Medallion Financial Corp. (MFIN) Earnings Call Transcript & Summary

Thank you. Good day and welcome to the Medallion Financial Corp Q2 2026 Earnings Conference Call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing star, zero. After today's presentation there will be an opportunity to ask questions. To ask a question, you may press star and 1 on your touchtone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would like now to turn the conference over to Ken Cooper, Investor Relations. Please go ahead.

Thank you and good morning. Welcome to Medallion Financial Corp's second quarter 2026 earnings call. Joining me today are Andrew Merstein, President and Chief Executive Officer, Anthony Catrone, Executive Vice President and Chief Financial Officer, and Justin Haley, President and CEO of Medallion Bank. Certain statements made during the call today are not subject to any comment. 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 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, Ken, and good morning, everyone. Our second quarter results further demonstrated the strength, stability, and growth potential of our lending platform. The highlights included our home improvement originations were up over twofold where they were last second quarter. As a matter of fact, the $128.6 million of originations was the highest origination quarter in our history for home improvement lending. We are doing this with stable credit quality and this level of origination has continued through July. Equally as impressive was our origination activity in recreation, where originations were up 60% from a year ago to $228.5 million. Home Improvement, this was a record high for originations and a quarter for this segment. Here again, we are achieving this with stable credit quality, and we are seeing this level of activity continue through July. This acceleration of origination activity led to outstanding total loan growth for the quarter. We are now at $2.79 billion in loans, a 12% increase year over year, and impressive 7% sequential growth from a quarter ago. Our company surpassed an important milestone during this quarter as we exceeded $3 billion in assets. Achieving this milestone is a testament to our entire organization, and we are very pleased with where we are today and where we intend on going in the future. In many ways, the second quarter marked the continuation of our performance across our operating segments and many of our key performance indicators. For the second quarter, the $57.2 million of net interest income is a new quarterly record, which was particularly satisfying as we maintained our net interest margin of the approximate 8% level. Our strategic partnership program continues to gain traction. We added a fifth partner in the quarter, which contributed to originating $247.1 million of loans and over $1.1 million in fee income in the quarter. We continue to work on our growing pipeline of new partner prospects and expect to add new partners over time. As I have said in the past, long term, we believe our program will scale to a more significant size. However, we are taking a very methodical approach to growth to ensure we satisfy the needs of all stakeholders, including our borrowers, team, partners, and regulators. That said, we are very pleased with progress particularly over the last year or so. From a capital allocation perspective, we remain committed to our shareholders. During the quarter, our Board of Directors approved a second quarter dividend of 14 cents per share, representing a 16.7% increase from last quarter and a 75% increase since we reinstated the dividend in the second quarter. quarter of 2022. We also bought back nearly 780,000 shares of stock during the quarter, which we were able to do at a discount to both book value and tangible book value. Our commercial lending business grew 5% during the quarter, with two new loans originated for a total of $7.1 million. portfolio now sits at 126 million with the weighted average coupon being 14.37%. Our company is well positioned for future growth. We have a clear track record of growing assets, net interest income, and our book value. We have proven to be able to do this profitably and believe we will continue to do so. As we have stated since our founding, our net income and earnings per share may be choppy quarter to quarter due to timing related to several unique drivers of our business, but all add shareholder value long term. Lastly, we recently completed our relocation to our new New York office, a move that is expected to reduce our annual occupancy costs and further enhance shareholder value through ongoing expense savings. 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 quarter, net interest income grew 7% to $57.2 million from $53.4 million in the prior year quarter. The increase was driven by growth in our loan portfolio, generating higher interest income, outpacing interest expense, which was higher due to an increase in both borrowings and average borrowing cost. Our net interest margin was 7.94% during the quarter, down 15 basis points from a year ago and down 60% basis points from the first quarter. Our interest yield on loans of 12.28% increased one basis point from a year ago, and our average cost of borrowings in the quarter was 4.32% compared to 4.20% a year ago. During the quarter, our average cost of deposits at Medallion Bank was 3.96% compared to 3.84% in the prior year quarter. As of June 30th, the weighted average coupon of recreation loans was 15.06% and was 9.69% for home improvement loans. During the quarter, we originated loans at rates averaging around 14 and 7 eighths percent for recreation loans and nine and a quarter percent for home improvement loans. During July, we have continued to originate both recreation and home improvement loans at similar rates. The provision for credit loss was $22.3 million for the quarter, a slight decrease from $22.5 million for the first quarter, and a slight increase from $21.6 million in the prior year quarter. Current quarter provision included approximately $6.5 million of day one provisioning, the allowance for credit loss we book when a loan is originated in comparison to approximately $2.5 million in the prior quarter and an approximate $400,000 benefit in the prior year quarter. As we continue to grow our consumer loan portfolios, particularly recreation loans, there is a steep penalty that presents itself on the income statement on the date of growth in terms of increased provisions. The $6.5 million of additional provisions translates into roughly 18 cents per share of reduced earnings in the quarter. If we chose to keep our loan book size static, excluding the impact of portfolio mix, we would not have those additional costs. However, we don't believe that to be in the best interest of our company or our shareholders. Net charge-offs in the recreation portfolio during the quarter were $13.3 million, or 3.14%, compared to 3.11% in the 2025 quarter, and were $2.9 million, or 1.37% of the average home improvement portfolio, compared to 1.87% in the 2020 quarter. the 2025 quarter. Turning to expenses, operating costs totaled $25 million in the second quarter, which were up from $21.5 million in the prior year quarter. With the increase tied to both higher employee costs as well as higher servicing expenses, both of which are associated with our growing loan portfolio. Additionally, our professional fee costs were elevated in the quarter related to this year's proxy. As we continue to expand our platform and focus on growth, we anticipate higher operating costs. As we've stated previously, long-term, we expect the growth in our net interest income to outpace any growth in operating costs. For the quarter, net income attributable to our shareholders was $7.4 million, or $0.31 per diluted share, compared to $11.1 million, or $0.46 per share. prior year quarter. With the prior year quarter including $5.9 million of higher gains on equity investments compared to the current quarter, and the current quarter including a significant amount of additional credit loss provisions tied to the growth we experienced when compared to a year ago has we just previously discussed. Our net book value per share as of June 30th was $17.62 $17.66 a year ago, and our tangible book value per share, which excludes the value of goodwill, intangible assets, and the correlated deferred tax liability associated with both, was $12.17 at the end of the quarter, up from $11.32 a year ago. reconciliation of our book value per share, the tangible book value per share, is available on our website. That covers our second quarter results. We are now happy to answer any questions you may have.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star, At this time, we will pause momentarily to assemble our roster. The first question is from Ken Cote, Raymond James.

Hey, good morning, guys. Thanks for taking my questions. Maybe I can start. Hi, again. Yes, hi, good morning. Starting out with loans. I know you guys have been pretty optimistic with loan growth and balance sheet growth going forward, but this level, this quarter was really impressive. I'm just trying to get a sense to how sustainable this level is going forward.

Yes, no, we were quite happy with the loan origination volumes this quarter, and we do think that they're sustainable. We would expect there to be continued seasonality like we've seen it. Q2 and Q3 are going to be our stronger origination months. with home improvement, there's just a huge ecosystem of loans to be done, and we're a growing but still a small player in that space. So we feel really good about that.

Awesome. Maybe sticking with home improvement, as you know, is really strong growth. I'm just wondering if the recent EnerBank and region hires that you guys made contributed.

that outsized growth and if they're gaining traction? Yes, they have. We really brought over a great person from EnterBank. As you know, EnterBank sold to regions and I think they sold for two and a half or three times book value. That often happens with mergers and acquisitions that the smaller bank usually people leave after the deal is done. The atmosphere is different, the culture is different, they want more of a growing smaller, more energetic company perhaps, and that's what we've found. These people have done a great job for us. We're actually bringing over some more of them in the coming weeks.

Awesome. It's good to know. And maybe if I could sneak one more in. Looks like you guys recognize some gains on the sale of recreation loans. Just wondering if you can provide maybe a little bit of color there. What was the balance of the loan sold? What drove the decision to sell? Maybe pricing and demand from the buyers?.

That'd be great, thanks. So Justin is Medallion Bank CEO is on the call. Justin, you wanna jump in on that?.

Hi, Ken. About 50 million sold and we're seeing plenty of demand for that. Good economics on it. We would anticipate as we're growing at the pace we're growing in order to manage our capital effectively that we'll have periodic sales. We'd like it to be consistent.

And I would just add that despite that portfolio sale, we still grew in the quarter 5% recreation loan. So this didn't hinder our ability to grow. And we see this as a good outlet, not just to generate more recurring earnings, but also to an outlet for these original originations that we seem to, you know, be lucky to have. Great. Thanks for taking my questions.

Thank you again. The next question from Mike Grondo, Northland Securities. Please go ahead.

Hey, morning guys. This is Logan on for Mike. Thanks for taking our question. First one from us. Hey, guys. Can you just dig in a little bit about how you are feeling about current credit trends and your outlook for credit in the second half of 2026?.

Sure. I think we're feeling positive about credit, particularly home improvement. I mean, charge-offs have come in sizably and performed much better than they have maybe a year ago. So, we're optimistic about that. REC is still elevated, but it's not ticking up, and it did come in, you know, as expected from Q1. So I think we look good. The economy is going to dictate to a larger extent where we end up, but I think the changes we made in terms of pricing that we spoke about last quarter on recreation loans should over time and in the coming quarters produce a better charge-off ratio, which for us is going to produce a better charge-off adjusted NIM.

Got it. And then originations were pretty robust across REC and home improvement. Granted 2Q is seasonally a strong quarter, but can you guys just go a little deeper talking about the underlying drivers of this growth for each segment?.

Justin, you want to jump in again? Yes. Hi, Logan. So it's two different stories in the recreation business. You think of our recreation business, it's got a couple of components to it. The one we talk about most is our non-prime business, which is near prime and subprime originations for RV and marine buyers. And in that business, as Anthony mentioned, we took a look at where we fell in the waterfall. And as a second look lender, we're not going to be at the top of the waterfall, but where we fall in the waterfall comes down to how competitive we are. And we chose to be a little more competitive and you're seeing the result of that in volume in the year. We also have what we call prime niche businesses, so they're small market businesses that allow us to originate some volume. We met with and engaged with some of our larger relationships there and modified the programs, not by modifying credit, but by modifying delivery and how we price in order to ensure that we met their needs and we could win more often. So that's RAC. And home improvement, as mentioned before, we have new talent in the team. You'll see this quarter we went from 700 contractors to 800 active contractors. Our marketing engine has stood up. We do expect to have better contractor acquisition going forward and to continue that growth. But for the volume today, it's like, Rick, we're leaning into our existing relationships and asking them how we can win. They're telling us. and then we're making the modifications to win. So we do think this is all sustainable.