MFIN - NASDAQ

Good day, and welcome to the Medallion Financial Corp. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Val Ferraro, Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to Medallion Financial Corp.'s Fourth Quarter and Full Year 2025 Earnings Call. Joining me today are Andrew Murstein, President and Chief Executive 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 fourth 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. 2025 marked a record year for Medallion with solid performance across our core financial metrics and operating segments. As compared to the fourth quarter and full year 2024, we reported increases in net interest income, net income, originations and portfolio size, reflecting the strength of our platform and consistent execution across our business lines. Loan demand remained healthy. Credit performance was solid, and our results demonstrate our ability to continue scaling the business profitably while maintaining discipline. Across the portfolio, we continue to execute effectively with meaningful contributions from our recreation, home improvement and commercial lending lines. Total loans reached $2.567 billion and total originations came in at $421 million for the fourth quarter and $1.5 billion for the full year, increases from both the same quarter last year and year-over-year. These results reflect a focused operating approach and our ongoing commitment to prudent growth across the platform, 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 $74.5 million for the quarter and $289.9 million for the year, growing 5% as compared to the same period of last year and 8% year-over-year. Within the Consumer Lending segments, -- the rec loan book grew 5% to $1.6 billion at December 31, 2025, representing 63% of our total loans. Originations for the quarter grew to $97.2 million compared to $72.2 million a year ago, and interest income rose to 6% to $54.2 million. Delinquencies of 90-plus days were just 0.82% of gross recreational loans and the allowance for credit losses is 5.32% to reflect expected seasonal and economic dynamics as compared to 5% a year ago. The home improvement loan book stood at $810.2 million at December 31, 2025, representing 32% of our total loans. Originations for the quarter was $61.7 million versus $82.5 million last year. Delinquencies of 90-plus days were just 0.16% of gross home improvement loans and the allowance for credit losses was 2.41% compared to 2.48% 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 recreational 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 continued to deliver meaningful equity gains. We had new originations of $4.1 million during the quarter compared to $7.3 million in the same quarter a year ago. However, for the year, total originations were $40.6 million compared to $14.3 million in 2024. The portfolio increased to $123.1 million from $111.3 million last year with an average interest rate of 14.22% compared to 12.97% a year ago. Additionally, as of December 31, we had more than 2 dozen 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. During the quarter, gains from equity investments were strong, generating $8.8 million of income. For the year, gains from equity investments generated $24.6 million. 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 second straight quarter of over $200 million of originations, reaching a record level of $258.3 million this quarter. Total loans held as of quarter end under the strategic partnership program were $15.1 million. Most of these loans outside of rec and home improvement and are mostly offered as employee benefits by large employers on loans for unplanned or elective medical procedures. Although this program represents a small part of fees and interest generated from Medallion Financial, it has reduced approximately $1.8 million in income this quarter and $5.4 million for the year. It has more than doubled from the prior year and it has expanded each quarter, representing a further diversification of our income sources. We continue to 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. Lastly, regarding our legacy taxi medallion business, we collected $2.5 million of cash during the quarter, which resulted in net recoveries and gains of $1.4 million. For the full year, we collected $13.6 million of cash, which resulted in net recoveries and gains of $4.6 million. Net taxi medallion assets declined to just $4.3 million and now represent less than 0.2% of our total assets. From a capital allocation perspective, we remain committed to our shareholders. During the quarter, we paid a quarterly dividend of $0.12 per share and continue to allocate a large portion of our earnings to growth. We continue to prioritize a disciplined origination strategy, prudent balance sheet management and effective capital deployment while expanding our portfolio. 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. Ending the year with positive momentum and solid execution across our business lines, we believe we are well positioned to build on this performance to continue delivering consistent, favorable risk-adjusted returns for our shareholders. One last item I wanted to touch on before turning the call over to Anthony is my transition into the CEO role, which took effect on January 31. As I step into this new role, I would like to have a few minutes to discuss our 2026 strategy. Our focus for 2026 is to build upon the strong foundation established over the past 30-plus years while further refining our strategic priorities. We aim to continue to grow our core business lines by targeting sustained growth in our Recreation segment. In addition, we believe there is significant growth potential within our home improvement line. As a result, in recent months, we added experienced talent to support increased growth and originations in this line with the goal of continuing to expand the portfolio. Our Commercial Lending segment also remains a strong contributor to earnings with the average interest rates increasing to 14.22% this year. At the same time, our strategic partnership program continues to be a rapidly growing component of our business. While per loan origination fees and interest income associated with this business remain modest due to the short term the loans remain on our books, originations continue to expand meaningfully quarter-over-quarter, and we see great potential in this business over the next several years. We remain thoughtful and disciplined in evaluating new business lines and growth opportunities. We will continue to assess adjacent markets where we believe we can expand the business in an accretive manner, consistent with our standards and return objectives. Looking ahead, I am proud of where the company stands today and confident in the foundation we have built together. While we recognize that market conditions may evolve, our strategy remains clear and consistent, execute with discipline, allocate capital thoughtfully and maintain a long-term perspective focused on sustainable value creation. Our proven business model, diversified portfolio and experienced management team provide both resilience and flexibility. We continue to evaluate opportunities to optimize our returns, improve margins and pursue strategic initiatives that align with our core competencies. At the same time, we remain committed to prudent risk management and maintaining a strong balance sheet to support future investments. I believe the company is well positioned to perform well in the years ahead. We are confident in our ability to navigate changing environments and deliver consistent, attractive returns for our shareholders. With that, I'll now turn it over to Anthony, who will provide some additional insight into our quarter.

Thank you, Andrew. For the fourth quarter, net interest income grew 8% to $56.4 million from $52 million in the same quarter a year ago and was up 1% over the most recent prior quarter. For the year, net interest income increased 7% to $216.9 million from $202.5 million in 2024. Our net interest margin was 8.04% during the quarter, up 20 basis points from a year ago. For the year, our net interest margin was 8.06% compared to 8.05% in 2024. Our total interest yield for the quarter increased 16 basis points from a year ago to 11.70% with our average cost of borrowings in the quarter being 4.24% compared to 4.12% a year ago. As of the end of 2025, the average interest rate on our deposits at Medallion Bank stood at 3.87% compared to 3.71% a year ago. During the fourth quarter, we originated $97.2 million of recreation loans, $61.7 million of home improvement loans with the weighted average coupon in those portfolios being 15.16% and 9.87% as of December 31. In January, we originated recreation loans at rates averaging around 14.5% and originated home improvement loans at rates averaging around 10%. For the full year, we originated $468.5 million of recreation loans and $224.5 million of home improvement loans. Our total loan portfolio reached a value of $2.567 billion at December 31, up 3% from a year ago. Total loans included $1.6 billion of recreation loans, $810 million of home improvement loans and $123 million of commercial loans. For the quarter, the average yield on our total loan portfolio increased to 12.26% from 12.01% a year ago. Consumer loans more than 90 days past due were $14.2 million or 0.6% of total consumer loans as compared to $11.4 million or 0.5% a year ago. Our provision for credit loss was $27.7 million for the quarter, an increase from $18.6 million in the third quarter and $20.6 million in the prior year quarter. During the quarter, we increased the allowance for credit loss in the recreation portfolio by $7.1 million, which accounted for growth in the portfolio and included the recharacterization of certain loans held for sale to held for investment and reflected the higher allowance coverage of 5.32% at the end of the quarter compared to 5.1% a quarter ago. Provision for credit loss was $1.6 million on commercial loans and reflected an additional $1.4 million of credit allowance on these loans. Additionally, the current quarter provision included a $0.2 million benefit related to taxi medallion loans. The total net benefit related to taxi medallion assets during the quarter was $1.4 million. Net charge-offs in the recreation portfolio during the quarter were $17.9 million, 4.41% on the total average recreation portfolio and 4.53% on the average held for investment recreation portfolio and were $2.2 million or 1.07% of the average home improvement portfolio. Turning to expenses. Operating costs totaled $22.2 million during the quarter, up from $17.2 million in the prior year quarter. The increase over the prior year was largely due to realization of insurance benefits in the prior year totaling $5.5 million, which reduced costs as well as and to a lesser extent, higher employee costs in the current year. As we continue to expand our platforms, grow our businesses and look to becoming a sizably larger enterprise over the next several years, we anticipate higher noninterest operating costs. We expect in the long term that the growth in our net interest income will outpace any growth we experienced in operating costs. Over the past 5 years, our loan book has more than doubled, and our annual net interest income has grown 96%, while our noninterest operating expenses have increased by roughly 50%. More importantly, over the last 5 years, we have seen our book value per share increased 88%, while our tax-adjusted tangible book value has quadrupled. There is a cost to growing, and we'll continue to experience that. However, we continue to believe that it is in the best long-term interest of our businesses and our shareholders. For the quarter, net income attributable to our shareholders was $12.2 million or $0.50 per diluted share, an increase of $2.1 million or $0.07 per share over the prior year quarter. For the full year, net income attributable to shareholders was $43 million or $1.78 per share, an increase of $7.2 million or $0.26 per share from 2024. Our net book value per share as of December 31 was $17.53, up from $17.07 a quarter ago and $16 a share a year ago. Our adjusted tangible book value per share, which excludes the value of goodwill, intangible assets and the deferred tax liability associated with both was $12.12 at the end of the quarter, up from $11.64 a quarter ago and $10.50 a year ago. That covers our fourth quarter and full year results. Andrew and I are now happy to take your questions.

[Operator Instructions] The first question comes from Mike Grondahl with Northland Securities.

First question, the provision expense, the $27 million or $27.7 million, how would you characterize that? It was up from the $18 million in 3Q. Is there a little catch-up there? And then what would you think is sort of a normalized provision quarterly in 2026?

Mike, yes, that's a good question because just looking at the numbers, it seems like a pretty sizable increase. But there's a couple of things going on there. One, in Q4, we took the remaining rec loans that we had as held for sale, and we moved them back into held for investment. So that was about a $2.2 million provision hit when we had to book the allowance. If we go back a year when we moved these loans, it was actually about $100 million we moved out to held for sale when we were contemplating a sale and speaking with potential buyers. That was -- we had about a $4 million gain or benefit. So between the 2 of them, that swing, one is a provision in this year and the other is a benefit last year. That was a $6 million swing that's part of that $7 million. In addition to that, on a $1.6 million book, our allowance coverage went from 5% last year to 5.32%. So I mean, there's a step-up in allowance that runs through the provision because of that. And then on top of that, we took commercial provisions of about $1.5 million, a little over $1.5 million in Q4, and it was just about $100,000 a year ago. That plus -- I can keep going. That plus the taxi medallion benefits were kind of light that ran through provision this year. Last year -- this year was only about $200,000. Last year it was $1.7 million. There's a whole list of things that reconcile that difference. Going forward, we wouldn't expect it to be the $2.7 million. It should be something less than that. But when we think about growth, we're looking at mid-teens growth looking in 2026 across our loan book, there'll be a fair amount of put on costs with booking allowances as we grow.

Got it. That's helpful. And then there was a couple of gains, and I know you guys record these from time to time coming out of the commercial book or coming out of the taxicab business. Could you just maybe go over a couple of those, the nature of those, the $8.7 million, is that one portfolio company? Was it a couple? And then there is -- I think in other, there was like $2.9 million. If you could just highlight a couple of those, the nature of those gains.

Yes. So in the equity gains, there was a little more than half a dozen changes and gains that we recognized throughout the quarter with our equity holdings. And again, that's the $80 million or so that's on our balance sheet. Just about $8.5 million of that is related to 3 specific exits. One was a gain on a warrant. We -- although we typically don't get them, we did get a warrant about 1.5 years ago on a loan. That portfolio company sold, loan was repaid, and we recognized a gain on that. And the other 2 were actual equity gains. So the 3 of them totaled about that $8.5 million. And then the some small items that reconcile to the full amount that's net on the income statement. And those other -- those equity gains, one of them, it was actually our oldest portfolio company. We originally made this loan just about 18 years ago. I had a lot more hair back then. And the other one was originated 4 or 5 years ago.

Got it. And that $2.9 million, and I think it was other income, what was that?

Yes. So that's -- there's a whole host of things there, but the biggest piece of that and the biggest component of that is we had -- and it's somewhat abnormal. We usually don't see it this large. We had income related to our CRA investments at Medallion Bank that was approximately $2.7 million. That's in that number. We wouldn't expect to see numbers that large on a regular basis. And that's just part of the investing we do to get CRA credit. We've got a fair amount of investments in these funds that give us the credit. And over time, they do generate a nice return. That was just an added bonus in Q4.

Great. Great. And then, Andy, a question for you. When you were talking about 2026, you seem to emphasize home improvement a little bit more. That portfolio has sort of been $800 million, I think, the last 5 quarters, give or take a little bit. But you mentioned you had added some talent there. Can you just talk about your growth outlook for home improvement? And did you add some salespeople? How many? That would be helpful.

Sure. There was a group that used to be at EnerBank, and they moved over when they were sold to Regions Bank. And I've been tracking how well they've been doing through the year. So we approached them and brought them in. I think the Medallion Bank put out a release on this in the last 30 days or so with the person's name. And we're excited about the growth opportunities there. We think we're going to grow mid-teens, which is substantially above where we've been, as you pointed out, for the last year or 2. This portfolio is tremendous credit. It's 780 or so FICO scores, which is AA+ quality. So it's nice to continue to strengthen our portfolio. That's one of the reasons why we have an investment-grade rating on it. This portfolio continues to perform extremely well, great margins, and I'm happy it's going to be a big part of our growth this year.

Yes. And the thing that I'd add also, Mike, is that unlike rec where we've got a lot more ability to ramp up originations or slow them down because we're dealing with smaller borrowers, the relationships we have with these home improvement contractors and dealers and brokers, it's a little bit different. So there's a lot of lead time involved in preparing for the origination volume that's to come down the line. So if we go back a year ago, we had to temper expectations with our third parties on what we would be able to do throughout the year just given where capital stood. We've gotten past that hurdle. We were able to raise additional capital at Medallion Bank throughout the year. So now in addition to what Andy said, bringing in this talent, we're able to go back to these partners and say, okay, yes, for 2026, we're committed and we could fund certain levels. The last thing we wanted to do last year was say, yes, we could originate at a certain level and not be able to do it because of capital constraints. So it was a conscious decision to keep that book somewhat flat throughout the year.

The next question is from Christopher Nolan with Ladenburg Thalmann.

Andrew, congratulations on the step-up. And Anthony, I can't believe that you've had more hair in the past. Anyhow, was the reserve increase driven by CECL? Or did you guys have some discretion on that?

Yes, it's CECL, right? So there's economic factors that go into it as well as our historical charge-off experience. So charge-offs -- Q4 charge-offs are always higher than most other quarters. So that has an impact on it. And it's a different product. We've seen the loss experience start to come down on the home improvement, and we're happy with that. It's still elevated in rec. So it's just -- I think over time, we'll start to see that settle. But right now, we're not seeing that turn the way we have in home improvement.

Great. And should we -- a follow-up on the previous line of questions. Should we be seeing a growth in the reserve ratio in 2026, percentage of loans?

I wouldn't expect anything significant, although obviously, the allowance is going to grow as we grow the book. The overall economy and how we continue to see these borrowers perform going into -- through Q1 and into Q2, that will drive how we think about that allowance coverage ratio.

Got you. And for the fourth quarter, what were the charge-offs -- net charge-offs? I didn't see the quarterly investor presentation, maybe I missed it.

Sure. So on the home improvement, I think we spoke about this just a few minutes ago. But on home improvement, net charge-offs for Q4 was 107%. On the rec portfolio, if we just base it upon loans held for investment, it was 453. If you look at the total portfolio, those that are held for sale and those held for investment, it was 441.

Great. And given the increase in 90 days past due for rec, should we be seeing a slowdown in the rec originations? And what's causing the erosion of asset quality in the rec portfolio?

Yes. Look, we're compensated for the risk, and we understand that, and we've been doing this type of lending for a long time. So I don't think we're that concerned. But I think what we're seeing -- and as I said, we've committed a whole lot of resources in terms of manpower, technology and capital to building out our systems over the past several years. We're going to continue to do that. One of those investments is on a data analytics team that looks at the performance of our portfolio, current, past and what we expect it to be going forward. And one of the things that we're trying to do, and we see that in where we're originating in January is maybe we're outside of the market in terms of rate, a little too high. So by bringing that down, January, we originated at 14.5%, maybe by bringing that down, we think that, that's going to generate better credit performance. We're still getting -- on paper, we're still getting the same borrower, but we think that they're actually going to perform better based upon all the data that we have.

So we should see net interest margin coming a little bit, right?

Yes, it will have an impact on net interest margin, right? So we'll see that maybe it will probably drop below the 8%. But when you look at the credit adjusted yield, we think that, that long term is going to be better than what we're seeing now.

Great. Final question for Andrew. Thank you for all the strategic commentary that you made. Does this put on the table potential for acquisitions and/or a sale of the company? And have you gotten any signals from regulators indicating that they'd be receptive to that?

Nothing is top of mind. The nice thing is that the ILC charters seem to be more acceptable now from the government agencies. Several of them have been approved for the first time in many years. So the potential for a change of control, I'd say, exists today. I don't see us really buying any businesses in the near term. I think there's just so much growth potential in the ones that we have. In terms of a sale, again, nothing come to mind, but I mentioned EnerBank before. and EnerBank is a bank that's sold for roughly 2 to 3x book value and 20 to 25x earnings. So if we ever got that price, I think we pulled the trigger, which is a significant premium. But I don't see us really doing anything now. I want to continue to do -- I mean in the last 5 years, we've made more than we have in the first 85 combined. So things are flowing really well for us today. Dividends have been going up. Buybacks should continue to go up. Earnings have been going up. So I think we're on a great course right now.

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

Thank you. And before closing the call, I'd just like to reaffirm my strong commitment to Medallion in my expanded role as CEO. As I mentioned earlier, my priority is to build upon the strong foundation we've established while thoughtfully expanding our capabilities and market presence in a disciplined manner. Having served as President for many years, I've been deeply involved in shaping our direction over the past few decades, and this transition represents a continuation of the leadership principles, a long-term approach that have guided us successfully over the years. We'll remain focused on disciplined growth, operational excellence across our business lines and prudent capital allocation. I'm very proud of what our team has accomplished and even more confident in what we can achieve together going forward. Our commitment to our shareholders remains strong, evidenced by our consistent earnings, our strategic buybacks and our dividend. I just want to thank our employees, partners and shareholders for your continued trust and support. We look forward to updating you on our progress next quarter, and I hope you all have a great rest of your day. Thank you again.