What Medallion Financial (MFIN) Said on Its Q3 Earnings Call

Key Points

• Loan growth continued: Recreation originations rose to $198.2 million and home-improvement originations reached $146.3 million, helping expand the loan book 15% year over year. Management is targeting growth in higher-quality credits and aims to increase assets from approximately $3 billion to $5 billion over five years.
• Margins and earnings weakened: Net interest margin fell to 7.34% from 8.21% as lower-yielding home-improvement loans grew and funding costs increased. Higher credit-loss provisions and charge-offs contributed to a decline in net income to $2.4 million, or $0.10 per share, from $7.8 million, or $0.32 per share.
• Capital flexibility remains a focus: Medallion expanded lower-cost non-brokered funding, issued $55 million of preferred stock and sold nearly $40 million of loans. The board also approved a new $40 million share-repurchase authorization after the company repurchased nearly 500,000 shares during the quarter.

Medallion Financial NASDAQ: MFIN reported third-quarter results marked by continued loan growth in its recreation and home-improvement businesses, though higher credit-loss provisions and a lower net interest margin reduced quarterly earnings.

President and Chief Executive Officer Andrew Murstein said the company’s growth strategy centers on expanding market share through competitive pricing, established dealer relationships and newer relationships in home improvement lending. He said the company is emphasizing credit quality rather than simply pursuing originations.

“We are not chasing volume,” Murstein said. “We are chasing market share with better performing credits to produce larger earnings with still market-leading returns.”

Originations Rise in Recreation and Home Improvement

Home-improvement originations totaled $146.3 million during the quarter, up $86.6 million from the prior-year period. Murstein said the segment’s growth rate was 18% and is expected to continue outpacing recreation lending growth for the time being.

Recreation-loan originations were $198.2 million, an increase of $56.5 million from a year earlier. The company attributed growth in both businesses partly to more competitive rates, expanded marketing and new lending relationships.

Chief Financial Officer Anthony Cutrone said originations contributed to a 15% increase in the loan book over the past 12 months. Interest income rose 10% year over year, while net interest income increased 5%.

Management reiterated its longer-term goal of increasing assets from about $3 billion to $5 billion over the next several years. During the question-and-answer session, executives described that target as a five-year objective.

However, Cutrone said seasonality is expected to affect fourth-quarter originations. October volumes were slightly ahead of the prior year but below levels experienced during the peak periods of the second quarter and first half of the third quarter. The company also said it is raising rates across its loan products in the fourth quarter, which it expects could moderate volume.

Margin Compression Accompanies Portfolio Shift

Net interest margin was 7.34% in the third quarter, compared with 8.21% a year earlier. The average yield on loans declined 52 basis points year over year to 11.87%, while the average cost of borrowings rose to 4.45% from 4.28%.

Cutrone said the lower yield reflected a growing share of super-prime home-improvement loans, as well as rate reductions implemented earlier in the year in the recreation portfolio to attract stronger borrowers. The coupon on home-improvement originations during the quarter was 9.14%, versus more than 10.5% a year earlier, he said.

The company also held more cash than usual during the quarter following a second-quarter notes offering. Cutrone said the cash balance weighed on margin but that the impact should diminish as capital is deployed.

Murstein said margin compression is an expected consequence of growing home-improvement loans more quickly than recreation loans. He said the trade-off is attractive because home-improvement borrowers have stronger credit profiles and the market opportunity is larger.

Management said it does not expect another significant margin decline in the fourth quarter, although it acknowledged margin could continue to edge lower as lower-yielding, higher-quality loans make up a larger share of originations.

Provisioning and Charge-Offs Reduce Earnings

The provision for credit losses rose to $30.8 million from $18.6 million in the prior-year quarter. Consumer loans accounted for $29.8 million of the provision.

Cutrone said approximately $5.6 million represented day-one provisioning associated with loan growth. Increased allowance coverage in the recreation and home-improvement portfolios accounted for another $4.7 million. Allowance coverage increased 14 basis points to 5.3% for recreation loans and 17 basis points to 2.59% for home-improvement loans.

Net charge-offs in the consumer portfolio were $19.6 million, or 2.84%, compared with $15 million, or 2.55%, a year earlier. Executives said their allowance model considers factors including delinquencies, historical charge-offs, unemployment and interest-rate trends.

Net income attributable to shareholders was $2.4 million, or $0.10 per diluted share, compared with $7.8 million, or $0.32 per share, in the prior-year quarter. Cutrone said day-one provisions and the higher allowance for credit losses reduced earnings by about $6.9 million during the quarter, compared with a $2.7 million impact a year earlier.

Operating costs totaled $24 million, down from $25 million in the preceding quarter but up from $20.7 million a year earlier. Cutrone said expenses are tied primarily to scaling the origination platform and growing the loan portfolio. He said fourth-quarter operating costs should be broadly similar to third-quarter levels, followed by incremental increases in 2027.

Funding, Capital and Share Repurchases

Medallion Bank expanded its use of non-brokered funding during the quarter. Non-brokered time deposits increased to $117.5 million at Sept. 30 from $27.2 million at the end of the second quarter, while high-yield savings balances grew to $101 million from $2.5 million.

Murstein said those funding sources were available at a lower cost than brokered deposits during the quarter, though the company plans to remain reliant on brokered deposits because of their predictable maturities and asset-liability matching characteristics. Justin Haley, president and CEO of Medallion Bank, said non-brokered sources can offer savings of roughly 10 to 15 basis points compared with similar brokered funding when market conditions are favorable.

During the quarter, Medallion Bank reopened its Series G preferred stock and issued an additional $55 million. Murstein said the 9% preferred coupon was unchanged from 15 months earlier despite higher rates during the intervening period.

The company also sold just under $40 million of loans across four pools during the quarter, including approximately 75% home-improvement loans and 25% recreation loans. Cutrone said the transaction generated a net gain of about 3% after related deferred costs. Management said it wants loan sales to become recurring, although the timing will depend on buyer demand.

• Net book value per share was $17.73 at Sept. 30, compared with $17.07 a year earlier.
• Tangible book value per share was $12.17, up from $11.64 a year earlier.
• The company paid a quarterly dividend of $0.14 per share.
• Medallion repurchased nearly 500,000 shares during the quarter for $5.6 million, or an average of $11.48 per share.
• Year-to-date share repurchases totaled $14.4 million as of the call date.

On Oct. 27, the board approved a new $40 million stock-repurchase authorization with no expiration date. Murstein said the company has generally been repurchasing shares when the price is below tangible book value and expects to continue doing so at similar levels. He also said Medallion recently retired $15 million of trust preferred securities at a discount, with the resulting gain expected to be recognized in the fourth quarter.

About Medallion Financial (NASDAQ:MFIN)

Medallion Financial Corp. is a specialty finance company that originates and services loans for taxi medallion owners and operators. Its lending activities have historically focused on financing the purchase and refinancing of taxi medallions, as well as providing loans secured by related commercial assets.

Through its subsidiaries, including Medallion Bank, the company also participates in consumer and commercial lending. Medallion Bank has offered financing for recreational vehicles, boats, home-improvement projects and other consumer purchases, while the company's broader lending operations serve small businesses and transportation-related borrowers.

Founded in 1995 and headquartered in New York, Medallion Financial has built its business around specialized lending markets that are often served by fewer traditional financial institutions.

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