MFIN - NASDAQ

Good day, and welcome to Medallion Financial Corp. Third Quarter of 2025 Earnings Call. [Operator Instructions] Also, please be aware that today's call is being recorded. I would now like to turn the call over to Val Ferraro, Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to Medallion Financial Corp.'s Third 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 third 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. We are pleased with the strong performance we delivered in the third quarter of 2025. As compared to the third quarter of last year, our net income was $7.8 million, $11.3 million when excluding a nonrecurring $3.5 million charge related to the redemption of preferred stock at Medallion Bank, supported by a 6% increase in net interest income to $55.7 million and continued momentum across our core lending verticals. We also saw a further improvement in net interest margin on both gross and net loans, which is reflected in our earnings. During the quarter, we redeemed the Series F preferred stock at Medallion Bank. While that resulted in a onetime $3.5 million charge to earnings, it lowers our ongoing cost of capital at the bank and positions us well going forward. Across the portfolio, we continue to execute effectively with meaningful contributions from our recreation, home improvement and commercial lending lines. Total loans reached $2.559 billion and loan originations came in at $427 million for the period, an increase from both the previous quarter and year-over-year. 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 with interest income of $74.1 million for the quarter, growing 5% as compared to the same period of last year despite consumer lending originations being $201.4 million as compared to $235.6 million a year ago. Within the consumer lending segment, the recreational loan book grew 3% to $1.603 billion at September 30, 2025, representing 63% of our total loans. Originations also grew slightly to $141.7 million compared to $139.1 million a year ago, and interest income rose 4% to $53.6 million. Delinquencies of 90-plus days were just 0.57% of gross recreational loans and the allowance for credit losses was 5.1% to reflect expected seasonal and economic dynamics as compared to 4.53% a year ago. The home improvement loan book decreased modestly to $804 million at September 30, 2025, representing 31% of our total loans. Originations were $59.7 million versus $96.5 million last year. Delinquencies of 90-plus days were just 0.16% of gross home improvement loans and the allowance for credit losses was 2.55% compared to 2.42% 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 688 for rec and 779 for home improvement. The vast majority of our book falls within super prime to near prime, which has moved up over the years. Moving on to our commercial segment, which continues to deliver meaningful equity gains. We had new originations of $17.5 million during the quarter, and the portfolio grew to $135.1 million with an average interest rate of 13.71%. Additionally, as of September 30, we had nearly 3 dozen equity investments with a book value of just $9.3 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 modest, generating $300,000 of income, but have generated $15.8 million year-to-date, and we do expect more realizations in the coming quarters. 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 fourth straight quarter of over $120 million of originations, reaching a record level of $208.4 million this quarter. Total loans held as of quarter end under the strategic partnership program were $15.3 million. 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 $1.5 million in total this quarter, it has nearly tripled from a year ago and continues to expand each quarter and represents 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 $6.1 million of cash during the quarter, which resulted in net recoveries and gains of $3.4 million. Net taxi medallion assets declined to just $5.1 million and now represents less than 0.2% 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 paid a quarterly dividend of $0.12 per share. And although we did not repurchase any shares this quarter with $14.4 million remaining under our $40 million repurchase program, we would expect to see additional purchases in the quarters to come, enhancing the return we provide to shareholders. From a credit perspective, we continue to benefit from a diversified portfolio, prudent underwriting standards and attractive returns on our lending activities. Our approach is highly analytical and data-driven, supported by advanced digital tools that help optimize underwriting, origination, servicing and overall portfolio visibility. These capabilities allow us to assess risk with precision and maintain consistently strong performance across operating environments. With solid execution across our businesses, a disciplined approach to credit and strong demand for our loan products, we believe we are well positioned to deliver sustainable growth and attractive shareholder returns over the long term. With that, I'll now turn it over to Anthony, who will provide some additional insights into our quarter.

Thank you, Andrew. Good morning, everyone. For the third quarter, net interest income grew 6% to $55.7 million from the same quarter a year ago. Our net interest margin was 8.21%, up 10 basis points from a year ago. Our total interest yield increased 17 basis points from a year ago to 11.92%, and the average interest rate on our deposits was 3.82% at the end of September, up just 1 basis point from the prior quarter. During the third quarter, we originated $141.7 million of recreation loans at an average rate of 15.77% and $59.7 million of home improvement loans at an average rate of 10.9%. 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 October at rate averaging around 15.5% for rec loans and averaging around 10.5% for home improvement loans. Our loan portfolio reached a value of $2.559 billion at September 30, up 3% from a year ago and included both loans held for investment and those loans held for sale. Total loans included $1.6 billion of recreation loans, $804 million of home improvement loans, $135 million of commercial loans and $15.3 million of strategic partnership loans. For the quarter, the average yield on our total loan portfolio increased 27 basis points from a year ago to 12.39%. Consumer loans more than 90 days past due were $10.2 million or 0.43% of total consumer loans as compared to $9 million or 0.39% a year ago. Our provision for credit loss was $18.6 million for the quarter, a decrease from $21.6 million in the second quarter and a decrease from $20.2 million in the prior year quarter. During the quarter, we increased the allowance for credit loss in the commercial loan portfolio by $300,000 as well as increasing the allowance for credit loss on our consumer loans given both seasonality and economic uncertainties, which resulted in additional provision of $3.9 million, $3.8 million of which was related to recreation loans with the remainder tied to home improvement loans. Additionally, the current quarter provision included $1.7 million of benefits related to taxi medallion loans. Total net benefits related to taxi medallion during the quarter were $3.4 million. Net charge-offs in the recreation portfolio during the quarter were $12.9 million or 3.36% of the average portfolio and were $2.1 million or 1.03% of the average home improvement portfolio. Turning to expenses. Operating costs totaled $20.7 million during the quarter, up from $19 million in the prior year quarter. The $1.7 million increase over the prior year included costs associated with technological initiatives surrounding our servicing platform and capabilities, resulting in higher third-party professional services and higher depreciation expense. As we've said in the past, the upgraded platform allows 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 efficiencies long term. Again, as previously disclosed, these costs are expected to remain elevated in comparison to prior years as we continue to expand our capabilities and incur the cost of the customized platform. Employee costs increased roughly $700,000 from a year ago, both as a function of retaining talent as well as enhancing our talent pool. For the quarter, net income attributable to shareholders was $7.8 million or $0.32 per diluted share. Net income to shareholders included a nonrecurring charge of $3.5 million, an impact of $0.14 related to the redemption of Medallion Bank Series F preferred stock. Excluding this nonrecurring charge, earnings would have been $11.3 million compared to $8.6 million or $0.37 per share earned in the prior year quarter. Our net book value per share as of September 30 was $17.07, up from $16.77 a quarter ago and $15.70 a year ago. Our adjusted tangible book value, which excludes the value of goodwill, intangible assets and the correlated deferred tax liability associated with both was $11.64 at the end of the quarter, up from $11.32 a quarter ago and $10.17 a year ago. That covers our third quarter results. Andrew and I are now happy to take your questions.

[Operator Instructions] And our first question here will come from Christopher Nolan with Ladenburg Thalmann.

Anthony, was the operating EPS $0.46 a share?

Yes. So $0.32 and $0.14 on that $3.5 million charge on the redemption of the bank's Series F, that would get you to $0.46.

And then were there any loans sold in the quarter?

No. No, we still have -- other than within the strategic partnership program, we still have a fair amount of recreation loans that we do anticipate selling. I don't know if it will happen in Q4, but we are targeting sometime in the next couple of quarters. What we're seeing is with the capital levels we have at the bank, that might not be necessary. So we'll -- as something comes together, we'll determine whether or not we want to bring those back and hold them or if we want to continue to sell them.

Okay. And then I noticed that on the income statement, noncontrolling income increased quarter-over-quarter. And on the balance sheet, noncontrolling interest decreased. Does that relate to the Series F redemption?

Yes. So the decrease in the -- on the balance sheet is the redemption of the Series F, that's correct. And on the income statement, we broke it out. So you've got the $3.5 million on the redemption of the Series F and also the interest -- the dividend -- the preferred dividend on those on the SBLF and the Series G, that's going to be recurring. That's 9% of that noncontrolling interest. That's what we would expect to see going forward.

So we should see -- what should be the noncontrolling income quarterly going forward on a run rate?

It's the $2.33 million.

Versus $1.5 million, which was roughly the run rate earlier, correct?

Right, right. So in our noncontrolling interest, the preferred stock of the bank has increased over the last year, so it's gone up. And the Series F a year ago had an 8% coupon. The Series G has a 9%, which is higher than last year, but lower than what the Series F stepped up to in Q2.

Got it. Final question, and I guess for Andrew. Given the government shutdown, do you guys have exposure to government employees?

No.

Yes, nothing that would affect us at all.

And our next question will come from Mike Grondahl with Northland Securities.

This is Logan on for Mike. First, congrats on the continued growth of the strategic partnership loans. Could you give us some color on how you guys are viewing strategic originations and fees in 2026?

That's been growing for quite some time now. We're pleased with the way it's been performing the last several quarters. We're going to try to bring on 1 or 2 new partners in the next 1 to 2 quarters. And therefore, I think, you're going to see a continued increase in performance there. The volume should go up significantly probably if we're able to contract with those firms. And even if we don't, I think, the volume is just ramping up nicely on its own.

Great. Then can you provide some color on why recreation originations were flat year-over-year and what your outlook is for that segment?

Part of it is just the capital. We were -- we raised our credit standards in the last several quarters. We didn't complete our offering. I think it was May or so. So we were just cautious. We didn't know if we were going to be able to successfully close the transaction. We thought we would. But until it's in your -- money is in the bank, so to speak, you never know for sure. But now that we're able to use that money and leverage it up with low-cost deposits, I think, you're going to see accelerated growth in the next several quarters.

Got it. And then with the Fed cutting rates yesterday for the second time, how should we be thinking about margins going forward?

Yes. I think the trend we saw in Q3 with margin expansion is something we would think continues. We're currently writing loans at rates above where our WACC sits. So we would expect our yield to continue. We should start to see some drop in cost of funds over the next couple of quarters, but it might take another quarter or 2. So I wouldn't expect any additional compression, but we should start to see some expansion -- further expansion in the coming quarters.

Got it. And then one last one from us. How do you feel about overall loan growth going forward?

I think we all feel pretty positive about it. It should grow closer to what it was several years ago when we had the excess capital. And again, we have it now. We also brought in a significant group that was doing home improvement lending. And they just started with us a couple of weeks ago. And I'm hearing great things about their names and reputations, and we may put out a release about it in the next few weeks, but that should really be a supercharge for us. I think if they can perform like we believe they can, I think that's going to really accelerate the home improvement lending.

And with that, we will conclude our question-and-answer session. I'd like to turn the conference back over to Andrew for any closing remarks.

Thank you. Before closing the call, as many of you know, the Board of Directors appointed me into an expanded role as CEO starting January 31, 2026, and I'm truly excited about this opportunity to build on our momentum and continue driving the company forward. I'm going to continue to work closely with our leadership team to assess performance across all of our business lines, identify new opportunities and ensure we remain agile in a rapidly evolving market environment. Over the past quarters, our focus has been on executing our strategic priorities, strengthening our operational foundation and positioning the company for sustainable long-term growth. As we approach the end of the year, we're proud of the strong performance we've achieved so far in 2025 and remain confident that we will continue to deliver solid results in the final quarter of this year. Moving forward, we plan to maintain the growth strategy that has guided our lending business successfully over the past several years. Our commitment to our shareholders remains strong, evidenced by our consistent earnings, our strategic buyback and our dividend. Thank you again for your investment and interest in Medallion, and have a great rest of your day.