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Edited Transcript of MFIN earnings conference call or presentation 15-May-18 12:30pm GMT

Q1 2018 Medallion Financial Corp Earnings Call

New York Jun 19, 2018 (Thomson StreetEvents) -- Edited Transcript of Medallion Financial Corp earnings conference call or presentation Tuesday, May 15, 2018 at 12:30:00pm 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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Presentation

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Operator [1]

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Good morning, and welcome to Medallion Financial's First Quarter 2018 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 the company begins 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 -- the company and 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 this date. We disclaim any obligation to update 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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Thank you, and welcome, everyone, to Medallion Financial's first quarter earnings call. We appreciate your continued support of Medallion. Joining me on today's call is our Chairman, Alvin Murstein; and our CFO, Larry Hall.

The first quarter was fairly newsworthy for Medallion on a few fronts. From the perspective of our results, our consumer and mezzanine segments continued to generate substantial profits and recorded another quarter of strong performance. With respect to medallions, we proactively took significant additional charge-offs and reserves while writing down New York City medallion values to a net of $183,500 and New York City wheelchair accessible medallions to $156,000.

For the month of April, the average medallion transfer price in New York City, as reported by the TLC, was over $230,000. Overall, we recorded $62.7 million in combined net charge-offs and reserves in the first quarter and recorded a sizeable net realized loss in the quarter related to our medallion segment.

Importantly, we significantly lessened our medallion lending exposure, reduced our carrying values on delinquent loans to their lowest level compared to par and, additionally, to a level at the lower end of those financial institutions that publicly reported.

During the first quarter, we received overwhelming shareholder approval to convert from a BDC into a noninvestment company, and we officially completed the process at the beginning of April. We will be consolidating all of our wholly owned or controlled portfolio investment subsidiaries, including Medallion Bank, and moving forward, we'll be reporting on our income statement and our balance sheet as one entity.

We expect reporting as one integrated entity, which will greatly, one, increase our overall transparency; two, simplify the ability of our shareholders to understand our financial condition; and three, and it's important to note, our ability to invest in the growth of Medallion Bank will no longer be limited due to BDC regulatory constraints. We want to once again thank our shareholders for their support of this initiative.

Let's go through some brief highlights with respect to our main segments. First, at the bank, our consumer lending segment once again led the way with the bank recording net investment income before taxes of $16 million. As of March 31, our consumer portfolio stood at $717 million of net receivables, a sequential increase of $33 million, led by solid increases in originations in our RV and home improvement loans.

Critically, our team continues to underwrite these loans with prudence, and at the end of the quarter, 90-plus day delinquencies were only 0.4%, an improvement from 0.6% as of December 31. The consumer segment's performance was offset by $22.6 million in additional unrealized depreciation in charge-offs within the bank's medallion portfolio.

As I've noted before but want to reiterate, the significant earnings that we have from our consumer lending segment are cash earnings, while the losses that we report for medallion lending are primarily attributed to noncash charge-offs. Thus, the overall cash flow at our bank is extremely strong with over $100 million per year in interest income being generated.

Our mezzanine segment continues to be a consistent producer for the company, as we now have a $93.6 million portfolio with loans that typically generate a 12% annual yield. For the quarter, the mezzanine segment earned $2.3 million, an over 20% return on equity for this segment. We expect this segment will continue to generate solid results for the company over the long term.

Importantly, our medallion exposure of both the Bank and Medallion Financial continues to be reduced. As of March 31, the company managed $319 million of medallion loans, a $69 million reduction from December 31 and a $165 million reduction from 1 year ago. Our 90-plus day delinquencies as of March 31 were also the lowest levels since the end of 2015, primarily reflecting the charge-offs taken.

In terms of our current medallion portfolio composition at Medallion Bank, medallion loans now comprise only 17% of the bank's net investment portfolio, which as a percentage of investments, is a historic low for the bank since its formation in 2003.

Finally, at the end of the quarter, we recorded net unrealized depreciation and appreciation on several of our holdings. We've renewed interest from third parties with respect to purchasing a portion or all of Medallion Bank as well as with potential partnership opportunities.

In addition, we're exploring other capital alternatives for the bank as well. We note that the adjustments to fair value has been a requirement under our old BDC and investment company structure, and moving forward, we will no longer be fair-valuing our majority-owned or controlled noninvestment company subsidiaries that were previously held as portfolio investments but will assess these segments for impairment on a recurring basis.

That said, I've noted before the significant operating earnings potential of the bank outside of the medallion portfolio, and no matter what direction we pursue in the quarters ahead, we'll be focused on creating long-term value through the bank for our shareholders.

So to sum it up, we took some significant steps in the quarter to simplify the company's reporting and remove additional overhang from our portfolio. We will continue to focus squarely on our consumer and mezzanine divisions, while further reducing our medallion exposure over time in order to unlock long-term value for our shareholders.

I'll now turn the call over to Larry, who will give some brief highlights regarding first quarter results.

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

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Thank you, Andy, and let me take you through some of our first quarter highlights.

In the first quarter, Medallion Financial recorded a net decrease in net assets resulting from operations of $14.9 million or a loss of $0.62 per share compared to a net increase in net assets resulting from operations of $1.1 million or $0.05 per diluted share in the prior year period.

Our first quarter 2018 results included $34.7 million in charge-offs, the large majority related to medallion loans, which was partially offset by $22.8 million in net unrealized appreciation, both on a pretax basis.

At Medallion Bank, we incurred a net loss of $9.1 million in the first quarter compared to a net gain of $4.3 million in the prior year period. The difference was primarily due to recording $28.5 million in reserves and charge-offs on nonperforming loans and assets. Net investment income before taxes was $16.1 million, a 6% reduction from $17.2 million in the prior year period.

At the bank, our net consumer lending portfolio as of March 31 stood at $717 million, up from $684 million as of December 31 due primarily to new originations in RV and home improvement loans. The portfolio's average interest rate was 14.86%, a slight increase from 14.79% in the prior year quarter.

Over 90-plus day delinquencies on the consumer portfolio stood at 0.4%, an improvement from 0.57% in the prior quarter. The bank's net medallion lending portfolio as of March 31 stood at $158 million, a 33% reduction from the prior year and a 12% reduction sequentially. Medallion loans represented just 17% of Medallion Bank's net investment portfolio compared to 26% as of March 31, 2017.

The average interest rate improved to 4.34% from 3.82% in the prior quarter as we continued to be able to refinance existing loans at higher rates. We wrote down $10.6 million of our repossessed inventory and took an additional $12 million of provision for bad debts as a result of marking the collateral value of New York City medallions to a net of $183,500, Boston medallions to a net of $66,200 and Chicago medallions to a net of $34,900.

At Medallion Financial and our other subsidiaries, the net medallion lending portfolio as of March 31 stood at $161 million, a 36% decline from the prior year and a 23% decline sequentially, as we took larger write-downs than we have in past quarters to further reduce our exposure. 90-plus day delinquencies as of March 31 were $38.4 million versus $59.7 million in the prior quarter.

On a managed basis with Medallion Bank, 90-plus day delinquencies were $53.2 million, down from $71.9 million in the prior quarter. Combined, our total net managed medallion loans as of March 31 were $319 million, 34% lower than $484 million as of a year ago.

Our net commercial loan portfolio, which is primarily made up of our mezzanine lending portfolio, stood at $94 million, a 27% increase from the prior year period, as we saw an increase in mezzanine loans during the quarter. The average interest rate on commercial loans was 12.07%, a reduction from 12.88% in the prior year quarter. The bank had $28 million in cash on its balance sheet as of March 31 and remains well capitalized.

Medallion Financial had debt of $321 million as of March 31, a decline from $328 million as of December 31. In March, we renewed our DZ credit facility for an additional 9 months. We believe we are on good terms with all of our warehouse lenders and appreciate their continuing support of Medallion.

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

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

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Thanks, Larry. As we have on previous calls, we asked for e-mail questions from the investment community and will now answer your questions.

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Questions and Answers

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Unidentified Company Representative [1]

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Yes. The first question comes from Mike Grondahl of Northland Securities. What is your confidence level for future provisions for medallion loans?

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

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Mike, thanks for the questions. We took pretty large reserves for the quarter. We hope that they're not going to be as large in the coming quarters. In fact, I think it's a very positive sign that we saw an uptick in medallion prices. So based upon what we've been seeing in April, we don't think they'll be anywhere near as large.

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Unidentified Company Representative [3]

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Second question. Can you talk about servicing opportunities for medallion loans as stated in your press release? Can you also give a range in regard to revenue potential and size of portfolios Medallion Financial would look to service?

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

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Sure. Just to be clear, we haven't signed anything yet. We're just in talks. We're hopeful. But there's quite a large number of medallion loans that need to be serviced either by us or by someone else. It's very possible $500 million or more will need to be serviced in the immediate future.

And in the past -- and there's no guarantees again we'll get something like this, but in the past when we've been talking to private equity firms and others, we've been talking about a 2 and 20 type project, which is as they work, as you know, most of them are 2% servicing fee and 20%-or-so of the upside. So that's what our goal would be.

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Unidentified Company Representative [5]

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The final question from Mike Grondahl. In regard to your consumer lending portfolio, are things trending forward or above internal expectations. Were they in line for the quarter?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [6]

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Yes. Actually, they're trending pretty much in line with our estimates. We remain very, very happy about this business.

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Unidentified Company Representative [7]

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These next set of questions is going to come from private investors.

The most important thing someone should take away from this quarter, at least to me, was how far you cut medallion values. It looks like you took them to levels below what most -- almost every other lender that publicly reported the prices were at.

We applaud you for doing so. The only concern was by taking this large loss, what would happen to your capital ratio at your bank? As long as it's above 15%, this could be a turning point finally in the company's stock price. Can you address that, please?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [8]

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Yes, I mean you're right. We weren't sure what our capital ratio would be when we're taking hits this large. The good news though is that, due from the continuous strong results from our consumer business, the bank's Tier 1 leverage ratio was over 15% as of April 30. The consumer business has really been incredibly profitable for us and, in many ways, has carried the company. And we believe it's going to continue to be a great business for us in the future.

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Unidentified Company Representative [9]

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Thank you. Next question. Can you touch on new medallion prices? And what are you seeing in the market?

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

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Well, the average transfer prices in April, New York City was actually about $230,000, slightly over. Prices have been all over the place from $150,000 to $400,000, depending upon -- if they're financed or if they're all cash deals. Many of the operators though have been reporting that they're doing well these days, which is very positive, and they're looking to actually buy medallions and expand their fleets.

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Unidentified Company Representative [11]

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What is the -- next question. What are the new regulations the city council is talking about?

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

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Well, they're talking about a lot of things. Many things that they're looking at now, the Mayor and the city council include capping the amount of Uber cars. That's something that the Mayor tried to do several years ago, some of you may recall, and was unsuccessful. And many of the politicians have said that they should have done it in retrospect. So there's a good chance something like that could happen now.

Increased licensing fees for hail companies, more handicap-accessible cars for Uber and Lyft and the other e-hail companies. Having them not be able to charge less than what a taxi medallion driver charges for a fare so that the e-hail drivers do not earn below minimum wage, as many of them have been doing. So there's a lot on the table. There's no guarantees any of them will go through, but several of these things are game changers if they do go through.

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Unidentified Company Representative [13]

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Let us ask since they're in the news so much. But is President Trump's lawyer, Michael Cohen, and one of his ex-associates, James Freeman, borrowers of yours? Sorry for asking this, but it's on a lot of people's minds.

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

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No problem. Actually, no -- neither one of them are borrowers of the company.

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Unidentified Company Representative [15]

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Turning to the next question from a private investor. What more can you tell us about the Cap One medallion portfolio sale.

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

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Well, a lot of it is rumor, just to be clear here too, but true, to me that was a very positive sign that the sale went through. Basically, for years, private equity firms and hedge funds have been circling the industry, ready to pounce when they felt the market hit bottom. I personally met with many of these funds, probably 10 or so, and they're pretty sharp people, and they -- most of them have great track records, too.

So to see new capital flowing into this industry is a major shot on the arm. It could be just the tip of the iceberg as they want to put a lot more money to use and they're looking to buy more medallions and more loans. So it's a very positive sign.

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Unidentified Company Representative [17]

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Next question from a private investor. The consumer business continues to be one of, if not the best lending business I have ever seen in my 20-plus years following financial stocks. Is there any new competition or any credit concerns?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [18]

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You're right. It's probably the best lending business I've seen in my 30 years of experience. The pretax ROE on this RV and marine lending segment we have is actually over 50%. So it's -- we're basically lending money at 15% rates and borrowing at 1.5%. So it's a tenfold mark up. Thankfully, we've not seen any new competition here.

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Unidentified Company Representative [19]

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You mentioned new fee income from servicing medallion loans in your press release. Can you comment further on that?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [20]

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Sure. There currently and probably continue to be several new investors in the market who are buying medallions and medallion loans. Many of them have no experience in this sector nor do they want to service these investments or portfolios. It's a lot of hard work.

The truth is that there's no better servicer in this industry than us. We've been doing it after all for over 50 years. There's also current lenders who just don't want to service their loans anymore or have workouts and they want to hand them over to us. So many of these groups have approached us for help.

It has the potential to be a real win-win scenario. They count on our expertise to help them. We don't have to take any more balance sheet risk or tie up any more capital in the industry, so we could charge service and workout fees, which will mainly fall to our bottom line since we already have the infrastructure and people in place to handle this. So, hopefully, we could work something out in the near future.

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Unidentified Company Representative [21]

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Next question from a private investor. Why would you even consider selling a bank when the investment community is valuing MFIN (technical difficulty) [so away on a bank?]

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [22]

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Yes. I don't know if everyone heard. It was a little muffled. But the question was, would we consider -- why would we consider selling the bank or a piece of the bank?

As we noted in the release and in my remarks, there's been renewed interest from third parties about purchasing a portion or all the bank as well as with respect to partnership opportunities, these came in unsolicited to us recently.

We firmly believe that the bank alone is worth a multiple of our market cap. We're not actively pursuing a sale. We'd be remiss, though, if we didn't at least explore whether the interest is bona fide. And if there's an opportunity to create significant value for shareholders, that's what we'd like to do.

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Unidentified Company Representative [23]

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The next question. Is there potential to see a dividend come back in 2019?

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Andrew M. Murstein, Medallion Financial Corp. - President, COO & Non-Independent Director [24]

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We're hopeful. Regarding the dividend, our board reviews our dividend policy quarterly. And if the dividend's reinstated, we'd announce it in due course. That's -- and capital allocation, priority is really continue to be deleveraging the company and growing our consumer business with those high ROEs, but again, we'd be hopeful for that in 2019.

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Unidentified Company Representative [25]

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Next question from a private investor. Does the performance of the RV loan portfolio at Medallion Bank track the performance of the broader nonprime auto lending market with respect to delinquency trends?

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

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Actually, the -- sorry, is that the, the full question?

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Unidentified Company Representative [27]

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Yes, I just wanted to finish. Also, second part is, if it does, is there a concern about increasing delinquency rate in that segment, especially as the bank and parent company are trying to weather the beating that medallions and medallion loans have taken?

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

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No. The [direct par] is very different demographics than a subprime auto buyer. We looked at the subprime business auto many times and have elected not to go into that business. [Direct product] is a luxury product and the auto buyer's really buying it for need. So historically, they perform very, very differently.

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Unidentified Company Representative [29]

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Next question from a private investor. What is the basis of the Medallion Bank for being worth $331 million versus $302 million last year? Is it in the book value of the bank?

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

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Actually, we're carrying the bank at about $274 million when netted with the deferred tax liability attributed to our investments. So it's less than what most people think. But as we've noted in the remarks, the bank was required to be adjusted for fair value at the end of the quarter under our old structure, but we're not going to be doing that anymore going forward.

The bank is becoming more valuable, in my view for many reasons, including but not limited to the shrinking medallion portfolio at the bank, which has been hurting the strong consumer earnings. The bank's medallion portfolio is the lowest level it's ever been at since we started the bank in 2003.

So, for example, on the medallion portfolio, if one day it is out of the bank entirely, it's clearly worth a lot more than -- to us and to others, than it will be in the bank, and third parties realize how low it's becoming and how valuable the bank is becoming. So the third party valuation firm looked at that. They looked at the projections. They looked at many other factors and determined the value that we're carrying it at.

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Unidentified Company Representative [31]

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Thank you. And the final question. What improvements would you like to see for MFIN shareholders by the end of 2018?

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

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Well, I guess, the short answer is a higher stock price, but I sincerely think we're going to get there collectively. Eventually, the medallion business will stabilize. We know that's going to happen. The stronger earnings for the rest of the company will definitely shine through brightly. I know it's taking more time than some people would like, but without question, we're doing our best, and I'm highly confident we're on the right path.

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Unidentified Company Representative [33]

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Mr. Murstein, that's the final question. With that, I'm going to turn the call back to you for closing remarks.

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

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Thank you. Thanks, [Brad.] I want to thank everyone for attending this morning's call. We look forward to updating you on further progress in the future. We tried to get as many questions in as we could, and we realize there are others, and we're happy to follow up if your question wasn't answered.

To that end, please contact Investor Relations at (212) 328-2176 or by e-mail at investorrelations@medallion.com. Thanks very much, and have a great day.

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Operator [35]

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