Medallion Financial - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered a clear beat: diluted EPS of $0.50 versus Wall Street consensus of $0.365*, and revenue of $87.0M versus $51.7M consensus*, underpinned by $9.43M equity gains and a stronger non-interest income mix. The board raised the quarterly dividend to $0.12 per share, signaling confidence in cash generation.
• Net interest margin on gross loans ticked up sequentially to 7.94% (from 7.84% in Q4), despite elevated funding costs; provision for credit losses increased to $22.0M given seasonality and macro caution.
• Strategic partnership originations accelerated to $136.2M, with management indicating durability of $100M+ per quarter and fees of 15–65 bps; a $53M loan sale closed at a 5% premium in early May, supporting near-term noninterest gains.
• Key near-term stock catalysts: ongoing equity monetizations at Medallion Capital, incremental loan sales at premiums, and sustained strategic partnership flow, offset by higher provisioning and funding costs commentary.

What Went Well and What Went Wrong

What Went Well

• EPS beat and revenue outperformance: $0.50 diluted EPS and $87.0M revenue (interest + other), both above consensus; management highlighted strong origination and equity gains (“We originated more than $280 million of loans…generated strong equity gains”).
• Sequential margin improvement and credit trends: gross NIM rose to 7.94%; consumer loans 90+ DPD improved to $8.7M (0.37%) from year-end; management noted improved delinquencies and healthier borrower profiles (FICO 685 rec, 781 home improvement).
• Capital actions and strategic momentum: dividend increased to $0.12 and buybacks of ~60k shares; strategic partnership volume $136.2M with management expecting “$100M+ per quarter” durability.

What Went Wrong

• Higher provisioning and operating costs: provision rose to $22.0M, including a $3.1M commercial allowance (tariffs and macro) and $1.4M consumer qualitative add; OpEx increased on technology investments and proxy/legal costs.
• Recreation net charge-offs elevated: $16.4M (4.67% of average portfolio), reflecting seasonal pressures; home improvement charge-offs at $3.1M (1.55%).
• Funding costs still a headwind: average deposit rate at 3.75% and cost of funds at 4.16% YoY higher; management expects margins to “stick around here” absent rate declines.

Transcript

Operator (participant)

All participants will be in listen-only mode. Should you need assistance, please signal 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 this event is being recorded. I would now like to turn the conference over to Ken Cooper with Investor Relations. Please go ahead.

Kenneth Cooper (Head of Investor Relations)

Thank you and good morning. 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 by clicking investor relations. The presentation is near the top of the page. With that, I'll turn it over to Andrew.

Andrew Murstein (President and COO)

Thank you, Ken. Good morning, everyone. We had a very strong start to the year with all aspects of our company contributing to the delivery of $12 million of net income and 50 cents of earnings per share for our shareholders. I'll start with our largest and most profitable segment, our consumer lending business. It had solid origination activity of $136 million for the quarter, and we maintained a healthy $2.4 billion loan book. What is most pleasing is that we are originating loans to individuals in these niches that have strong credit quality. Average FICOs at origination are now 685 for rec and 781 for home improvement. The vast majority of our book falls within super prime to near prime, which has moved up over the years. Commercial had two nice wins to start the year.

First, that division originated new and follow-on loans totaling $9.7 million and exited one loan and the related equity investment. This exit is a perfect example of how this mezzanine business works. Back in September of 2022, we performed due diligence on a manufacturer and installer of metal canopies used at gas stations and quick service restaurants. We ended up writing a $4.5 million loan at 12% interest and made a $750,000 equity investment in the business. Fast forward to February 2025, when the company was acquired by a strategic buyer at a healthy premium. We not only received full payment on the loan, but received more than $10 million for our investment. To this end, as of March 31, we had more than 30 equity investments with a book value of $9 million on our balance sheet. These equity investments are nearly all tied to our commercial lending business.

The exact timing of any exit is not predictable, and not every investment we make will share the same return as our most recent exit, but we have built a strong track record over the past decade of consistently adding gains to our financial performance through this business model. Our taxi medallion business was stable this quarter. We collected $2.6 million of cash, which was the same as it was in the fourth quarter. We believe there is staying power to collect this level of cash for some time. Although our net medallion assets are insignificant at this point, they continue to generate meaningful cash. With more than $100 million of charged-off medallion loans, mostly in New York City, we believe this represents additional recovery opportunities. Our strategic partnership program had its second straight quarter of over $125 million of originations.

This is great progress on this business, whereby we earn an origination fee and about three to five days of interest on holding loans before selling them back to the partner. Virtually all of these loans are outside of our rec and home improvement and offers further diversification. This includes loans offered as employee benefits by large employers and loans for unplanned or elective medical procedures. We continue to do 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 the right way. Finally, we had a good quarter related to capital allocation. We bought back about 60,000 shares of our stock and have nearly $15 million left under our share repurchase plan. In addition, we paid an $0.11 dividend to our shareholders in the quarter.

Subsequent to the quarter, our board approved a 9% increase to the quarterly dividend to $0.12 per share, the third increase to our dividend since we reinstated it three years ago. With that, I will now turn the call over to Anthony, who will provide some additional insight into our quarter.

Anthony N. Cutrone (EVP and CFO)

Thank you, Andrew. Good morning, everyone. For the quarter, net interest income grew 7% to $51.4 million from a year ago and was consistent with the prior quarter. Our net interest margin on gross loans was 7.94% for the quarter, up 10 basis points from the fourth quarter and down 16 basis points from a year ago, with the decrease overwhelmingly attributable to our cost of funds increasing 49 basis points to 4.16% from the prior year. Our interest yield increased 31 basis points from a year ago to 11.65%, and the average interest rate on our deposits was 3.75% at the end of March. During the first quarter, we originated $86.8 million of recreation loans at an average rate of 16.06% and $48.8 million of home improvement loans at an average rate of 11.5%.

We continued to originate both recreation and home improvement loans at rates above our current weighted average coupon in these portfolios, with new originations in April at rates around 15.5% for rec loans and 11.5% for home improvement loans, with the rate change in recreation loans tied to a stronger average credit from new borrowers. Total loans outstanding were $2.5 billion, increasing 12% from a year ago, and included both loans held for investment and loans held for sale. Total loans included $1.5 billion of recreation loans, $812 million of home improvement loans, and $116 million of commercial loans. For the quarter, the average yield on our loan portfolio increased 20 basis points from a year ago to 12.04%.

Consumer loans more than 90 days past due were $8.7 million, or 0.37% of total consumer loans, as compared to $11.4 million, or 0.49% at the end of 2024, and $7.7 million, or 0.37% a year ago. Our provision for credit loss was $22 million for the quarter, an increase from the $20.6 million in the fourth quarter and $17.2 million in the prior year quarter. During the quarter, we increased the allowance for credit loss in the commercial loan portfolio by $3.1 million. We increased the allowance for credit loss on our consumer loans, given both seasonality and economic uncertainties, which resulted in an additional provision of $1.4 million, $1.2 million related to recreation loans, and $200,000 tied to home improvement loans. In addition, the current quarter provision included $800,000 of a benefit related to taxi medallions.

Total net benefits related to taxi medallions during the quarter were $1.7 million. Net charge-offs in the recreation portfolio during the quarter were $16.4 million, or 4.67% of the average portfolio, and were $3.1 million, or 1.55% of the average home improvement portfolio. Operating expenses were $20.8 million during the quarter, up from $18.2 million in the prior year quarter. The increase over the prior year included costs associated with technological initiatives surrounding our servicing platform and capabilities. These initiatives will allow for greater flexibility in the servicing of our consumer loans, with a fair amount of self-service tools, which we believe will add to an improved customer experience and greater efficiency long term. These costs are expected to remain elevated in comparison to prior years as we continue to expand our capabilities and incur the costs of the customized platform.

Employee costs increased roughly $500,000, both as a function of retaining talent as well as enhancing our talent pool. Additionally, legal costs increased $700,000 over the prior year quarter for a variety of corporate and proxy-related matters. For the quarter, net income attributable to our shareholders was $12 million, or $0.50 per share. Our net book value per share as of March 31st was $16.36, up from $16 in the prior quarter and $14.93 a year ago. Our adjusted book value per share, which excludes the value of goodwill, intangible assets, and the correlated deferred tax liability associated with both, was $10.90 at the end of the quarter, up from $10.50 a quarter ago and $9.45 a year ago. That covers our first quarter results. Andrew and I are now happy to take your questions.

Operator (participant)

Thank you. We are now moving to the question and answer session. Our first question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead.

Christopher Nolan (Sr VP)

Hey, guys. Anthony, were there any non-recurring expense items aside from the ones that you highlighted just now?

Anthony N. Cutrone (EVP and CFO)

Hey, Christopher. How are you doing? Yeah. Our professional fees were a little elevated compared to prior quarters. There was about $300,000 of technology costs that I had mentioned are going to be recurring. That relates to our servicing platform. There was about $600,000 of costs related to our upcoming annual meeting and our proxy season.

Christopher Nolan (Sr VP)

Okay. Nothing related to the SEC matter or anything?

Anthony N. Cutrone (EVP and CFO)

No. No. Those costs were essentially zero.

Christopher Nolan (Sr VP)

Okay. Andrew, any update you can give us on the SEC matter?

Andrew Murstein (President and COO)

We stated a few weeks ago that we believe the matter has been resolved. It is still conditional upon board approval of the SEC and the judge signing off. We think we should have an update on that very soon, probably in the next week or so. As you know, from the fourth quarter, we booked the penalty at that time with an offsetting insurance reimbursement for related matters. Hopefully, it is now fully behind us.

Christopher Nolan (Sr VP)

Okay. I guess two more questions. One, what sort of latitude do you guys have in building reserves, allowance reserves? Is it still strictly formula-based on CECL, or are the regulators giving you a little bit more flexibility?

Anthony N. Cutrone (EVP and CFO)

Yeah. No. It's not necessarily a regulator issue. We do have flexibility to use judgment in determining those allowances. We did that to some extent in Q1 using some qualitative factors, increasing the consumer provisions. It was $1.4 million, $1.2 million on the rec, and $200,000 for home improvement. We do have that flexibility. If we're concerned about something that we're seeing that just isn't being reflected in the quantitative calculations we're putting together, we'll make sure to include that.

Christopher Nolan (Sr VP)

And then I guess on the growth capital initiative, which I appreciate the detail on that, are there any sort of realizations that you see on the horizon for the rest of the year?

Anthony N. Cutrone (EVP and CFO)

Can you just expand on that? I'm not sure I follow the question.

Christopher Nolan (Sr VP)

Yeah. Should we be anticipating any further capital gains from Medallion Capital for the rest of the year?

Anthony N. Cutrone (EVP and CFO)

Yeah. We never know the timing. The past, let's call it four or five quarters, they've almost been consistent, and we've seen a number of these large gains. We would expect to see maybe one or two more this year. We're not sure if it's going to be a Q2, 3, or 4 event, but we are hearing that there are some portfolio companies that are looking to sell. After that, we've got 30 investments in these, and they range in size from on the books. Some of them are $500,000 of invested capital. Others are insignificant. We would expect these gains to continue, but the timing is hard to predict.

Christopher Nolan (Sr VP)

Okay. These things sit at the holding company, so they don't really affect the bank ratios, right?

Anthony N. Cutrone (EVP and CFO)

They are at our SBIC Medallion Capital, but they are outside of the bank, to your point, so they do not affect the ratios. Correct.

Christopher Nolan (Sr VP)

Okay. That's it for me. Thanks, guys.

Anthony N. Cutrone (EVP and CFO)

Thank you. Thanks, Chris.

Operator (participant)

Thank you. Our next question comes from Mike Grondahl from Northland Securities. Please go ahead.

Mike Grondahl (Head of Equities/Director of Research)

Hey, guys. Thanks. Congrats on the monetization out of that mezz book. Hey, Anthony, maybe start with you. Trying to think about normalized earnings. I think on the positive side, you had the $9.4 million gain. Did you say a $1.7 million benefit from collecting some written-off taxi medallions? I think that was maybe offset by, what is it, $600,000 of proxy expense and maybe a couple hundred thousand tech expense. Is that the right way to kind of get back to normalized?

Anthony N. Cutrone (EVP and CFO)

Yeah. We're hesitant to say that the equity gains aren't a core part of our business, but I understand you can't—we can't project these and know when they're going to fall. Yeah, I mean, if you wanted to pull that out, one of the things I'd say is that in our commercial provision, we had $3.1 million of allowance that we took. We don't expect that to be every quarter. That was some of it tied to tariffs, some of it tied to what the future economic outlooks look like for some of these smaller enterprises that we invest with and in. Maybe that's not recurring if you're going to take the gains out. Maybe you take that out.

Mike Grondahl (Head of Equities/Director of Research)

I think that's 31. Okay.

Anthony N. Cutrone (EVP and CFO)

Yeah. And then on the cost side, it's the proxy costs as well as additional allowances on the consumer that it's just us being more cautious to want for. Yeah. I think when you—if you net all that out, the $0.50 goes to somewhere around $0.35.

Mike Grondahl (Head of Equities/Director of Research)

Got it. Got it. Yeah. Hey, I know you have those Mezz gains from time to time, but it is hard to model. I am just trying to strip that out a little bit. You still have $124 million of loans held for sale. Any sense of the timing there and what that gain may look like?

Anthony N. Cutrone (EVP and CFO)

Yeah. We expect to have a loan sale close in Q2. It will not be the full amount. It will be roughly half of that. We are talking about another loan sale for about the balance later in Q3 or the beginning of Q4. From a gain perspective, I think the current sale that we are looking to close is, I think, a 5% premium to par. It should roughly result in a 2-2.5% gain when you factor in all the deferred costs and things.

Andrew Murstein (President and COO)

Yeah. That was nice, by the way, that there's strong interest in those loans. And the $105 price is a fair price, but also a strong price for us in that it shows the quality of loans that we're producing there. That's really imminent. We are expecting that in this month, actually.

Mike Grondahl (Head of Equities/Director of Research)

Got it. Got it. On the strategic partnership, that loan volume, $136 million, Andrew, I think you said employee benefits-related stuff and elective medical procedures. Any other categories that you're doing this in, or are those the two main ones? What's the origination fee you make?

Andrew Murstein (President and COO)

We've got four or five partners now with several discussions underway. We've been very selective with the groups. We could have probably taken in a lot more than that. For example, other banks are taking in partners that are writing loans north of 36%. We've stayed away from that. They're all in similar industries, just by coincidence, or related industries. It could be any industry that we take in a partner in the future, but so far, a lot of them are in that area. Fees range anywhere from 15 basis points-65 basis points, depending upon loan volume and minimums and other factors.

Mike Grondahl (Head of Equities/Director of Research)

Got it. Do you see that volume as being durable, $100 million plus a quarter?

Andrew Murstein (President and COO)

I do. The hope is that we even increase that further. We're kind of starting to gain steam there. It took us a couple of years to get up and running. We're in a good position now where some of our competitors, and I've mentioned this before, have grown too fast and have stumbled a bit, and they get consent orders. Therefore, a lot of these customers are coming to us now. Thankfully, we really have our picking of who to do business with.

Mike Grondahl (Head of Equities/Director of Research)

Cool. Maybe, Anthony, rough outlook on margins and total loan growth kind of for the rest of the year. Margins were up 10 basis points sequentially. Kind of what are you thinking about there and then just overall loan growth?

Anthony N. Cutrone (EVP and CFO)

Yeah. I think the 10 basis point increase from the last quarter, a lot of that, we had some loans that went on non-accrual, and we backed out some interest in Q4. That is why Q4 was a little lower than we had anticipated and expected. We think that the margin, it is going to stick around here. We do not see a significant amount of downside from where we are. A couple of basis points, we are going to fluctuate. I think we stay around here longer than we initially anticipated. Our cost of borrowing, they seem to be sticking around. When I talk about that, I am talking about our CD rates on three and five-year paper. As of yesterday, we are talking about 4.1%. It is about 30-35 basis points from where we are at the end of March, average.

We're able to—we're getting a better rate on our new loans, so that's helping the yield. Until we start seeing some meaningful decrease in interest rates, we're not going to—we're not going to see some expansion.

Andrew Murstein (President and COO)

Just as a follow-up, I mentioned the sale was imminent. It actually closed within the last 48 hours or so. It was a $53 million sale, which is a nice sale for us.

Mike Grondahl (Head of Equities/Director of Research)

Got it. Congrats on that. Anthony, I don't know, rough total loan growth, high single digits?

Anthony N. Cutrone (EVP and CFO)

Yeah. I mean, we still think that we'll probably grow 5-7% for the year. Obviously, we're not going to chase growth at the expense of the type of loan that we want to hold. We're going to see what happens the next nine months throughout the year with the economy. We're not going to look to grow at the sake of putting our franchise in jeopardy. That could be lower. It could be higher. There's a lot of factors out there and a lot of question marks, not just we have, but most companies like us.

Mike Grondahl (Head of Equities/Director of Research)

Fair. Fair. Lastly, could you repeat what you said about net charge-offs for rec? I got the $3.1 million and the 1.55% for home equity, but I did not get the rec numbers.

Anthony N. Cutrone (EVP and CFO)

Sure. It was 4.67%. It was 4.67% for rec, and you got the 1.55% for home improvement, you said?

Mike Grondahl (Head of Equities/Director of Research)

Yeah. What was the dollar amount for rec?

Andrew Murstein (President and COO)

I'm just checking.

Anthony N. Cutrone (EVP and CFO)

Too many numbers in front of us. It was $16.4 million.

Mike Grondahl (Head of Equities/Director of Research)

Got it. Okay. Hey, thanks, guys.

Andrew Murstein (President and COO)

Thank you.

Operator (participant)

Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Andrew Murstein, President and COO, for closing remarks.

Andrew Murstein (President and COO)

Thank you. We are off to a great start to the year. What's very encouraging is that we are getting contributions from each of our businesses. We look forward to seeing our investors on the road later this month with our participation in the annual B. Riley Conference, May 21st in California. Our commitment to our shareholders remains strong, evidenced by our ongoing delivery of earnings, our opportunistic buybacks, and our recently increased dividend. Thank you again for your investment and interest in Medallion, and have a great rest of your day.

Operator (participant)

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