Participants

Ken Cooper; IR; Medallion Financial Corp.

Andrew Murstein; President & COO; Medallion Financial Corp.

Anthony Cutrone; CFO; Medallion Financial Corp.

Christopher Nolan; Analyst; Ladenburg Thalmann

Matthew Howlett; Analyst; B. Riley Securities

Presentation

Operator

Good day and welcome to the Medallion Financial Corporation first quarter earnings conference call today and all participants will be in a listen only mode. Should you need assistance during today's call, please submit 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 Kenny Cooper with Investor Relations. Please go ahead, sir.

Ken Cooper

Thank you, and good morning, everyone. Welcome to Medallion Financial Corp's first quarter earnings call. Joining me today are Andrew Bernstein, President and Chief Operating Officer, and Anthony Petrone, Executive Vice President and Chief Financial Officer, and 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.
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 state, 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 Bernstein, President Thank you, Ken.

Andrew Murstein

Good morning, everyone. Coming off a record-breaking 2023, we had a nice start to 2024. This included growing our loan portfolio and 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 this segment's average interest rate was up [38 basis points] to 14.80% at quarter end. The average loan size on 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 seven hundreds, 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 direct lending segments. 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. Loan portfolio was 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 excess can be unpredictable. There are key elements of the return on the business. Segment generated an 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 used 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 $0.1 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.

Anthony Cutrone

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 ONIM 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 despite further compression anticipated. We do believe that our level of M. 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 maintain tighter credit criteria, which is consistent with our view of ongoing uncertainty in the economy. Nonprime recreation loans was 36% of the portfolio, and nonprime originations during the quarter was 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 credit with only 1% of loans being nonprime.
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 taxi 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 Taxi 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 can 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 or $0.42] per diluted share. That covers our first quarter results. Andrew and I are now happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions) Christopher Nolan with Ladenburg Thalmann. Please proceed.

Christopher Nolan

Anthony, have you guys do you know what the non-performing loan volumes are in the quarter?

Anthony Cutrone

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

Christopher Nolan

Yes, 90 days plus delinquencies.

Andrew Murstein

We're just pulling it up, subtract them.

Anthony Cutrone

On the record, it's $6.4 million, $1.4 million in home improvement.

Christopher Nolan

Okay. So it's down quarter over quarter last quarter was $13.8 million. So is that a fair assessment?

Anthony Cutrone

Yes. And it's it's typical what we see seasonally as you know, November December, January, things are slower, especially in the direct side of the business. People aren't telling their trailers and then again on their boats. But but that starts to improve or whether it starts to improve.

Christopher Nolan

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 be like our earnings picture and see whether or not there's more flexibility financial services companies like yours, too boosters are more?

Anthony Cutrone

So our reserving and our allowance model isn't predicated upon, you know, necessarily what the regulators want. It's you know, 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 regulators' desires.

Christopher Nolan

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

Anthony Cutrone

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

Christopher Nolan

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

Anthony Cutrone

It's seasonal, you know, nondeductible expenses, different aspects of the code, you know, get picked up in the first quarter that should smooth out so at a lower rate as we go through the year.

Christopher Nolan

Okay. That's it for me.

Andrew Murstein

Thanks, Chris.

Operator

Michael Grondahl, Northland Capital Markets.

Hey guys. This is Luke on for Mike. I'm looking at the P&L, so this was the first quarter in awhile 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 how you're sort of thinking about this line item as we progress into 2Q and into the back half of the year.

Anthony Cutrone

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

The net interest income dropping sequentially about a little over $1 million. I'm just wondering about what drove that in the quarter since it's sequentially gone up for the past several quarters?

Anthony Cutrone

So we are it's a function of our volume. So as you know, our home improvement book stayed pretty pretty stagnant from December. We did grow our direct portfolio a little bit, but you know, total loans only grew less than about 0.5% in the three months. And so that's going to that's going to drive it. We've seen an increase in our cost of funds. We've 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 rack. And just given where those rates are right now, we expect net interest income, T&O. study start increasing. You know, beginning with Q2.

Got it. That's helpful. And then just looking at the EPS, the $0.42 and then 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.

Anthony Cutrone

We don't do that. Regarding that $4.2 million, again, that's that's tied to our commercial lending business. So we don't 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. Equity investments are probably 10% of the overall commercial assets. So we wouldn't back that out.
Unfortunately those those don't model out well there. There are equity investments in, you know, P&E it's in our sponsors 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. So 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 cash. We've got $10 million of exposure. On a run rate, we we think that we collect anywhere between 1.5 and two a quarter going forward based upon where our portfolio is positioned. And it's going to generate in our bottom line.
Quarter-in, quarter-out, as Andrew said, we after-tax we did about $600,000 in that segment. So on the and again, you can 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 in any sort of trends you saw in the month of April?
Yes. So on volumes were good. You know, I think I would just say that we originated I think when we closed the month yesterday, we originated about $100 million in loans. $80 million of them own rack. 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 rack, and that's consistent what we saw in April. So I our we're happy with that volume. We think those trends continue throughout Q2.

Andrew Murstein

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.

Operator

Matthew Howlett, Nomura.

Matthew Howlett

Because I would be rally. But hey, first, I got to congratulate you on the on the buyback, both the My congratulations to you for buying because it almost a quarter million shares. My question to you, Andrew, is with these, you said that you'll be opportunistic with the buyback as you get these cash collections and premium Medallions. I mean, how should we view how much. And how much do you want to execute on that $17 million left on the authorization stocks at a 30% discount to what I call how I calculate tangible book you're doing a mid-teens ROE currently looks accretive to put money to work via the buybacks.

Andrew Murstein

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 some. I'm a fan of buybacks that I think they're 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 wrecked portfolio. So it would 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.

Anthony Cutrone

Yes, I'd echo what Andrew just said. Just to add to that, you know, again, you know, on our loan bucket grew half a percent 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, you know -- we didn't have to deploy it in growth in Q1, we did have the availability of capital to give back to the shareholders.

Matthew Howlett

Got you. And just remind me again what the ending share count is that currently?

Andrew Murstein

Will give you exact numbers, it's 23 in change.

Anthony Cutrone

23,377,564.

Matthew Howlett

Okay. I'm looking can really work that down and that certainly that's going to be accretive. Any any 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. It feeds the valuation's.
Next question on yields on CDs and deposits. When or where do you or how far out, are you going? I mean, it's hire people, I think have generally agree, it's higher for longer. And how far out you go in the CDs and the how do you think about the rate cycle? Have we start to get some? Is it next year or early this year?

Anthony Cutrone

You're right. That three, four months ago was a different conversation. And today, we were looking at three rate cuts. Maybe we get one now and I'm not an economist, but typically we match fund. We're not, you know, to the expected life of our loans. We're not seeing a significant change it out maybe a few months have been tacked onto that average life that others are seeing between the two consumer products around 36 months, a little little higher and a little lower depending upon the product we go out, you know, funded, you know, we're still issuing in oh three and five year CDs. Some shorter term, but I'm but nothing drastic.

Matthew Howlett

CD pricing changed at all recently with the move in rates and from price up a little bit?

Anthony Cutrone

Yes, it's up a little bit you know, it's going to fluctuate, but it will we think we're closer to the top 10 than that and that's going to translate into a higher interest expense as we go through that as the quarter, you know, a little bit more compression in them. But but I think we're blessed we're positioned well, just given where we're at.

Matthew Howlett

Then second pendulum framing of that, you'll start to move the other way. With that said, when the Fed stops or starts easing and your your rate, I guess your coupons coming down are going to be slower than probably than just on the liabilities. I mean, I would think about the margin moving back to 9% over time from normalization or matter just when I think about the margin the next 12, 24 months, it may be it drops a little bit more.

Anthony Cutrone

I don't think there's any substantial legs down, but then once once our cost stop rising. We've we've done a really good job of increasing the yield on our current book and we do originations. That's just going to continue. So, you know, as the older lower-yielding loans roll off the newer loans become more of a more prominent?
I think it's that pendulum, right? We're swinging one way, but eventually we're going to start expanding that now.

Matthew Howlett

8% margins. Terrific, just by itself and the improvement that is just that it's just terrific. Okay. Like what we'll we can do the modeling on that last question, TrueBeam, maybe talk a little bit about the partnership. What can we put in or how do we think about modeling animated? I'm assuming this is capitalized. 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?

Anthony Cutrone

Yes. So I think another Gandhi would disagree with this some the pill tell me if it 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, you know, volumes that make this a viable business. We think we might have that with this new partner there. They're backed by some strong companies and within a space that we understand really well, they do primarily no solar installations. So 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 then than what we had initially.
Well. But but you know, we're we're optimistic that this is going to be what makes this segment profitable. And again, you know it full year, if it is if it generates the type of returns we're expecting, we could think about adding another one or $2 million to the bottom line. Obviously, it's never going to eclipse direct business.

Matthew Howlett

It is after tax something like $0.05 to $0.1 or something a year, and it's very good.

Andrew Murstein

It's sort of back up other people's projections we as Anthony. So that leaves 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 can add $1 million to $2 million of earnings if they are coming through on the projection models that they gave us and so far looks pretty solid.

Matthew Howlett

But no, I would I would look that would be absolutely terrific, especially given you're really taking on more 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.

Andrew Murstein

Yes, we'll probably hold the paper for anywhere from 30 to 90 days, a little bit of paper there of seven, 60 type cycle scores.

Matthew Howlett

So A-quality paper, I mean, 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 is there room to do other asset classes or you're talking to other people? Anything too exciting.

Andrew Murstein

And the MRs are in strike out there just kind of taking the patch, meaning that you're not losing money, but it's not adding anything to the bottom line?
So exactly. As you said, Matt, is a fee business so there's very little downside here on the ROEs. If you look at the other banks that are public 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 is an exceptional reputation with the 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 have been 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 to start to take off.

Anthony Cutrone

Yes, I think the compliance is key for us and there's a cost associated with that. So where other were other players in this space might be able to just originate massive, massive amounts of volumes and operate on a margin 5 to 10 basis points that that model just doesn't work for us. You know, we're not we're not willing to jeopardize our franchise and to operate on that sort of a margin. So we're compliant The key issue here. And then if we if this works and we can get more partners just like it, we're open to that.

Matthew Howlett

And that's what we're going to look to do, look, I got to commend you on the RO. is clearly moving in the right direction with the growth, the buyback, things like this really just go to improve our already pretty industry-leading ROEs. I got to congratulate you guys and keep up the good work.

Andrew Murstein

Thank you. Appreciate it.

Operator

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.

Andrew Murstein

And 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 dividends 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.

Operator

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