MFIN - NASDAQ

Good day, and welcome to the Medallion Financial Corp. second quarter earnings conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Val Ferraro. Please go ahead.

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.

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. Medallion Financial is a specialty finance company primarily operating via 2 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 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 strategic partners. Medallion Bank recently raised over $75 million through a public offering of noncumulative perpetual preferred stock that trades under the symbol MBNKO on the 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 4 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 has 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 remained 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 recreational 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 book 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 recreational 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 and new originations now 687 for recreational 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. 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 8 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 3 to 5 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 rec 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, 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 charge-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 dividend since we reinstated it 3 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.

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 3 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 $200,000 tied to home improvement loans. In addition, the current quarter provision included $600,000 of benefits related to taxi medallions. The total net benefits related to taxi 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.

[Operator Instructions] Our first question comes from Christopher Nolan with Ladenburg Thalmann.

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

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

Correct.

Yes. So those weren't the strategic partnership loans. Those were actual rec loans. We had started talking with a couple of different potential buyers 6 or 7 months ago, and we closed a sale of about $53 million in April. So those were our typical rec loans that we usually hold on the balance sheet.

Okay. And is that going to be an ongoing thing?

Yes, 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.

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

They remain on the balance sheet only for 5 days, I think, on average is the hold period. So we'll fund these loans. We do our diligence. We fund these loans. And then 5 days later, the partner or a related entity of the partner would buy these loans back from us.

Got you. Were there any nonrecurring items in the quarter aside from the gains?

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

Got you. And then 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?

So we -- so the -- I think the fair value portfolio of these loans sits right around $60 million right now. So we hold them at the lower of amortized cost or fair value. So currently, fair value is higher, which is why we were able to book a gain. So 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. But we would only expect to see gains going forward upon the exit.

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

Yes, no problem. That's why we're here.

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

Yes. So 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 of perpetual preferred stock. We think we've got ample capital to continue growth now. We should expect growth higher than what we've seen in the past 2 quarters. And we still target, on average, that high single digits 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 of the overall economy as well as the performance of the portfolio.

Our next question comes from Mike Grondahl with Northland Securities.

This is Logan on for Mike. It appears like rec loan delinquency seems to be trending up year-over-year. Is there anything to call out on that?

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, and that's the type of loans that we're writing currently. So we would expect that to improve as the quarters and years go by.

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

Yes. 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, but we do think that with this capital, we could see that origination number go up.

Yes, that makes sense. And then for clarification purposes, can you walk us through the unit economics of these strategic partnership loans and how they compare to consumer loans?

Sure. So the way that works is we have about 5 fintech partners. We hope to sign another large one in the next 90 days or so. But the ones that we have, they'll send us their loans. We'll fund them. We'll charge a fee, it ranges from 20 basis points to 50 basis points. And then we'll get the float for a couple of days, as Anthony mentioned, about 5 days or so. 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.

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

Yes. 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, and we don't want to price ourselves out of the market. In terms of margin, we're hovering around that 8-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.

And 8-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. Congrats on the quarter.

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.

Thank you. As mentioned, we're pleased with our performance through 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. Have a great rest of your day.