will be coming in and existing lenders will start financing and stepping up next year.

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

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That's helpful. Last one, just in terms of continued rundown in the Medallion portfolio to get from 14% of the loan book to 12% of the loan book. I mean is that a safe assumption as kind of a run rate decline going forward over the next few quarters? Or are there opportunities for kind of larger exposure reduction?

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

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I think that's -- it's probably step by step, as you've been seeing in the last couple of years by now. So we keep knocking it down bit by bit. It's a very manageable level, as you pointed out. It's 12% of loans, I think it's 8% of total assets. So the hope is to continue to chip away at it each quarter. All we need to do is get that business close to a breakeven, and then the cream will really rise to the top in our consumer and mezz business, which continues to do very well. So that's where we're headed.

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Operator [24]

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Our next question comes from Giuliano Anderes-Bologna with BTIG.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [25]

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I guess jumping into a couple of 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 -- close to -- just under $19 million. Is there a sense of how much of that reduction was from pay downs or recoveries versus charge-offs in the period?

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

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We don't know the exact amounts. I mean most of the loans are 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 Q, but we don't have it as of yet.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [27]

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That works. 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 a portion of the partner originations on your balance sheet?

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

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I think we should look at that. Originally, the plan is to hold very little. It will depend upon the 15% Tier 1 ratio or where we're at, at that time. I think over time, the plan would be to hold some loans. I mean they're very high rates. If we could hold some paper at north of 16% rates on our books, it will be a nice added income in addition to the fee income that we'll 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 2, if we feel comfortable in the quality of the paper.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [29]

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That makes sense. And one other quick one. It looks like -- so a slight reduction in the 90-plus days delinquent Medallion loans. We saw significant drop in the 30-day delinquent balances. Is there anything we can read into that going forward into kind of the next period -- next quarter because you'll have credit, you may charge-off a portion of those 90-plus days, but the -- if slower inflows going in for, I guess, 2 quarters from now?

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

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Yes. No, that's true. I mean last quarter, we were at high levels and led to a large write-off or reserve that we had in this quarter. We took a $5 million or so hit on a large Medallion borrower. Otherwise, the earnings would have been even better. The loss would have been even more improved from where it was last year, but we have very few of those large fleets left. So the trend right now is good. Last quarter, we were high 90 days and high 30 days and it dropped significantly now. So it's -- the hope is that it will continue to the next quarter or 2.

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Operator [31]

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

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [32]

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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 our Investor Relations department at (212) 328-2176 or e-mail at investorrelations@medallion.com. We're available today, all week, any time to answer any additional questions. I wanted to thank everyone, again, for today's call. Thank you.

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Operator [33]

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