Good day, and welcome to the Medallion Financial Corporation First Quarter Earnings Conference Call. [Operator Instructions] 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 Murstein, President and Chief Operating Officer; and Anthony Cutrone, 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 Murstein, 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% at 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 was up 12% to $106 million with our average interest rate of 58 basis points to 13.0%. Our goal is to grow this segment prudently over time. And although excess…

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 2 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 couponing yield is a slow process, slower than the rise of cost of funds. That said, we do anticipate that our average couponing 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…

[Operator Instructions] And today's first question comes from Christopher Nolan with Ladenburg Thalmann.

Let's see. Anthony, have you guys -- do you know what the nonperforming loan volumes were in the quarter?

Seasonally, those numbers are higher throughout the first quarter as we come out of our slow period and work down. But if we look at the end of the -- you're looking for delinquencies?

Yes, 90-day-plus delinquencies.

Yes. We're just pulling it up. On the rec, it's $6.4 million, $1.4 million in home improvement.

Got you. Okay. So it's down quarter-over-quarter. Last quarter was $13.8 million. So is that a fair assessment?

Yes. And it's typical what we see. Seasonally is 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 when 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 or would 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...

So 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 CSIL. So we look at historic losses, we look at economic factors, but there's really no flexibility there as it pertains to the regulators' desires.

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

Yes. I mean at the end of the quarter, we're at 16.4%, so 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?

Yes, it's seasonal, nondeductible expenses. Different aspects of the code get picked up in the first quarter. That should smooth out to a lower rate as we go through the year.

The next question comes from Mike Grondahl with Northland Capital Markets.

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 $1 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 $1 million. Just wondering about what drove that in the quarter since it's sequentially gone up for the past several quarters.

Yes. So we -- it's a function of our volume. So as our home improvement book stayed pretty stagnant from December, we did grow our rec portfolio a little bit. But total loans only grew about 0.5% in the 3 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 a $0.25?

Yes. We don't -- regarding that $4.2 million game, that's tied to our commercial lending business. So we don't view that as a noncore item. It's not a one-off investment. That's part and parcel with that business and what we do there. The equity investments are probably 10% of the overall commercial assets. So we wouldn't back that out. That's -- unfortunately, those don't model out well. They're equity investments in PE and sponsor-backed 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 yes, we wouldn't back that out. The $0.04, we quantify that because that's what we've done all through 2023, just given the sizable amount of recoveries we had. We wanted to make sure that the readers and the shareholders understood what was going on. We collected $3 million of cash. We've got $10 million of exposure. On a run rate, we think that we collect anywhere between 1.5 and 2 quarter going forward based upon where our portfolio is positioned. It's going to generate bottom line quarter in, quarter out. As Andrew said, after tax, we did about $600,000 in that segment. So again, you can back it out, but I don't necessarily -- we wouldn't.

Okay. Yes. 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?

Yes. So the volumes were good. I think we just said we originated -- I think when we closed the month yesterday, we originated about $100 million in loans, $80 million of them are in rec. And just to give you an idea, in Q1, the rates we were getting on these originations averaged just over 12% in home improvement, 15.3% in rec, and that's consistent with what we saw in April. So we're happy with that volume. We think 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. Congrats on the quarter.

The next question is from Matthew Howlett with Nomura.

With B. Riley. But first, I got to congratulate you on the buyback, both my congratulations to you for buying, I think, it was almost 0.25 million shares. A question to you, Andrew, is I mean with these -- you said that you'll be opportunistic with the buyback as you get these cash collections in from the medallions. I mean how should we view -- how much do you want to execute on that $17 million left in the authorization? Your stock's at a 30% discount to what I -- how I calculate tangible book. You're doing a mid-teens ROE. Clearly, it looks accretive to put money to work for buyback.

I think we'll get to the full amount eventually. It's just hard to predict the timing, and I would like to do what we say. So 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 time. So it's just hard to predict sometimes. As Anthony just said, the volume looked great in April. So 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 extra capital available, I think it's a good time to jump in the market and pick up cheap stock.

Yes, I'd echo what Andrew just said, and just to add to that. Again, our loan book, it grew 0.5% in the quarter. Originations look really strong in April. We would expect that growth to be much higher in Q2. So to the extent that we didn't have to deploy it in growth in Q1, we did have that availability of capital to give back to the shareholders.

Got you. Just remind me again what your ending share count is currently.

We'll get the exact number. It's 23 and change.

23,377,564.

Okay. Good. Look, you can really work that down. And then certainly, that's going to be accretive to any buybacks you do to our EPS. So congratulate on that, and I certainly appreciate the loan growth, but buyback makes a lot of sense here at these valuations. Next question on CDs and deposits. Where do you -- how far out are you going? I mean it's higher -- people, I think, would generally agree, it's higher for longer. How far 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?

Yes, right. 3, 4 months ago, it was a different conversation than today. We were looking at 3 rate cuts. Maybe we get 1 now. I don't know, I'm not an economist. But typically, we match fund. We're not 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 2 consumer products around 36 months, a little higher and a little lower depending upon the product. But we go out, match funded. We're still issuing 3- and 5-year CDs. Some shorter term, but nothing drastic.

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

Yes. It's up a little bit. It's going to fluctuate. But it's -- we think we're closer to the top than not. Now that's going to translate into higher interest expense as we go through the quarter, a little bit more compression in NIM. But I think we're positioned well just given where we are.

It's like a pendulum, right? I mean you'll start to move the other way with the Fed. When the Fed stops or Fed starts easing and your rate -- I guess the coupon is coming down or going to be slower than probably than you just on the liability side. I mean in other words, I think about the margin moving back to 9% over time for normalization. Or how to just sort of think about the margin in the next 24 months?

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

Yes, an 8% margin is terrific just by itself. Any improvement, that is just terrific. Okay. Look, we can do the modeling on that. Last question, TriBeam. Talk a little bit about the partnership, what could we put in our -- how do we think about modeling it. I mean I'm assuming this is capital light. You're really putting up no capital. You're getting some origination for your success fees. And how many more of these could you do?

Yes. So I think -- I don't think Andy would disagree with this. He'll tell me if he does. I think the strategic partnership operations have been somewhat disappointing. We just haven't found that right partner that could generate the type of volumes that make this a viable business. We think we might have that with this new partner. They're backed by some strong companies, and it's in a space that we understand really well. They do primarily solar installations. So we know the business. It's home improvement, and there's a lot of potential for significant volumes. It is capital light. Maybe we look down the line to holding some of the paper longer term than what we initially will. But we're optimistic that this is going to be what makes this segment profitable. And again, full year, if it generates the type of returns we're expecting, 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.

This is after tax, something like $0.05 to $0.10 or something a year? Or is this...

I think it could. It's hard to back up other people's projections. We -- as Anthony said, we've -- 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 year. 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 the origination fee. And that's it?

Yes, we'll probably hold a 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 the misses aren't strikeouts. They're just kind of you've taken 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 north of -- 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 the bank -- our bank has an exceptional reputation with regulators. They do a great job for us, and you don't want to kind of stumble 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 3 or so years now, so it's kind of mature to the point where potentially it could start to take off.

Yes. 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 5 to 10 basis points, that model just doesn't work for us. We're not willing to jeopardize our franchise to operate on that thin of a margin. So compliance is the key issue here. And if we -- 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 got to commend you. I mean 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 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 Murstein 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, our 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.