Medallion Financial Corp. Third Quarter 2026 Earnings Conference - MEDALLION FINANCIAL CORP

Financial Performance:

• Originations drove a 15% increase in the loan book over the past 12 months, resulting in a 10% rise in interest income and a 5% increase in net interest income (NII) year-over-year.
• Net interest margin (NIM) declined to 7.34% from 8.21% in the prior year quarter, impacted by portfolio mix shifts toward lower-yield superprime home improvement loans and higher cost of funds.
• Average loan yield decreased 52 basis points to 11.87%, while average cost of borrowings rose to 4.45% (up from 4.28%) due to higher rates on new deposits and maturing older issuances.
• Provision for credit losses increased significantly to $30.8 million (from $18.6 million), driven by $5.6 million in "day one" provisioning on new growth and a $4.7 million increase in allowance coverage.
• Net charge-offs reached $19.6 million (2.84% of the consumer portfolio), up from $15 million (2.55%) in the prior year quarter.
• Net income attributable to shareholders was $2.4 million ($0.10 per diluted share), down from $7.8 million ($0.32 per share) in the prior year, reflecting the impact of increased provisions.
• Tangible book value per share increased to $12.17 from $11.64 a year ago; net book value per share was $17.73.
• Operating costs were $24 million, down sequentially from $25 million but up from $20.7 million in the prior year due to scaling origination platforms.
• The company repurchased approximately 500,000 shares ($5.6 million) during the quarter and retired $15 million of trust-preferred securities at a discount.

Guidance and Future Outlook:

• Long-term capital goal remains to grow assets from $3 billion to $5 billion over the next five years; the company believes it is on target to achieve this.
• Anticipates Q4 origination volumes will be seasonally softer than Q2/Q3 peaks but slightly ahead of Q4 2025 levels.
• Plans to raise rates across all loan products in Q4 in response to Fed decisions, which may modestly slow volume but is expected to improve NIM long-term.
• Management projects operating costs will remain similar to Q3 levels in the short term, with only incremental increases expected in 2027.
• Cash deployment from the recent $55 million preferred stock issuance and other capital raises is expected to gradually reduce the drag on NIM from holding excess cash.
• Expects continued volume growth and improved credit profiles to eventually offset current NIM compression and earnings pressure, leading to enhanced future earnings.

Business Segments and Product Lines:

• Home Improvement: Volumes of $146.3 million, representing an 18% year-over-year growth rate; expected to continue outpacing the REC segment due to larger market opportunity and stronger credit profiles (superprime).
• REC (Recreation): Volumes of $198.2 million, a 40% increase year-over-year; management is strategically pricing lower to attract better-quality borrowers.
• Strategic Partnerships: Added a sixth partner near the end of the quarter, which is the company's first captive finance relationship; the program is in a ramp phase with no immediate volume quantification, though retention of $10–$20 million per month is targeted eventually.
• Funding Model: Increased non-brokered time deposits from $27.2 million (Q2) to $117.5 million (Q3) and high-yield savings from $2.5 million to $101 million; these sources offer 10-15 basis points lower cost than brokered deposits when available.
• Asset Sales: Sold approximately $40 million in loans (75% home improvement, 25% REC) generating a ~3% net gain; this is the first time home improvement loans have been sold in this manner, with plans to make it a recurring activity.

Market and Competitive Landscape:

• Strategy focuses on gaining market share through competitive pricing and new relationships rather than chasing volume indiscriminately.
• Shift in portfolio mix toward "superprime" home improvement loans (approx. 9% coupon originations vs. >10.5% previously) to secure higher quality credits that perform better in varying economic cycles.
• Management cites a recent investment-grade rating as evidence of portfolio strengthening and competitive positioning.
• Competitive advantage relies on flexibility to price aggressively to win share, supported by a historically high NIM and strong funding model.

Risks and Challenges:

• NIM Compression: Continued growth, particularly in home improvement, is expected to compress net interest margins in the short term as a trade-off for higher volume and better credit quality.
• Provisioning Costs: Near-term earnings are pressured by the cost of growth, specifically "day one" provisioning and increased allowance coverage requirements.
• Interest Rate Risk: Rising interest rates increase the cost of borrowings; the company relies on asset-liability matching via brokered deposits but faces higher costs on new funding.
• Economic Sensitivity: Growth trajectory is dependent on the broader economy; a shaky economy could dampen origination volumes in future quarters.
• Cost of Funds: Non-brokered funding opportunities are opportunistic and not guaranteed; the company must rely on potentially higher-cost brokered deposits if better alternatives are unavailable.

Management Commentary and Tone:

• Tone is confident and strategic, emphasizing "measured growth" and prioritizing balance sheet expansion and asset quality over immediate bottom-line earnings.
• Management acknowledges that net income is temporarily depressed by growth penalties (provisions) but views this as a necessary investment for long-term shareholder value.
• Andrew Merstein (CEO) reiterated commitment to capital allocation priorities: business growth, dividend increases (up 75% since 2022), and opportunistic stock buybacks (new $40M plan with no expiration).
• Justin Haley (Medallion Bank CEO) highlighted the bank's operational readiness, noting zero losses in 23 years and the stability of their funding model.

Analyst Questions and Answers:

• NIM Drivers: Confirmed NIM decline was structural due to portfolio mix shift to lower-yield superprime loans and cash drag from recent capital raises; no major one-time items reversing results.
• New Partnership Volume: The new captive finance partner is in a ramp phase; no specific volume numbers quantified yet, but retention targets of $10–$20M/month are planned once scaled.
• Growth Outlook: Q4 expected to be seasonal but positive vs. prior year; 2027 growth depends on economic conditions, though the 5-year $3B to $5B asset goal remains unchanged.
• Deposit Costs: Non-brokered funding (via third-party marketplaces) offers 10-15 bps savings over brokered CDs; the company takes these opportunities opportunistically.
• Allowance Coverage: Increases in coverage were driven by a quantitative model factoring in seasonal delinquency upticks, macroeconomic factors (unemployment, rates), and portfolio aging.
• Regulatory Leverage: Management plans to request a reduction in the bank's Tier 1 leverage ratio (currently 15%) based on strong performance and credit quality, comparing favorably to newer banks approved at lower ratios.
• Operating Expenses: Costs will likely remain stable in Q4 with incremental growth expected in 2027; no major savings events occurred in Q3 other than planned initiatives.
• Equity Gains: Fee income from equity investments remains "lumpy"; no specific gains anticipated in Q4, though potential exits may occur in future years.

Other Key Points:

• Medallion Financial Corp. issued an additional $55 million in Series G preferred stock at a 9% coupon, increasing Tier 1 capital to support growth.
• The company retired $15 million of trust-preferred securities at a discount, a gain to be recognized in Q4 earnings.
• Management plans to seek regulatory approval for a lower leverage ratio, citing 23 years of consecutive profitable years and improved asset quality.
• The board approved a new $40 million stock repurchase plan with no expiration date, viewing the stock as undervalued relative to tangible book value.
• The company will be presenting at the Piper Financial Conference in Miami in mid-November.