Medallion Financial Corp. ($MFIN)

Greetings, and welcome to the Medallion Financial Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Val Ferraro of -- the Equity Group. Please go ahead.

Thank you, and good morning. Welcome to Medallion Financial Corp.'s First Quarter 2026 Earnings Call. Joining me today are Andrew Murstein, President and Chief Executive Officer; Anthony Cutrone, Executive Vice President and Chief Financial Officer; and Justin Haley, President of Medallion Bank. Certain statements made during the call today constitute forward-looking statements. 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.

Thank you, and good morning, everyone. The first quarter of 2026 marked a continuation of solid performance across our core financial metrics and operating segments. Notably, we delivered one of our strongest loan volume quarters on record, reflecting exceptional demand for our products and the success of our loan origination growth efforts. Compared to the first quarter of 2025, we reported increases in net interest income, originations and portfolio size, reflecting the strength of our platform and consistent execution across our business lines. Loan demand remained healthy, which allowed us to generate $377 million in origination volume for the quarter. Credit performance was solid and total loans reached a record $2.62 billion. Our results demonstrate our ability to continue scaling the business profitably as we execute our strategy, which I will now walk through in further detail. I'll start with consumer lending, our largest and most profitable business, which continues to anchor our performance with interest income of $73.4 million for the quarter, up 4.5% compared to the same period of last year. Within the Consumer Lending segment, direct loan book grew 8% to $1.67 billion at March 31, 2026, representing 64% of our total loans. Originations for the quarter grew 64% to $142.5 million compared to $86.8 million a year ago, and interest income rose 7% to $54 million. Delinquencies of 90-plus days were just 0.57% of gross recreational loans and the allowance for credit losses was 5.19% as compared to 5.0% a year ago. As a reminder, the allowance is forward-looking and designed to absorb all future expected losses. The home improvement loan book grew to $814.9 million at March 31, 2026, representing 31% of our total loans and interest income was $19.4 million. Originations for the quarter grew 32% to $64.4 million versus $48.8 million last year. Delinquencies of 90-plus days were just 0.17% of gross home improvement loans and the allowance for credit losses was 2.49%, consistent with a year ago. Importantly, we are originating loans to individuals in these niches that have strong credit quality with average FICOs on new originations now at 687 for rec and 781 for home improvement. The vast majority of our book falls within the super prime to near prime part of the credit spectrum, and that concentration has improved over the years. Moving on to our Commercial segment. Though we did not have any new originations in the first quarter, the portfolio increased to $119.6 million from $116.1 million last year, with an average interest rate of 14.18% compared to 13.14% a year ago. Additionally, as of March 31, we have more than 2 dozen equity investments with a book value of just $8.1 million on our balance sheet. These equity components are a result of our long-term strategic investments. And while the timing of exits is inherently unpredictable, we remain confident in our pipeline. During the quarter, gains from equity investments were just $0.3 million. Our strategic partnership program, which produces origination fees and approximately 2 to 5 days of interest before we sell the loans to the partner or the other third parties had another good quarter with $170 million of originations. Total loans held as of quarter end in the strategic partnership program were $10.8 million. Our partners today originated consumer loans, most of which are outside of the rec and home improvement loans we originate for our portfolio. Although this program represents a small part of fees and interest generated at Medallion Financial, it has produced approximately $1.2 million of revenue this quarter, representing a further diversification of our income sources. We continue to work on our growing pipeline of new partner prospects and expect to add new partners over time. Furthermore, we are taking a very methodical approach to growth to ensure we continue to do it in a way that keeps us safe and sound. From a capital allocation perspective, we remain committed to our shareholders. During the quarter, we paid a dividend of $0.12 per share and continue to prioritize organic growth and meaningful tangible shareholder return. Additionally, subsequent to quarter end, our Board of Directors approved a second quarter dividend of $0.14 per share, representing a 16.7% increase from last quarter and a 75% increase since we reinstated the dividend in the first quarter of 2022. Looking ahead, I am confident in the strength of our platform and the opportunities in front of us. Our diversified and proven business model, experienced management team and disciplined loan origination approach positions us well to continue generating consistent risk-adjusted returns. Our approach is increasingly analytical and data-driven, supported by digital tools that help optimize underwriting, origination, servicing and overall portfolio visibility. Our investments in technology over the years from a full migration to the cloud, to business process automation work, a new loan servicing system and tighter integrations with our sources of loan volume are generating meaningful value today. The evolution of our advanced technical and analytical capabilities will allow us to grow the business while assessing risk with greater precision than ever, which will help us maintain consistently strong performance across operating environments. Additionally, as announced this week, we are pleased to have closed a $75 million notes offering led by JPMorgan Investment Management, strengthening our funding partnerships and positioning us well for continued growth. I also wanted to briefly touch on our SBIC program. We remain committed to our long-term standing relationship with the SBA and have submitted 2 qualified management candidates for approval by the SBA. More broadly, we have deep confidence in the abilities of our management team. With that, I'll now turn it over to Anthony, who will provide some additional insight into our quarter.

Thank you, Andrew. Good morning, everyone. For the first quarter, net interest income grew 5% to $54.1 million from $51.4 million a year ago. Our net interest margin was 8% during the quarter, up 6 basis points from a year ago. Our total interest yields for the quarter increased 5 basis points from a year ago to 11.7%, with our average cost of borrowings in the quarter being 4.28% compared to 4.16% a year ago. During the quarter, our average cost of deposits at Medallion Bank was 3.95% compared to 3.80% in the prior year quarter. As of March 31, the weighted average coupon of recreation loans was 15.11% and was 9.82% for home improvement loans. During the quarter, we originated loans at rates averaging around 14.75% for recreation loans and 10% for home improvement loans. Currently, in April, we have originated recreation loans at similar rates and home improvement loans at rates of approximately 9.5%. Our total loan portfolio reached $2.62 billion at March 31, up 5% from a year ago. Total loans included $1.6 billion of recreation loans, $815 million of home improvement loans and $120 million of commercial loans. For the quarter, the average yield on our total loan portfolio increased to 12.15% from 12.04% a year ago. Our provision for credit loss was $22.5 million for the quarter, a decrease from $27.7 million in the fourth quarter and a slight increase from $22 million in the prior year quarter. Net charge-offs in the recreation portfolio during the quarter were $17.7 million or 4.38% compared to 4.67% in the 2025 quarter and were $2.9 million or 1.44% of the average home improvement portfolio compared to 1.55% in the 2025 quarter. Turning to expenses. Operating costs totaled $22.4 million during the quarter, up from $20.8 million in the prior year quarter. The increase over the prior year was largely due to higher employee costs as well as higher loan servicing and collection expenses, all of which are associated with our growing loan portfolio. As we continue to expand our platforms, grow our business and look to becoming a sizably larger enterprise over the next several years, we anticipate higher operating costs. As we've stated previously, we expect in the long term, our net interest income to outpace any growth we experienced in operating costs in the near term. For the quarter, net income attributable to our shareholders was $5 million or $0.20 per diluted share compared to $12 million or $0.50 per share in the prior year quarter, with that prior year quarter including $9.1 million of higher equity gains compared to the current. As mentioned in the past, gains from equity investments in the commercial portfolio do not adhere to any specific trend and may fluctuate from quarter-to-quarter. Our net book value per share as of March 31 was $17.10, up from $16.36 a year ago. Our adjusted tangible book value per share, which excludes the value of goodwill, intangible assets and the deferred tax liability associated with both was $11.83 at the end of the quarter, up from $10.90 a year ago. That covers our first quarter results. Andrew and I are now happy to take your questions.

[Operator Instructions] Our question first is from Mike Grondahl with Northland Securities.

Andrew, in the press release, it talks about significant technology change and adding talented people. And I know on the year-end call, you talked a little bit about some of the investments you were going to be making. Any way to kind of quantify the investment in 1Q, what you think it's going to be for 2026 and kind of specifically where you're spending the money?

So talking about talented people, we have our new President of Medallion Bank, Justin Haley, on the call, and that's right in his wheelhouse. So Justin, why don't you jump in and answer that, please? Mike, it's nice to meet you.

Our tech investment has been going on for several years. We have a pretty consistent run rate. We're an agile shop. So we really are focused on incremental improvement over time. What -- so you don't see anything in Q1 that's significant, but you should expect to see generally increasing technology investment marginally over where we are today. The last significant capital improvement was in Q4 of 2024, when we launched our loan origination system. The next one that we have on the docket is likely in the first half of 2027 as we focus on our loan origination -- sorry, I think I said loan origination system first and it should be second. As far as talent goes, we had a press release earlier in the year. We hired a new SVP of Sales and Marketing. He comes from a bank that has deep experience in home improvement. And so we're expecting growth there. We've hired a new VP of Marketing. We've hired a new VP of Credit. We're adding talent into our technology operations and our lending operations teams. This is all to support growth. You saw some increase in salaries and benefits as a result. I would expect to see similar growth in that over time. We could grow our headcount at the bank by 30 to 40 this year as we scale up.

Got it. You said 30 to 40 people over the course of the year, Justin?

Yes.

Yes. And just to put that into context, headcount increased just at the bank by 10 people in Q1. So I mean, we're right on track to hit those levels.

Got it. Anthony, maybe one for you. Just at a high level, how are you thinking about credit quality, the rec, the home improvement book? How are things kind of trending?

I think home improvement, I think we're comfortable where credit is right now. And then on the rec side, we definitely see it improving, and it's a decent start to the year. I mean, year-over-year charge-offs in home improvement are down 11 basis points. And on the rec, they're down even larger than that when we look at Q1 of '25. So I think we know there's still a ways to go with rec. It's still higher than historically, we'd like -- it's been and where we'd like to see it. But we've made some changes in terms of pricing not necessarily credit, but we want to make sure that we're not pricing ourselves out. This business historically for us, we're a second look lender. We want to make sure that we stay a second look lender and that we're not falling towards the bottom of the stack. So we brought our new origination prices in line with where competition is. And we think over time, that will improve the credit and give us a better credit-adjusted yield on this portfolio.

Got it. And then just lastly, how should we think about higher oil prices and kind of your credit outlook, especially on the rec side? Does it matter?

I think it matters to some extent. Again, with the type of recreational vehicles we're financing. These aren't huge cabin cruisers that are controlling the seas. These are smaller boats. So the gas impact isn't as significant as those larger ticket items. But there's an impact to our borrower. Definitely at the lower end of the borrower spectrum, there's probably more tightness. That's not our borrower [ per se ]. And we've spoken about the composition of our borrower in the past. These are individuals that have W-2 wages approaching, if not exceeding 6 figures. So it's something that we're cognizant of, but we haven't seen any major impact. I mean if things change sizably, obviously, I think all lenders like us will be impacted.

Our next question is from Christopher Nolan with Ladenburg Thalen.

Anthony, on the tangible book value you gave, does that include all goodwill and intangible assets?

Yes. So that...

Excludes, I should say.

Yes, it excludes the all goodwill, all intangible assets, and then we add back that approximate $42 million of the deferred tax liability.

And then the tax rate, should we expect it to go back to the low 30s or so?

Yes. I think it's a little high this quarter, and that's just a function of it's Q1. A lot of the nondeductible expenses get factored in Q1. As pretax income increases, we would expect that to settle in the lower 30s.

Got it. And Justin, are a lot of the tech investments you're making, are they going to be services where you're basically integrating an API and application program interface? Are you buying boxes and hiring coders?

We have a team of software engineers. We are focused on offering greater services to our clients. So it is that API integration, also more tools at the point of sale and then investments in-house that will streamline the operation as it scales up.

And what does this mean for working with your strategic partners? Does it suddenly mean that you'll have the ability to scale in terms of those loans that you take in and sell or not?

It will definitely help. Yes. As we add partners that have greater volume, we need those kinds of tools to allow us to process that volume and also to -- part of what we do in the strategic partnership business is we provide compliance services and oversight of their platforms. So we can do that at greater scale with these kinds of investments.

Okay. And this is a question you may not want to answer it, but what's the ROI you expect on these investments?

Let's say that we anticipate providing the returns over time that we're used to providing. So will bake it into the overall model.

That doesn't help the cost. Okay. Great. Andrew, the $8 million in equity investments that you mentioned, what's the fair value on that, please?

We don't record it at fair value. Again, it's hard to say because we account for these at cost less impairment. Some of them have values in excess of where we're carrying them. These are small business concerns overwhelmingly. So they're not in public securities that trade. So it's hard to say, and that's why we don't disclose that. We recognize the income when there's an exit.

You guys...

You guys have not been sporting today.

I'll give you a little more color. It's always the same, right? The CFO is very black and white. So just to add some color to it. We're getting a lot of great looks at fintech companies, one which we did not invest in was a company called Cashable, but they're one of our biggest strategic partners, as we've said before, and they just got, I think, a $30 million to $50 million investment in this week by Goldman Sachs. So that's going to probably pick up their loan volumes substantially, which will help our SP business continue to grow. In the past, we were in the first round of a company called Upgrade, which was Renaud Laplanche's company. We had a small investment there, but that went up actually about 100-fold. So -- and we still own a little piece of that there. I think we got in at $0.10 a share and got out at most of our position at about $10 a share. So the strategic partnership does a lot for us. In addition to just nice fee income business, it lets us get these early looks at fintech companies.

That's a spicy answer. Good stuff. And I guess as a final question and just general, it sounds like between the tech investments and you guys talking about the strategic partnerships, it sounds like the company is drifting more and more towards those type of loans and less towards its traditional bread and butter RV and home improvement and all that stuff. Is that a fair characterization?

I don't think so, honestly. I think those businesses, the RV, marine and home improvement are just tremendous cash flow businesses. So they let us take looks at other lines of business, which are still small, but there's just so much growth in the existing lines that we continue to go after. We did that $75 million debt deal this week. It was nice to be able to bring in such a prestigious name as JPMorgan. We've never really reached those levels as a company before. an investment-grade rating. So that's going to give us a lot of dry powder just to continue to block and tackle in our existing lines of business.

And what I'll add to that is looking ahead in the coming years, we're expecting growth -- asset growth, loan growth around 10%. 2025, we only grew at 3%. So I think much of that is going to come in our traditional lines, the consumer loans.

You have a very hungry group between the 3 of us on the phone today and a lot of experience too. But -- so the 3 of our goals are to take the company from $3 billion in assets to $5 billion in assets in the next 5 years, and I think we can accomplish that.

Well, between your good looks and Anthony's great hair cut, I'm sure that helps.

That plus the numbers as well.

There are no further questions at this time. I'd like to hand the floor back over to Andrew Murstein for any closing remarks.

Thank you. And before closing the call, I'd just like to reinforce our commitment to delivering strong risk-adjusted returns to our shareholders. We remain confident in the strength of our loan book and our ability to execute on the opportunities ahead. We look forward to updating you on our progress next quarter, and I hope you have a great rest of your day. Thank you.

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