Medallion Financial Corp. (MFIN) Q3 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to the Medallion Financial Corp. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ken Cooper, Investor Relations. Please go ahead.

Thank you, and good morning. 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 for credit losses, which is obvious in this quarter's numbers and which Anthony will discuss in detail. But 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 rate, 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. And 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 broker 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 broker 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, as 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 30. When we have these opportunities to 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 stock 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'd 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 has 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 3 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. Our third priority is to continue to opportunistically buyback 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'll 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 is 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 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 1 provisioning and changes in allowance coverage on our loans due to a variety of economic and portfolio inputs. The Day 1 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. Additionally, during the quarter, our allowance coverage increased 14 basis points to 5.3% for recreation loans and 17 basis points to 2.59% for home improvement loans, which represents $4.7 million of provision for credit loss in the quarter. These 2 components had the most significant impact on our provision for credit loss and our earnings during the quarter, particularly when compared to the prior year. Net charge-offs in the consumer portfolio during the quarter were $19.6 million or 2.84% compared to $15 million or 2.55% in the 2025 quarter. Operating costs totaled $24 million in the third quarter, which were down from $25 million in the prior quarter and up from $20.7 million in the prior year quarter. The increase in noninterest expense is overwhelmingly tied to operating costs associated with both scaling our origination platform and growing our loan portfolio. As we continue to expand our platforms and focus on growth, we anticipate operating costs to continue to grow. For the quarter, net income attributable to our shareholders was $2.4 million or $0.10 per diluted share compared to $7.8 million or $0.32 per share in the prior year quarter. The increase in day 1 provision and increasing our allowance for credit loss during the quarter reduced earnings by an approximate $6.9 million during the quarter as compared to a reduction of $2.7 million in the prior year quarter. Our net book value per share as of September 30 was $17.73 from $17.07 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 $11.64 a year ago. In addition to paying our quarterly dividend of $0.14 per share, we repurchased just under 500,000 shares of our company stock during the quarter at an average price of $11.48 for a total repurchase during the quarter of $5.6 million. As of today, we have repurchased $14.4 million of stock this year. That covers our third quarter results. We are now happy to answer your questions.

[Operator Instructions] The first question comes from Ken Kohut with Raymond James.

Maybe starting with the NIM. Anthony, I really appreciate the commentary you provided. But maybe going into a little bit more detail there. The sequential drop linked-quarter was pretty large from my perspective, it looked like a big driver was the home improvement portfolio. I think average balances were up $80 million and the portfolio yield was down 76 basis points. I'm just wondering, was there any onetime items impacting results in the quarter that might reverse going forward? And what was the yield on new originations during the quarter?

Sure. Yes. No, you hit it on the head. It was -- and this is consistent with what we've been saying for a while now as the portfolio, the mix changes and we shift towards more of these super prime loans with a better credit, the yield is going to be impacted. Originations during the quarter for home improvement was 9.14% as a coupon. A year ago, we were originating around north of 10.5%. So it's a pretty big drop. But again, we think that long term, this is going to benefit us. These are better credits, not that we were writing bad credits a year ago, but these are better credits that perform better from all the data that we have and what we see. So it's that shift. And again, beginning of the year, we lowered rates in rec, again, hoping to get a better borrower, a better performing credit. So that's got some impact on it, too. And then the notes offering we did, it takes us a while to deploy this capital. We can't just put it to work day 1. So we held significantly larger balances of cash. That does have an impact on our NIM, particularly in the quarter. So as we continue to deploy that, that should lower the impact that it has on our NIM.

Great. And then maybe switching gears to the new partnership that you added during the quarter, our finance relationship. Can you just quantify maybe the size of the opportunity there and the origination volumes expected? And how much do you anticipate retaining on the balance sheet?

Ken, this is Justin. It's a difficult thing to quantify. Our finance team currently offers a marketplace, they operate a marketplace where this new product is competing with it. So they're in a ramp phase right now where they're attempting to win that volume. With rate changes and the like, it's difficult to quantify. I will say that we have intentions of retaining some of this paper. We'd like to when they're at full steam at a point where we're retaining $10 million to $20 million a month. We don't know that that's going to be happening for the next few months. So unfortunately, unable to quantify, but we are enthusiastic about it.

The next question comes from Manuel Navas with Piper Sandler.

How should we think about loan pipelines and growth from here? I'm expecting some seasonality here in the fourth quarter. But this is the last 2 quarters have been really strong, and it should drive that momentum. Should that continue into next year? Any early thoughts on growth next year as well?

So just thinking about the fourth quarter right now, you're absolutely right, seasonality, that's just a part of our business. What we are seeing is that origination volumes in October this year are slightly ahead of where they were a year ago, which is positive, but they're down from the peak seasons that we experienced in Q2 and in the first half of Q3. Justin, do you want to talk about '27?

It's a function of the economy. So if the economy is a little bit shaky, and we're not necessarily projecting that, but it's certainly different now than it was 6 months ago. We won't see the same level of growth. If the economy is strong, then we would anticipate the kind of growth that we've experienced this year.

And I'll just add, long term, the vision hasn't changed. As we said on the last call, the goal is to go from $3 billion to $5 billion over a 5-year period, and we think we're on target for that. And with that, as we stated, the NIM, just to use an example, if it was 700 basis points and $5 billion, you're talking about $350 million versus 800 basis points on $4 billion, $320 million. So it's $30 million more, obviously, by us to reach that $5 billion threshold. So that's our goal.

And I'd also add to both of those is that in Q4, we're actually raising rates across the board on our loans, particularly just given what the Fed decision was and what we anticipate it to be going forward. That will slow the volume a little bit, we think. But again, we dropped rates at the beginning of the year for better credit. The rate environment is what it is. We don't control that. But -- so we will be raising rates there, and that will help over time our NIM.

Another piece that you hinted on the NIM, is that you have a couple of money market and CDs from non-brokered sources. Can you just talk a little bit about how you're sourcing that? What's the -- you gave some balances, but I don't think you gave the rate unless I missed it, and I'm sorry. But can you kind of say the difference between your brokered deposit costs today versus in-sourcing or sourcing your own money market and CDs.

This is Justin again. Yes, we're opportunistic on this. So if we can find a way to lower our cost of funds, we want to take advantage of that. In this case, if you're comparing to similar brokered CDs to the CDs we're able to get in non-brokered or you're comparing the high-yield savings account, maybe we get 10 to 15 basis points against that cost of funds. And at the scale, that's advantageous. So $100 million here, $100 million there, it starts to add up. We'll -- if those opportunities aren't available, then we'll continue to use brokered because we like that stability. But I would think of it in those terms.

Is it digital? Like what do you -- how are you sourcing it? And where can that grow? Why and how would it grow?

We have a relationship with a third party that helps us to source it. That way, it's not brokered, but it is a third party that runs a marketplace that we can tap into. It is unlimited. So it's capped by the extent to which we can get a better cost of funds by doing it that way. Sometimes we can't. The prices there are just higher than maybe what we can get brokered and sometimes we can. And this was one of those quarters where we had a real opportunity, and we're hoping to do so again in Q4, but that will be seen.

Okay. I appreciate some of the description on the growth math on the provision. But there was still an increase in the loan loss reserve kind of the high teens basis points in each portfolio. And I think that seems to be definitely a driver. Can you just talk about those changes? Was that kind of inputs from a model? Like what kind of drove some of those changes?

Yes, that's exactly one of those. We've got a fairly sophisticated quantitative model that generates our allowance coverage in the various portfolios and the sub-portfolios. And to the extent delinquencies tick up like they always do this time of the year, that causes us to have to take more allowances -- historic charge-offs, if we see an uptick like we do in Q2 compared to Q3, that also causes a shift up.

There are also macroeconomic factors that are built into the model. So it's looking forward, and it's taking -- in our case, we're looking at unemployment rates. We're looking at interest rate changes and the like. And as those look rougher, then you'll see the model start to build more reserve in anticipation of future losses. As those improve, then the model will bring down that reserve.

There was some -- I appreciate that. There were some loans sold in the quarter. Can you just kind of talk through that transaction? I don't think I saw the balance that was sold. Just thoughts there.

Sure. It was just around -- just below $40 million across 4 different pools of loans. About 75% of them were home improvement, 25% of them were rec. And we net around -- when you factor in the cost of the deferred costs that we have to write off, we net about a 3% gain.

That's what I was looking for. I -- have you sold home improvement often in the past? It seemed like there were more rec loans. Is that any shift there?

It is a shift. We sold home improvement loans in the 2016 to 2018 time line, but the -- this was the first time we sold home improvement with this shift.

And the hope is this will be a recurring process. You've talked about that in the past, but is this mix shift also part of that recurring process?

Yes. We're interested in selling both -- from both pools because we're growing in both places. And it's based on the appetite of the buyers that we encounter. And we do want this to be a recurring thing, though. Sometimes the timing is going to be a little bit difficult to project. We have multiple buyers now and our stable of buyers that are -- that want to be repeat, and it depends on when they next want to buy that we'll have the next transaction, but we're always looking for more.

Yes. We're talking with several right now. We don't have any documents signed. So nothing scheduled to close in Q4, but that could change if it falls to Q1 or later. I mean that's always possible. But there's always ongoing conversations with this.

The next question comes from Christopher Nolan with Ladenburg Thalmann.

Is it correct to say that you're prioritizing balance sheet growth over the earnings to cover the dividend?

Yes, I think that's fair, particularly just given the type of assets we originate and that the GAAP impact to originating those with the day 1 provision immediately. And we've spoken about this in the past -- in these years where we're growing significantly, the bottom line is not going to paint the picture of how successful or not we're being. So again, that you quantify that growth penalty. Last quarter, it was $0.18. This quarter, it's around $0.16. But yes, growth is a priority for us.

And then as a follow-up question, is growth strategy a wise decision at this point in the cycle? Because I highlight that you are experiencing a lower net interest margin, higher net charge-off ratio and you're dealing with a consumer base, which is dealing with higher fuel costs as well as higher interest rates. And on top of that, you have a balance sheet mismatch, which does not work in your favor in rising interest rates. I mean, what am I missing?

I think it's measured growth, but it's growth, to your point, in a questionable economy that's in our favor, meaning better quality growth. So as the investment-grade rating that we received recently further indicates, I think the portfolio is strengthening. The more home improvement lending that we could do at 760 FICO scores, the better and the overall health of the portfolio improves. And we're very well matched. We're able to broker CDs, kind of match fund everything that we put out. So there's very few long-term liabilities that aren't properly matched for us. Anthony, I don't know if you want to add anything to that.

Yes. No, I think that, as we said, the portfolio, the mix shift that we're experiencing now, we're cognizant of what's going on in the economy and where these loans are -- where they're performing. It's something we talk about daily, multiple times a day. That's part of the reasons why we lowered rates in our rec portfolio at the beginning of the year because we do like this paper. We've operated here for a long time, but we do want a better performing asset. So we think of things like that and shifting more towards and focusing more on growing our home improvement portfolio with the NIM impact long term, that's good for our company.

Okay. Final question. Given all the changes that you mentioned in terms of going for a higher-quality client and everything else, have you gotten any feedback from regulators? Are they willing to lower the 15% leverage ratio at the bank level?

We plan on asking for them to do that. But of course, that's out of our control. But that's part of our argument when we go in and talk to the next or discussion, I should say, is look how well the portfolio is performing, look at the credit quality of the fastest-growing part of it, look where the 15% Tier 1 requirement is compared to new banks with 0 track record that are getting approved at 10% to 12%. You have a bank here that has been knocking the cover off the ball for 23 straight years. In 23 years, this bank has never had a loss in a full year since it started. So all those things are in our benefit. But of course, it's not only up to us, and we have to be able to convince others. So we'll try once more probably.

And we have a follow-up from Manuel Navas with Piper Sandler.

The NIM decline this quarter, is that -- is the cash deployment and continued growth enough to have it stabilize from here? Or is the continued trend down?

I think it's a wait and see. If it -- we wouldn't expect a large step down from here. But again, where interest rates go, particularly on our cost of borrowing, that could impact it, how quickly we can deploy it. And we're not looking to just write loans just for the sake of putting money out that we're not comfortable with. But I wouldn't expect to see a significant drop like you did in Q2 to Q3 in Q4.

It's practical that it could go down a little bit, as Anthony is saying, because you just -- you're adding better quality loans. So when you're adding 9%, 10% home improvement loans faster than you're adding 15% loans, it usually means a compression, but it also usually means an increase in profits, and that's what we're more focused on.

Yes. The NII trajectory is pretty solid. The buyback pace with -- in light of the new authorization, I know it doesn't expire, but what -- and it's pretty large the authorization, where do you kind of stand on its use versus the last couple of quarters? The pace has been very accelerated. Just kind of any updated thoughts on that buyback pace?

We were fortunate that in the last 6 months, I think we raised about $130 million between the parent company debt and the bank preferred. So we're in a good financial position and that we could accomplish all 3 of our goals, which are growth, dividend increases and buybacks. So you're right, it did accelerate this year. And for the most part, we've been buying any time, it's been below tangible book, which is $12 and change or so. So at these price levels, I think we'd continue buying.

I appreciate the price sensitivity there. This quarter, OpEx stepped down. I know that it should rise with your pretty strong revenue growth. Is that as soon as next quarter? Is that just kind of -- there was a little bit of a savings this quarter. Just trying to think of how -- what's the right run rate if there's anything interesting that happened this quarter that lowered it. I know you changed your saving on your headquarters. There's some other ways that you're saving, but it should have an upward trajectory from here. But just kind of speak to OpEx in general, please.

Yes. I would expect Q4 to look fairly similar to Q3 and then incremental increases in 2027. Nothing -- I think a lot of the big expenditures and initiatives we intended on putting into place were done. So there's always going to be some increase in operating costs, but I wouldn't expect a sizable step up.

I appreciate that. And then the fee line, there's still -- there's the lumpy gain on equity investments, it comes and goes. Is there any sight line to booking some of those near term? I know that can be difficult to predict.

Yes. Last year, we had a whole lot of exits that generated a whole lot of gains. This year, it's been essentially flat, a few things here and there. We don't have anything that we're anticipating in Q4. There was one portfolio company that we were -- that was being talked about, that's been tabled for -- I think the sponsor couldn't get the price they wanted. So it's being tabled for now. If it's sold next year, it wouldn't surprise me, but if it dragged out another 2 years, that wouldn't surprise me either. So it's going to continue to be lumpy. We'll have really big years and then years with nothing.

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 again for joining us this morning. We remain pleased with our business momentum and are confident that we have the business, the team and the market positioning to maintain our strong volumes, which will result in long-term shareholder value. For those who can make it, we look forward to seeing you at the Piper Financial Conference in Miami in mid-November. If not, we, of course, are always available at any other time to speak or meet. Thank you for your continued support, and I hope you have a great rest of your day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.