Medallion Financial Corp 2026 Q3 Earnings Call

Welcome to Medallion Financial Corp's Third Quarter 2026 Earnings Call. Joining me today are Andrew Murstein, President and Chief Executive Officer, Anthony Cutrone, Executive Vice President and Chief Financial Officer, and Justin Haley, President and CEO of Medallion Bank. 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, Ken, and good morning, everyone. Our third quarter results were driven by our growth strategy, which focuses on growing our market share with strong volumes in our rec and home improvement segments and our strategic partnership program. We are doing this by pricing in market and leveraging our long-term relationships with some new relationships developed particularly in our home improvement segment. Our approach to credit risk was consistent with prior quarters, with an emphasis on reducing long-term losses in the rec segment and maintaining losses in a stable range for the home improvement segment. During the quarter, our home improvement book grew more quickly than the rec book. Volumes in the home improvement segment were $146.3 million, an increase of $86.6 million over the prior year quarter.

Against a smaller base, that produces the more rapid 18% growth rate, and we expect the home improvement growth rate to continue to outpace the rec growth rate for now. That is not to say that the rec segment did not grow nicely. It did. Volumes of $198.2 million were $56.5 million more than the originations a year ago. The growth in both segments is partly due to more competitive positioning of our rates, but we are seeing the results of an expansion of our marketing and the new relationships that brings. As I mentioned on our first quarter call, our goal is to grow from $3 billion to $5 billion in assets over the next few years. We feel we have the business, the team, and the market positioning to achieve this goal.

The cost of the growth is primarily in our provision of credit losses, which is obvious in this quarter's numbers and which Anthony will discuss in detail. A secondary effect is the reduction of our net interest margin. Our NIM has historically been, and continues to be, one of the highest within the banking industry. That gives us an advantage. We have the option to use rate to help us win market share in the short term because we have the flexibility of an outsized NIM. We will not always choose to win with rates, but with increased market share and the step-up in asset size, we will deliver increased net interest income, which we expect will enhance our earnings in future periods. Also, as a reminder, by growing our home improvement book faster than our rec book, NIM compression will be a side effect.

This is a trade we would take as the credit profile is stronger for home improvement and the opportunity in that market is larger. Of course, if we are successful, this will enhance our earnings long term and result in a more valuable company. To reiterate, we expect our strong origination activity to be coupled with equally strong or improved credit profiles of our borrowers. We are not chasing volume. We are chasing market share with better performing credits to produce larger earnings with still market-leading returns. To facilitate our growth, we rely on our proven funding model using brokered deposits. The advantage of using brokered deposits is that they have predictable maturities without any run risk. Using brokered deposits is more expensive than core deposits, and we regularly evaluate alternatives that might lower our cost of funds.

In the third quarter, we originated more non-brokered time deposits than we have in the past, the balance of which grew from $27.2 million in Q2 2026 to $117.5 million at Q3 2026. This was available to us at a lower cost than we would have paid for brokered deposits, which may not always be the case. We continue to rely on time deposits because we value the asset-liability matching that this confers, what we have done since the bank's inception. However, we also grew our high-yield savings balances from $2.5 million in Q2 2026 to $101 million as of September 30th. When we have these opportunities, we diversify our deposits and reduce our cost of funds. We will take them. During the quarter, we reinforced our readiness for growth by reopening our Series G preferred at Medallion Bank and issuing an additional $55 million.

This additional capital qualifies as Tier 1 capital, and when leveraged, will generate recurring earnings, which we expect to exceed the contractual coupon associated with it. This capital will allow us to continue to grow our consumer lending business, and with it, our earnings. I would like to note that the 9% coupon on the preferred was the same as it was 15 months before, despite rates rising significantly in the interim. We appreciate that investors view us as a safe investment over time. Our strategic partnership program continues to evolve. Originations remain strong, and we added a sixth partner to the program near the end of the quarter, which was our first captive finance relationship. Our strategic partnership program has the ability to scale significantly bigger than it is today, particularly as our reputation grows and our strategy differentiates us from the competition.

Our pipeline of potential partners is strong, but each is a significant investment in time and process. We expect to launch more partners in the coming quarters. My final comments are related to capital allocation priorities. The three priorities continue to be the focal point of delivering for our shareholders. One priority is to continue to grow the business, as I just described. The second is our dividend. We have always been and continue to be committed to an appropriate tangible capital return to our shareholders. Since we reinstated our dividend in 2022, our dividend has grown 75% to its current level. The third priority is to continue to opportunistically buy back our stock. Since reinstating our stock repurchase plan in 2022, we have repurchased $40 million of stock.

To that end, on October 27, our board of directors approved a new $40 million stock repurchase plan with no expiration date. We look at this as a reload, and gives us the ability to buy our stock back since we believe it is undervalued. Another example of our capital allocation efforts took place a few weeks ago when we were able to retire $15 million of our trust preferred securities at a discount. That gain will be shown in the fourth quarter. Again, I am pleased with our performance. On behalf of the entire management team, thank you to our entire company for expanding our reach and allowing us to serve more borrowers. With that, I will now turn it over to Anthony, who will provide some additional insight into our quarter.

Thank you, Andrew. Good morning, everyone. We had another great quarter of growing our top line. Originations have driven the 15% increase in our loan book over the past 12 months. This translated into a 10% increase in interest income and a 5% increase in net interest income over the prior year quarter. Our net interest margin was 7.34% during the quarter, down from 8.21% a year ago. Our average interest yield on loans was 11.87%, decreasing 52 basis points from the prior year quarter, and our average cost of borrowings in the quarter was 4.45%, up from 4.28% a year ago.

The change in our average loan yield reflects both the shift in our portfolio mix, with an increasing portfolio of super prime home improvement loans becoming a larger portion of our overall business, as well as the rate changes we instituted at the beginning of the year, intended to deliver us stronger credits and borrowers that will perform better in varying economic cycles. Additionally, during the quarter, we held more cash than is typical, much of this due to the notes offering of the second quarter. As we continue to deploy that capital, we would expect our average cash balance to decrease, and thus the negative impact of holding large amounts of lower-yielding cash has on our NIM to be somewhat muted.

The increase in our cost of borrowings is due to a growing total borrowings required to support our consumer loan business and rising interest rates on new bank deposits as older issuances mature. The provision for credit loss was $30.8 million for the quarter, as compared to $18.6 million in the 2025 quarter. As expected, the vast majority of our provision, $29.8 million, is from our consumer loans. If we deconstruct the provision, the components are actual loan losses, day one provisioning, and changes in allowance coverage on our loans due to a variety of economic and portfolio inputs. The day one provision during the quarter, which again, is the additional allowance for credit loss needed on a growing loan portfolio, recorded at the time the loans are originated, was approximately $5.6 million.