Medallion Financial - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered strong profitability: net income rose 56% YoY to $11.1M and diluted EPS was $0.46; net interest income increased 7% YoY to $53.4M, with net interest margin on gross loans at 8.09% (flat YoY on net loans at 8.42%).
• Results were a clear beat vs Wall Street: EPS $0.46 vs $0.315 consensus; “revenue” (interest income + other income) $86.7M vs $53.0M consensus; estimates based on 2 analysts* (EPS +$0.145; revenue +63%) [values retrieved from S&P Global]*.
• Segment drivers: Recreation and Home Improvement loan books grew modestly; strategic partnerships set a record $168.6M originations; commercial segment recognized $6.1M equity gains; provisions increased to $21.6M amid cautious credit posture.
• Capital actions and shareholder returns: $0.12 quarterly dividend declared for Q3 2025 and buybacks of ~48K shares; net book value per share climbed to $16.77.
• Near-term catalysts: outsized revenue/EPS beat*, rising strategic partnership volumes, commercial equity gains, and loan sale gains ($1.3M) support estimate revisions and sentiment, while higher allowances and recreation delinquencies temper the outlook [values retrieved from S&P Global]*.

What Went Well and What Went Wrong

What Went Well

• Strong headline beat and profitability momentum: net income up 56% YoY to $11.1M; diluted EPS $0.46; net interest income up 7% YoY to $53.4M.
• Strategic partnerships reached record originations of $168.6M and continued diversification; average holding period ~5 days with fees generated of $0.8M in Q2.
• Commercial segment contribution: $6.1M net equity gains; portfolio at $121.4M, average interest rate 13.43%; management highlights cumulative $27.6M equity gains over 8 quarters as a durable driver.

Selected management quotes:

• “We are pleased with the strong results... 56% increase in net income year-over-year.” — Andrew Murstein.
• “We would expect it [NIM] to remain in that realm over the next few quarters with some expansion coming when we start to see interest rates eventually fall.” — Anthony Cutrone.
• “We think we’ve got ample capital to continue growth now.” — Anthony Cutrone (re: $77.5M Bank preferred offering).

What Went Wrong

• Recreation originations fell YoY ($142.8M vs $209.6M), while 90+ day delinquencies rose to 0.49% (from 0.41%); allowance increased to 5.05% (from 4.35%) reflecting cautious credit stance.
• Provision for credit losses rose to $21.6M (vs $18.6M YoY), reflecting increased allowances across consumer and commercial portfolios.
• Operating costs increased to $21.5M (from $20.0M YoY) tied to technology initiatives; margin expansion remains constrained by deposit costs (~3.81% end of June).

Transcript

Speaker 5

Good day and welcome to the Medallion Financial Corp. second quarter earnings conference call. All participants will be in the 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 this event is being recorded. I would now like to turn the conference over to Val Ferraro. Please go ahead.

Speaker 1

Thank you and good morning. Welcome to Medallion Financial Corp.'s second 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. 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 second 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.

Speaker 3

Thank you and good morning, everyone. Before discussing our second quarter performance, for all of you new to our story, I would like to start by providing an overview of Medallion Financial Corp. Medallion Financial Corp. is a specialty finance company primarily operating via two subsidiaries: Medallion Bank and Medallion Capital. Medallion Bank is an industrial bank, a special and unique banking charter. These charters are highly sought after, and there are only about 15 of them in the U.S. We are not a bank holding company and not regulated by the Fed, but through Medallion Bank, we are able to take in FDIC-insured deposits, thus giving us a low-cost, dependable funding source for our lending business.

We originate and service a growing portfolio of consumer loans, working with more than 4,000 dealers, contractors, and financial service providers to finance RVs, boats, collector cars, other consumer recreational equipment, and home improvements. We also offer loan origination services via our fintech partners in our strategic partnership program. Medallion Bank recently raised over $75 million through a public offering of non-cumulative perpetual preferred stock that trades under the symbol MBNKO on NASDAQ. Medallion Capital is a Small Business Investment Company, or SBIC, with its founding dating back to the 1980s. As an SBIC, Medallion Capital is able to access 10-year debentures from the Small Business Administration. These debentures, along with capital, are what fund our growing commercial loan portfolio. While most SBICs have a finite life, Medallion Capital has a permanent capital base, which has allowed it to operate and grow for nearly four decades.

This unique structure is advantageous and allows us to invest over a longer time horizon than many of our competitors. Medallion Capital originates and services mezzanine loans in various commercial industries and is an equity investment in many of the portfolio companies it finances. Now moving on to our quarterly results. We are very pleased with our second quarter performance. As compared to the second quarter of last year, our net income increased 56% to $11.1 million, and our earnings increased to $0.46 per share. Net interest income also increased 7% to $53.4 million, and our net interest margin remains steady at 8.09%. This improved performance reflects the continued strength across our lending segments, driven by disciplined execution and strategic positioning, which I will now walk through in further detail. I'll start with consumer lending, our largest and most profitable business line, which continues to anchor our performance.

While total originations for both recreation and home improvement segments were lower at $197 million compared to $277.6 million a year ago, interest income rose 9% to $71.2 million. The recreation loan books grew modestly to $1.55 billion, representing 62% of our total loans. While originations were lower at $142.8 million compared to $209.6 million a year ago, interest income rose 8% to $51.1 million. Delinquencies of 90-plus days were just 0.49% of gross recreation loans, and the allowance for credit losses was 5.05% to reflect expected seasonal and economic dynamics as compared to 4.35% a year ago. The home improvement loan book also grew modestly to $803.5 million as of June 30, 2025, representing 32% of our total loans. Originations were $54.3 million versus $68 million last year.

Delinquencies of 90-plus days were just 0.16% of gross home improvement loans, and the allowance for credit losses was 2.54% compared to 2.38% a year ago. Importantly, we are originating loans to individuals in these niches that have strong credit quality, with average FICOs in new originations now $687 for recreation and $781 for home improvement. The vast majority of our book falls within superprime to near prime, which has moved up over the years. Our commercial segment continues to deliver meaningful equity gains. It generated $3.3 million of income this quarter, and equity gains have now generated a total of $27.6 million of income over the past eight quarters. The portfolio grew to $121.4 million with an average interest rate of 13.43%. Additionally, as of June 30, we had more than 30 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. Our strategic partnership program, whereby we earn an origination fee and about three to five days of interest on holding loans before selling them back to the partner, had its third straight quarter of over $120 million of originations, reaching a record level of $168.6 million this quarter. Most of these loans are outside of recreation and home improvement and are mostly offered as employee benefits by large employers and loans for unplanned or elective medical procedures. Although this program represents a small part of fees and interest generated from Medallion Financial Corp., approximately $1.2 million this quarter, this business continues to expand each quarter and represents a further diversification of our income sources.

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. Turning to our taxi Medallion assets, we collected $2.3 million of cash during the quarter. Net taxi Medallion assets declined to just $5.9 million and now represent less than 0.3% of our total assets. Despite the small size, these assets continue to generate cash, and with more than $150 million of charged-off Medallion loans, a majority in New York City, we believe there continues to be recovery opportunities. From a capital allocation perspective, we remain committed to returning capital to shareholders. During the quarter, we repurchased more than 48,000 shares of our stock and have approximately $14.4 million remaining under our $40 million repurchase program.

Additionally, we paid a quarterly dividend of $0.12 per share, representing a 20% increase year over year, and marked the third increase to our dividends since we reinstated it three years ago. Overall, we remain encouraged by the momentum across our business lines and believe we are well positioned for continued success. With that, I'll now turn it over to Anthony, who will provide some additional insight into our quarter.

Speaker 2

Thank you, Andrew. Good morning, everyone. For the second quarter, net interest income grew 7% to $53.4 million from the same quarter a year ago. Our net interest margin on gross loans was 8.09%, down three basis points from a year ago. Our total interest yield increased 23 basis points from a year ago to 11.75%, and the average interest rate on our deposits was 3.81% at the end of June. During the second quarter, we originated $142.8 million of recreation loans at an average rate of 15.96% and $54.3 million of home improvement loans at an average rate of 11.57%. We continue to originate both recreation and home improvement loans at rates above our current weighted average coupon in these portfolios, with new originations in July at rates averaging around 16% for recreation loans and averaging around 11% for home improvement loans.

Our loan portfolio was $2.49 billion at the end of June, up 4% 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, $803.5 million of home improvement loans, and $121.4 million of commercial loans. For the quarter, the average yield on our loan portfolio increased 29 basis points from a year ago to 12.27%. Consumer loans more than 90 days past due were $8.6 million, or 0.37% of total consumer loans, as compared to $11.4 million, or 0.49% at the end of 2024, and $7.2 million, or 0.33% a year ago. Our provision for credit loss was $21.6 million for the quarter, a decrease from $22 million in the first quarter and an increase from $18.6 million in the prior year quarter.

During the quarter, we increased the allowance for credit loss in the commercial loan portfolio by $2.9 million, as well as increasing the allowance for credit loss on our consumer loans, which resulted in an additional provision of $3.7 million, $3.5 million of which was related to recreation loans and $0.2 million tied to home improvement loans. In addition, the current quarter provision included $0.6 million of benefits related to taxing Medallions. The total net benefits related to taxing Medallions during the quarter were $1.4 million. Net charge-offs in the recreation portfolio during the quarter were $11.9 million, or 3.25% of the average portfolio, and were $3.8 million, or 1.87% of the average home improvement portfolio. Turning to expenses, operating costs totaled $21.5 million during the quarter, up from $20 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 $700,000, both as a function of retaining talent as well as enhancing our talent pool. For the quarter, net income attributable to our shareholders was $11.1 million, or $0.46 per diluted share. Our net book value per share as of June 30 was $16.77, up from $16.36 a quarter ago and $15.25 a year ago.

Our adjusted tangible book value per share, which excludes the value of goodwill, intangible assets, and the correlated deferred tax liability associated with both, was $11.32 at the end of the quarter, up from $10.90 a quarter ago and $9.74 a year ago. That covers our second quarter results. Andrew and I are now happy to take your questions.

Speaker 5

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Speaker 4

Hi. Congratulations on the quarter. What were the strategic partners that you sold the loans to identified? I didn't see it.

Speaker 2

No. Are you referring to the loan sale that generated the $1.3 million?

Speaker 4

Correct.

Speaker 2

Those weren't the strategic partnership loans. Those were actual recreation loans. We had started talking with a couple of different potential buyers six or seven months ago, and we closed a sale of about $53 million in April. Those were our typical recreation loans that we usually hold on the balance sheet.

Speaker 4

Okay. Is that going to be an ongoing thing?

Speaker 2

Yeah. I wouldn't expect to see it on a quarterly basis every quarter, but we do think it's a good way for us to keep the engine going with our origination platforms. There's clearly an appetite for this type of loan product, so we do expect to do more of these in the future.

Speaker 4

The strategic loan, those remain on the balance sheet, if I understand it correctly. Is that right?

Speaker 2

They remain on the balance sheet only for five days. I think on average is the hold period. We fund these loans, we do our diligence, we fund these loans, and then five days later, the partner or a related entity of the partner would buy these loans back from us.

Speaker 4

Gotcha. Were there any non-recurring items in the quarter, aside from the gains?

Speaker 2

Other than the $1.3 million gain on the loan sale, which we'll probably see more of as we get through the upcoming quarters, I don't think there's anything that I would call out as non-recurring. Everything that's going on right now is part of our business.

Speaker 4

Gotcha. I guess with the fair value loans, should we start seeing more regular gains and losses on the income statement as the values of those fluctuate?

Speaker 2

I think the fair value portfolio of these loans sits right around $60 million right now. We hold them at the lower of amortized cost or fair value. Currently, fair value is higher, which is why we were able to book a gain. We don't intend on marking those loans up until there's actually an exit. If something were to happen in the market and we couldn't sell these loans, that portfolio, obviously, we would have to take a charge and mark those down. We would only expect to see gains going forward upon the exit.

Speaker 4

Okay. Final question. I apologize for the string of questions, but this is an important one.

Speaker 2

No problem. That's why we're here.

Speaker 4

Your reserve ratio is going up. Your capital ratios are going up, which are all good things. It gives you some flexibility. What's the thinking in terms of managing both the reserves and the capital levels going forward?

Speaker 2

Yeah. The capital, particularly at the bank, our capital went up significantly during the quarter, and that's driven by the offering we did in May, raising $77.5 million perpetual preferred stock. We think we've got ample capital to continue growth now. We should expect growth higher than what we've seen the past two quarters. We still target, on average, that high single-digit growth rate long term. In terms of allowance, I think that's more of a function of us managing our growth and really ties to the economics, the overall economy, as well as the performance of the portfolio.

Speaker 4

Okay. Safe for me. Thank you.

Speaker 2

Thanks, Chris.

Speaker 5

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

Hey, guys. This is Logan on for Mike. Thanks for taking our question.

Speaker 4

Hi, Logan.

First off, hey, guys. It appears like recreation loan delinquency seems to be trending up year over year. Is there anything to call out on that? Thanks.

Speaker 2

No, nothing to call out. We've spoken about it in the past. Probably halfway through 2023, we took a big step up in the credit and the type of loans that we wanted to write while maintaining the yield that we get on these loans. I think what we're seeing in terms of delinquency is that those older vintages, pre that big step up in credit, where the charge-offs remain slightly elevated and the performance isn't as good, we're definitely seeing improved performance in our newer vintages. That's the type of loans that we're writing currently. We would expect that to improve as the quarters and years go by.

Great. That's good to hear. When excluding strategic partnership loans, originations were down about $78 million year over year. Is this just due to a tightening of underwriting? Any clue there would be great.

I think it's our underwriting standards. It's managing capital. One of the things that we've got to do is make sure that we've got enough capital, not just for today, but based upon our projections. I think with this additional capital that we've raised, we'll be able to grow and put more originations and more loans on the book. I wouldn't expect it to all happen in Q3. It's a slow process. We do think that with this capital, we could see that origination number go up.

That makes sense. For clarification purposes, can you walk us through the unit economics of these strategic partnership loans and how they compare to consumer loans?

Speaker 3

Sure. The way that works is we have about five fintech partners. We hope to sign another large one in the next 90 days or so. The ones that we have, they'll send us their loans. We'll fund them. We'll charge a fee of it ranges from 20 bps to 50 bps. We'll get the float for a couple of days, as Anthony mentioned, about five days or so. The float adds nicely to our numbers because these yields are about 20% interest rates. They're a lot higher than our typical consumer loans.

Thanks for the color there. One last one from us. Anything else to call out in terms of outlook for loan growth, margin, and credit quality going forward? Thanks.

Speaker 2

No, I don't think there's anything to call out. As I think we just spoke about, we would expect to maintain our current credit standards. We're not looking to reduce rates, although we do want to, we are mindful of competition. We don't want to price ourselves out of the market. In terms of margin, we're hovering around that eight-ish where we've been for a number of quarters now. We would expect it to remain in that realm over the next few quarters with some expansion coming when we start to see interest rates eventually fall.

Speaker 3

Eight-ish, as you know, is a big number. It's 800 basis points or so, which is a pretty high standard compared to where other banks are getting their net interest margins these days.

Great. Thank you, guys. Congrats on the quarter.

Speaker 2

Thank you.

Speaker 5

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

Speaker 3

Thank you. As mentioned, we're pleased with our performance for the first half of the year. As we move into the second half of the year and beyond, we will remain focused on delivering value to our shareholders through the execution of our prudent growth strategy. Our commitment to our shareholders remains strong, evidenced by our ongoing delivery of earnings, our opportunistic buybacks, and our recently increased dividend. As always, if you have any questions, please feel free to contact our investor relations team. The contact info is on the last page of our earnings supplement, as well as the IR section of our website. Thank you again for your time and interest in Medallion Financial Corp. Have a great rest of your day.

Speaker 5

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