Medallion Bank

Good day, and welcome to the Medallion Financial Corporation first quarter earnings conference call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note that today's event is being recorded. I would now like to turn the conference over to Ken Cooper with Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Medallion Financial Corp's first quarter earnings call. Joining me today are Andrew Merstein, President and Chief Operating Officer, and Anthony Catrone, Executive Vice President and Chief Financial Officer. Certain statements made during the call today constitute forward-looking statements made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in our earnings press release issued yesterday and in our filings with the SEC. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update these forward-looking statements. In addition to our earnings press release, you can find our first quarter supplement presentation on our website by visiting medallion.com and clicking Investor Relations. The presentation is near the top of the page. With that, I'll turn it over to Andrew Merstein, President.

Thank you, Ken. Good morning, everyone. Coming off a record-breaking 2023, we had a nice start to 2024. This included growing our loan portfolio on strong bottom-line performance. Our recreational lending segment had a standout quarter and is now at $1.4 billion. Originations were up 4% versus the prior year quarter. We continue to originate new loans at elevated interest rates as compared to prior years, and the segment's average interest rate was up 38 basis points to 14.80% at quarter end. The average loan size in our portfolio stayed at roughly $20,000. Our allowance for credit loss level of 4.40% was up from 4.12% a year ago. Our other major consumer lending business, the home improvement lending segment, grew approximately 12% over the prior year quarter to $752 million. This growth rate came down from the last year or so as origination activity slowed due to credit tightening. This segment continues to be focused on super prime borrowers with credit scores in the mid to upper 700s, which keeps our delinquency and loss levels low. Our average interest rate for the home improvement lending segment was 9.60% of quarter end, with a 77 basis points of increase from a year ago, reflecting our ability to pass on some of the Fed rate increases to our borrowers, just like we have done in the REC lending segment. Our allowance for credit loss level of 2.38% was up slightly from the 2.19% a year ago. Our commercial lending segment had a strong quarter and included an equity investment exit, which resulted in a $4.2 million net gain. The loan portfolio is up 12% to $106 million, with our average interest rate up 58 basis points to 13.0%. Our goal is to grow this segment prudently over time, and although exits can be unpredictable, they are key elements of the return on the business. The segment generated after-tax earnings of $3.6 million during the quarter. Finally, our taxi medallion segment collected $3.1 million in the first quarter. As we indicated on our call last quarter, we expect a sizable slowdown in cash collections related to taxi medallion assets on our first quarter unfolded as expected. During the quarter, cash collections translated into $1.6 million of net benefits to the income statement, and the segment continued to be profitable, generating after-tax net income of approximately $600,000. Our strategy continues to be to increase net interest income through smart loan growth with pricing that is optimal given the markets and competitive pressures we face. We expect to maintain high credit standards and use pricing to our advantage. We anticipate loan growth to continue to moderate, similar to 2023, from the levels we saw in 2022. Finally, during the first quarter, we used some of our excess cash to buy back $2.1 million of our common stock. Our authorized share buyback plan has $17.9 million remaining of the $40 million approved. And going forward, you should expect us to use it opportunistically rather than on any regular cadence. Our share buyback activity, together with our $0.10 per quarter dividend and net income performance, continues to deliver positive results for our shareholders. With that, I will now turn the call over to Anthony, who will provide some additional insight into our quarter.

Thank you, Andrew. Good morning, everyone. For the quarter, net interest income grew 10% to $47.9 million from the prior year, driven by increased interest rates on new loan originations and growth in our loan portfolio during the past 12 months. Our net interest margin on gross loans was 8.1% for the quarter, down 32 basis points from the first quarter last year, and down 10 basis points from the fourth quarter of 2023. Compression in our NIM continues to be attributable to the higher interest rate environment, with our average cost of funds increasing 100 basis points from last year, offset by a 56 basis point increase in our yield as we continue to pass along a portion of these higher rates on new originations. During the quarter, we originated recreation loans at an average rate of 15.31% and home improvement loans at an average rate of 12.05%, both in excess of the current weighted average coupons on those portfolios at 14.8% and 9.6%. As we've said in the past, and which still holds true today, given the fixed rate nature of our loans, increasing the average coupon and yield is a slow process, slower than the rise of cost of funds. That said, we do anticipate that our average coupon and yield will continue to increase well after our cost of funds plateaus, at which point the compression we've seen in our margin should reverse and begin to expand. Although we do still expect additional compression over the next several quarters, we believe that we are closer to the bottom than not, and despite further compression anticipated, we do believe that our level of NIM positions us well above industry norms. During the quarter, we originated 173 million of loans, with total loans outstanding increasing 12% to 2.2 billion from a year ago. And we saw our yield increase to 11.34% from 10.78% over the same period. We maintained tighter credit criteria, which is consistent with our view of ongoing uncertainty in the economy. Non-prime recreation loans were 36% of the portfolio, and non-prime originations during the quarter with 30% down from the 34% and 35% levels originated during the full 2023 and 2022 years. Our home improvement portfolio continues to be overwhelmingly prime and super prime credits with only 1% of loans being non-prime. Our provision for credit loss was 17.2 million for the quarter compared to 4.0 million in the prior year quarter. The provision included a net benefit related to tax and medallion loan recoveries of $900,000 in the current quarter compared to a net benefit of $7.1 million in the prior year quarter. Higher charge-off activity in both consumer products, partly attributable to seasonality, the lower tax and medallion recoveries and benefits, along with increases in credit loss allowance related to growth in the recreation portfolio were the key drivers related to our change in provision from a year ago. Operating expense was $18.2 million during the quarter, which was down sequentially from $19.1 million in the fourth quarter and down slightly from $18.4 million in the first quarter of 2023. Our quarterly supplement on our website shows how over the past several years and continuing into the current quarter, how operating expense as a function of net interest income has migrated lower. Quarter to quarter, this may fluctuate, but you could see that over time, the growth in our net interest income has well outpaced any growth in operating costs as we continue to grow and scale our lending businesses. For the quarter, net income attributable to Medallion Financial shareholders was $10 million, 42 cents per diluted share.

That covers our first quarter results. Andrew and I are now happy to take your questions.

Thank you. We will now begin the question and answer session. As a reminder, to ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Christopher Nolan with Leidenberg Solomon. Please proceed.

Hey, guys. Let's see. Anthony, do you know what the non-performing loan volumes are in the quarter?

You know, seasonally, those numbers are higher throughout the first quarter as we come out of our slow period and work down. But if, you know, we look at the end of the – are you looking for delinquencies?

Yeah, 90-day-plus delinquencies. Okay.

Yeah.

We're just pulling it up.

Okay. On the REC, it's 6.4 million, 1.4 in home improvement.

Gotcha. Okay.

So it's down quarter of a quarter. Last quarter was 13.8 million. So is that a fair assessment?

Yeah. And it's typical what we see, you know, seasonally is, you know, November, December, January, things are slower, especially in the rec side of the business. People aren't towing their trailers and they're not getting on their boats. But that starts to improve. The weather starts to improve.

All right. And then have you guys sort of heard any flexibility from regulators in terms of reserving? In the past, regulators sort of come down in terms of not having the reserves sort of be like an earnings piggy bank. and see whether or not there's more flexibility for financial services companies like yours to boost reserves more than... Our reserving and our allowance model isn't predicated upon necessarily what the regulators want.

It's the models that we've put together, particularly with the implementation of CECL. So we look at historic losses. We look at economic factors. But there's really no flexibility there, you know, as it pertains to the, you know, regulators' desires.

Okay. And then on that note, given that you don't have flexibility on reserving any plans to boost capital ratios at all, or are you going to continue to run at the similar capital ratios?

Yeah, I mean, at the end of the quarter, we're at 16.4. So, you know, we need to maintain at least a 15% based upon our capital maintenance requirement at Medallion Bank. So we're comfortable that we stay above that number.

All right, final question, tax rate. It went up in the quarter. Should we expect a higher tax rate in 2024, or is it just sort of a seasonal thing?

Yeah, it's seasonal, you know, non-deductible expenses, you know, different aspects of the code, you know, get picked up in the first quarter. That should smooth out to, you know, a lower rate, you know, as we go through the year.

Okay, that's it for me. Thank you.

Thanks, Chris.

The next question comes from Mike of Grundahl with Northland Capital Markets. Please proceed.

Hey, guys. This is Luke on for Mike. Just looking at the P&L, so this was the first quarter in a while where net interest income dropped sequentially, I think down just over a million from 4Q. So wondering if you guys could just talk a little bit about what drove this and then how you're sort of thinking about this line item as we progress into 2Q and into the back half of the year.

I'm sorry, could you just rephrase that question real quick?

The net interest income dropping sequentially by a little over a million. Just wondering about what drove that in the quarter since it's sequentially gone up the past several quarters.

Yeah, so we, you know, it's a function of our volume. So as, you know, Our home improvement book stayed pretty stagnant from December. We did grow our REC portfolio a little bit, but total loans only grew about a half a percent in the three months. So that's going to drive it. We've seen an increase in our cost of funds. We've been transparent about that. We've seen that. I think looking ahead, we don't anticipate that to be a trend that continues. April, our volumes were quite strong. We originated about $100 million in loans, 80% of those in REC. And just given where those rates are right now, we expect net interest income to start increasing beginning with Q2.

Got it. That's helpful. And then just looking at the EPS, the $0.42, and then if you back out the $0.04 medallion collection benefit, and then As far as that $4.2 million equity gain in the quarter, if we kind of back that out, should more of a core EPS number for the quarter be like at $0.25?

Regarding that $4.2 million gain, that's tied to our commercial lending business. So we don't view that as a non-core item. It's not a one-off investment. That's part and parcel with that business and what we do there. You know, the equity investments are probably 10% of the overall commercial assets. So we wouldn't back that out. You know, unfortunately, those don't model out well. You know, they're equity investments and, you know, PE and, you know, sponsors, you know, back companies. So we never know when these things do exit, but they do, and we've shown a track record of them doing it. But, yeah, we wouldn't back that out. The four cents, you know, we quantify that because – You know, that's what we've done, you know, all through 2023, just given the sizable amount of recoveries we had. We wanted to make sure that, you know, the readers and the shareholders understood what was going on. We collected $3 million of cash. You know, we've got $10 million of exposure. You know, on a run rate, we think that we collect anywhere between one and a half and two a quarter going forward based upon where our portfolio is positioned. It's going to generate, you know, bottom line, you know, quarter in, quarter out. As Andrew said, after tax, we did about $600,000 in that segment. So, again, you could back it out, but I don't necessarily – we wouldn't.

Okay. Yeah, no, that makes sense. And then just lastly here, can you guys just touch on the month of April as far as originations and credit and any sort of trends you saw in the month of April?

Yeah, so, you know, the volumes were good. You know, I think we just said we originated – You know, I think when we closed the month yesterday, we originated about $100 million in loans, $80 million of them in REC. And just to give you an idea, you know, in Q1, you know, the rates we were getting on these originations averaged just over 12% in home improvement, 15.3% in REC. You know, and that's consistent with what we saw in April. So, you know, we're... We're happy with that volume. We think, you know, those trends continue through Q2.

And just as a point of reference, the $100 million is probably compared to about $80 million or so in April 2023, so it's up about 25%. Okay. Got it.

Well, thanks for taking the time today, guys, and congrats on the quarter. Thank you. Thank you.

The next question is from Matthew Howlett with Nomura. Please proceed.

Oh, hey, guys. With B. Riley. But, hey, first, I've got to congratulate you on the buyback. My congratulations to you for buying. I think it was almost a quarter million shares. My question to you, Andrew, is with these, you know, you said that you have the opportunity to stick with the buyback as you get these cash collections in from the medallions. How should we view How much do you want to execute on that $17 million left on the authorization? Your stock's at a 30% discount to how I calculate tangible bulk. You're doing a big team's ROE. Clearly, it looks secretive to put Bonnie to work via the buyback.

I think we'll get to the full amount eventually. It's just hard to predict the timing. We like to do what we say. The $40 million that was approved by the board, as you pointed out, we're more than halfway through. I'm a fan of buybacks. I think they're a good use of our capital at the appropriate times. So it's just hard to predict. Sometimes, as Anthony just said, the volume looked great in April. So, you know, we'll put more money to use there where the ROEs are so high for us in that REC portfolio. So it'll be sporadically with the stock drops where we have a extra capital available, I think it's a good time to jump in the market and pick up cheap stock.

Yeah, I'd echo what Andrew just said. And, you know, just to add to that, you know, again, you know, our loan book, it grew half a percent in the quarter. You know, originations look really strong in April. We would expect that growth to be much higher in Q2. So to the extent that, you know, we didn't have to deploy it in growth in Q1, we did have that availability of capital to give back to the shareholders.

Gotcha. Just remind me again where the ending share count is currently.

We'll get the exact number.

It's 23 and change. Okay, good.

You can really work that down. Certainly, that's going to be creative to any buybacks you do to our EPS. So, congratulate on that. I certainly appreciate the loan growth, but the Buyback makes a lot of sense here at these valuations. Next question on CDs and deposits. How far out are you going? I mean, people I think generally agree it's higher for longer. How far out are you going on the CDs? I mean, how do you think about the rate cycle here if we start to get some easing next year or late this year?

Yeah, right. Three, four months ago, it was a different conversation than today. We were looking at three rate cuts. Maybe we get one now. I don't know. I'm not an economist. But typically, we match fund to the expected life of our loans. We're not seeing a significant change. Maybe a few months have been tacked on to that average life that hovers between the two consumer products around 36 months. a little higher and a little lower, depending upon the product. But, you know, we go out, you know, match-funded, you know. We're still issuing, you know, three- and five-year CDs, some shorter term, but nothing drastic.

Has CD pricing changed at all recently with the moving rates? I'm sure it's probably up a little bit.

Yeah, it's up a little bit. You know, it's going to fluctuate, but it's, you know... We think we're closer to the top than not. Now, that's going to translate into, you know, higher interest expense as we go through the quarter, you know, a little bit more compression in them. But I think we're positioned well, just given where we're at.

It's like a pen. It's like a pendulum, right? I mean, you start to move the other way when the Fed, you know, when the Fed stops or the Fed starts easing and, you know, your rate. I guess the coupons coming down are going to be slower than probably than you adjust on the liability side. In other words, do I think about the margin moving back to 9% over time to normalization? Or how do I just sort of think about the margin in the next 24 months?

Yeah, you know, maybe it drops a little bit more. I don't think there's any substantial legs down. But then, you know, once our costs stop rising, you know, we've done a really good job of increasing the yield on our current book. and with new originations, you know, that's just going to continue to, you know, as the older, lower-yielding loans, you know, roll off, the newer loans become more of a, you know, more prominent. You know, I think it's that pendulum, right? You know, we're swinging one way, but, you know, eventually we're going to start expanding that NIM.

Yeah, and 8% margin is terrific just by itself. You know, any improvement that is just terrific. Okay, look, we'll... We can do the modeling on that. Last question, TriBeam. Talk a little bit about the partnership. What could we put in? How do we think about modeling it? I'm assuming this is Capital Light. You're really putting up no capital. You're getting some origination fee or success fee. And how many more of these could you do?

Yeah, so I think, you know, I don't think Andy would disagree with this. He'll tell me if he does. You know, I think, you know, the strategic partnership, you know, operations have been somewhat disappointing. We just haven't found that right partner that could generate the type of, you know, volumes that make this a, you know, a viable business. We think we might have that with this new partner. Um, you know, they're, they're backed by some strong companies and, and you know, it's in a space that we understand really well. They do primarily, you know, solar installations. So, so we know the business it's, it's home improvement. Um, And there's a lot of potential for significant volumes. It is capital light. You know, maybe we look down the line to holding some of the paper longer term than what we initially will. But, you know, we're optimistic that this is going to be what makes this segment profitable. And, again, you know, full year, if it generates the type of returns we're expecting, you know, we could think about adding another $1 million or $2 million to the bottom line. obviously, it's never going to eclipse the REC business.

So this is after tax, something like $0.05 to $0.10 or something a year?

I think it could. It's hard to back up other people's projections. As Anthony said, you see a lot of hockey stick projections in the fintech industry. So This group, though, I think is heads and shoulders above many of the others that we've passed on through the years. So it easily could add $1 million to $2 million of earnings if they are coming through on the projection models that they gave us. And so far, it looks pretty solid.

No, look, that would be absolutely terrific, especially given you're really taking on no credit risk. You said maybe over time you could add some of these loans to the book, but now this is just, what, an origination fee and that's it?

Yeah, we'll probably hold the paper for anywhere from 30 to 90 days, a little bit of paper. And they're all 760-type FICO scores, so A-quality paper.

Going forward, do you think – I know you said you had some misses on the fintech side, but what do you think in terms of doing more deals like this? It seems like with the bank and some of these fintech companies out there, is there room to do other asset classes? Are you talking to other people? Anything exciting?

And, you know, the misses aren't strikeouts. They're just kind of you taking the pitch, meaning that you're not losing money, but it's not adding anything to the bottom line. So exactly as you said, Matt, it's a fee business, so there's very little downside here. And the ROEs, if you look at the other banks that are public and that are in this sector, they're well north of 20%, 25%. So if done right, it's a very profitable business. Yes, the hope would be to add on another player like this next year or so. As good as this business is, you can't grow too fast because you have compliance risk here. So our bank has an exceptional reputation with regulators. They do a great job for us, and you don't want to kind of stumble anywhere. just for the sake of growth by adding on volume. So they've been doing it very prudently, and I think we've been in it for three or so years now, so it's kind of matured to the point where potentially it could start to take off.

Yeah, I think the compliance is key for us, and there's a cost associated with that. So where other players in this space might be able to just originate massive, massive amounts of volumes and operate on a margin of five to ten basis points, That model just doesn't work for us. We're not willing to jeopardize our franchise to operate on that sort of a margin. Compliance is the key issue here. If this works and we can get more partners just like it, we're open to that, and that's what we're going to look to do.

Look, I've got to commend you. The ROE is clearly moving in the right direction with the growth, the buyback, things like this. really just go to improve an already pretty industry-leading ROE. So I've got to congratulate you guys and keep up the good work.

Thank you. Appreciate it.

At this time, we are showing no further questioners in the queue, and this does conclude our question and answer session. I would now like to turn the conference back over to Andrew Merstein for any closing remarks.

Thank you again for joining us this morning. We're off to a great start of the year, as you just heard. Each of our business segments has been part of this performance and have helped us navigate the current environment very well. Our teams are doing an excellent job of balancing growth of our loan portfolio and net interest income while maintaining high credit standards. We remain focused on delivering shareholder value, including earnings or dividend and periodic repurchases of our common stock. As always, if you have any questions, please feel free to contact our investor relations team. The contact information is on the last page of our earnings supplement, as well as the IR section of our website.

Thank you again, and have a great rest of your day.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.