Q2 2025 Medallion Financial Corp Earnings Call
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I would now like to turn the conference over to valid Ferraro. Please.
Please go ahead.
Thank you and good morning will.
Welcome to medallion financial Corp's second quarter earnings call joining.
Joining me today are Andrew Mertz, Dean President and Chief operating Officer, and Anthony <unk> 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 second quarter supplement presentation on our website by visiting medallion dot 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.
Before discussing our second quarter performance for all of you new to our story I would like to start by providing an overview of medallion financial.
Medallion financial is a specialty finance company, primarily operating via two subsidiaries medallion bank and medallion capital.
Medallion Bank is in industrial bank, a special and unique banking shorter leash.
These charters are highly sought after and there are only about 15 of them in the U S.
We're not a bank holding company and not regulated by the fed but through medallion bank are able to take an FDIC insured deposits, thus, giving us a low cost dependable funding source for our lending business.
We originated and service a growing portfolio of consumer loans working with more than 4000 dealers contractors of financial service providers to finance Rv's boats collector cars other consumer recreational equipment at home improvements.
We also offer a loan origination services via our Fintech strategic partners.
Medallion Bank recently raised over 75 million through a public offering of non cumulative perpetual preferred stock that trades under the symbol and B and K O on the NASDAQ.
Medallion capital is a small business investment company or Spi C with its founding dating back to the 19 eighties.
As in Spic's medallion capital is able to access 10 year debentures from the small business administration.
These debentures, along with capital are what fund our growing commercial loan portfolio.
While most spic's have a finite life medallion capital has a permanent capital base, which has allowed us to operate and grow for nearly four decades.
This unique structure is advantageous and allows us to invest over a longer time horizon than many of our competitors.
Medallion capital originates in services mezzanine loans and various commercial industries and as an equity investment in many of the portfolio of companies it finances.
Now moving on to our quarterly results.
We are very pleased with our second quarter performance as compared to the second quarter of last year. Our net income increased 56% to $11 1 million on our earnings increased to 46 cents per share.
Net interest income also increased 7% to $53 4 million and our net interest margin remained steady at eight point at one 9%.
This improved performance reflects the continued strength across our lending segments, driven by disciplined execution and strategic positioning, which I'll 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.
While total originations for both the recreational and home improvement segments were lower at 197 million compared to $277 6 million a year ago interest income rose, 9% to $71 2 million.
The recreation loan book grew modestly to $1 $5 5 billion, representing 62% of our total loans.
While originations were lower at $142 8 million compared to $209 6 million a year ago interest income rose, 8% to $51 1 million.
Delinquencies of 90, plus days were just point, 49% of gross recreational loans and the allowance for credit losses was 5.15% to reflect expected seasonal and economic dynamics as compared to $4 three 5% a year ago.
The home improvement loan book also grew modestly to $803 5 million as of June 32025, representing 32% of our total loans.
Originations were $54 3 million versus $68 million last year.
Delinquencies of 90, plus days were just one 6% of gross home improvement loans and the allowance for credit losses was 2.54% compared to $2 three 8% a year ago.
Importantly, we are originating loans to individuals in these niches that have strong credit quality with average FICO is in new originations now $6 87 for recreational at $7 81 for home improvement.
The vast majority of our book falls within the Super Prime near Prime which has moved up over the years.
Our commercial segment continues to deliver meaningful equity gains.
It generated $3 3 million of income this quarter and equity gains have now generated a total of $27 6 million of income over the past eight quarters.
The portfolio grew to 121 4 million with an average interest rate of 13.43%.
Additionally, as of June 30th we had more than 30 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 while the timing of exits is inherently unpredictable we remain confident in our pipeline.
Our strategic partnership program, whereby we earn an origination fee and about three to five days of interest on holding loans before selling them back to the partner had its third straight quarter of over $120 million of originations, reaching a record level of $168 $6 million this quarter.
Most of these loans are outside of Rec and home improvement, mostly offered as employee benefits by large employers are loans for unplanned or elective medical procedures.
Although this program represents a small part of fees and interest generated from a diet financial approximately $1 2 million. This quarter. This business continues to expand each quarter represents a further diversification of our income sources.
We continue to do 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 with the right way.
Turning to our taxi medallion assets, we collected $2 3 million of cash during the quarter net taxi medallion F. That's declined to just $5 $9 million and now represent less than <unk>, 3% of our total assets.
Despite the small size these assets continue to generate cash and with more than $150 million of charged off medallion loans a majority in New York City. We believe there continues to be recovery opportunities.
From a capital allocation perspective, we remain committed to returning capital to shareholders.
During the quarter, we repurchased more than 48000 shares of our stock and have approximately $14 4 million remaining under our $40 million repurchase program.
Additionally, we paid a quarterly dividend of <unk> 12 per share representing a 20% increase year over year and marked the third increase to our dividends since we reinstated it three years ago.
Overall, we remain encouraged by the momentum across our business lines and believe we are well positioned for continued success.
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 second quarter net interest income grew 7% to $53 $4 million from the same quarter a year ago.
Our net interest margin on gross loans was 8.09% down three basis points from a year ago. Our total interest yield increased 23 basis points from a year ago to 11, 75% and the average interest rate on our deposits was 381% at the end of June.
During the second quarter, we originated $142 8 million of recreation loans at an average rate of 15, 96% and $54 3 million of home improvement loans at an average rate of 11, 5% or 7%. We continue to originate both recreation and home improvement loans at rates above our current <unk>.
Weighted average coupons in these portfolios with new originations in July had rates, averaging around 16% for recreation loans and averaging around 11% for home improvement loans.
Our loan portfolio was $2 49 billion.
At the end of June up 4% from a year ago.
And included both loans held for investment and loans held for sale.
It'll loans included $1 5 billion of recreation loans.
$803 5 million of home improvement loans, and $121 $4 million of commercial loans.
For the quarter the average yield on our loan portfolio increased 29 basis points from a year ago to 12, 7%.
Okay.
Consumer loans more than 90 days past due were $8 6 million or <unk>.
0.37% of total consumer loans as.
As compared to $11 4 million or four 9% at the end of 2024 and.
$7 2 million or three 3% a year ago.
Our provision for credit loss was $21 6 million for the quarter, a decrease from $22 million in the first quarter and an increase from $18 6 million in the prior year quarter.
During the quarter, we increased the allowance for credit loss in the commercial loan portfolio by $2 9 million as well as increasing the allowance for credit loss on our consumer loans, which resulted in an additional provision of $3 7 million.
$3 5 million of which was related to recreation loans, and 200000 tied to home improvement loans.
In addition, the current quarter provision included 600000 of benefits related to taxi medallions.
Total net benefits related to taxi medallions during the quarter were $1 4 million.
Net charge offs in the recreation portfolio during the quarter were $11 9 million or three 5% of the average portfolio and were $3 8 million or $1, 87% of the average home improvement portfolio.
Turning to expenses operating costs totaled $21 5 million during the quarter up from $20 million in the prior year quarter the.
The increase over the prior year included costs associated with technological initiatives surrounding our servicing platform and capabilities.
These initiatives will allow for greater flexibility in the servicing of our consumer loans with a fair amount of self service tools, which we believe will add to an improved customer experience and greater efficiency long term.
These costs are expected to remain elevated in comparison to prior years as we continue to expand our capabilities and incur the costs of the customized platform.
Employee costs increased roughly $700000, both as a function of retaining talent as well as enhancing our talent pool.
For the quarter net income attributable to our shareholders was $11 1 million or <unk> 46 per diluted share our net book value per share as of June 30 was $16 77.
Up from $16.36, a quarter ago, and $15 25, a year ago.
Our adjusted tangible book value per share, which excludes the value of goodwill intangible assets and the correlated deferred tax liability associated with both was $11 32 at the end of the quarter up from $10 90, a quarter ago and $9 74, a year ago.
That covers our second quarter results, Andrew and I are now happy to take your questions.
Thank you.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Hi, congratulations on the quarter.
Where are these strategic partners that you sold the loans to identify it I didn't see it.
No.
<unk> to the loan sale that generated the $1 3 million correct.
So those were those warrant the strategic partnership loans those were actual loans.
We had a we had started talking with a couple of different potential buyers.
Six or seven months ago.
And we closed the sale of about $53 million in April. So those are those where our typical rec loans that we usually hold on the balance sheet.
Okay and is that going to be an ongoing thing.
Yeah, I wouldn't I wouldn't expect to see it.
On a quarterly basis every quarter, but we do think it's a good way for us to keep the engine going.
With our origination platforms.
Yeah.
Theres clearly an appetite for this type of loan product.
So we do expect to do more of these.
So in the future.
And the strategic loan.
Those remain on the balance sheet, if I understand correctly is that right.
They remain on the balance sheet only four five days I think on average as the as the.
<unk>.
Whole period. So we'll fund these loans, we do our diligence we fund these loans and then five days later, the partner or a related entity of the partner would buy these loans back from us.
Gotcha, where there any nonrecurring items in the quarter aside from the gains.
Other than the $1 $3 million gain on the loan sale, which we'll probably see more of those as we get through the upcoming quarters.
I don't think Theres anything that I would call out as nonrecurring.
Yes, everything that's going on right now is core to our business.
Got you and then.
Yes, with the fair value loans should we start seeing them.
More regular gains and losses on the income statement as the values of those.
Fluctuate.
So we so the I think the fair value portfolio of these loans sits right around $60 million right. Now so we hold them at the lower of amortized cost or fair value. Currently fair value was higher which is why we were able to book a gain so we we don't intend on marking those loans up until there is actually an exit.
If something were to happen in the market and we couldnt sell these loans that portfolio. Obviously, we would have to take a charge and mark those downs.
But we would only expect to see gains going forward upon the exit.
Okay and final question and I apologize for the string of questions. But this is an important no problem. That's why we're here.
Your reserve ratio is going up your capital ratios are going up which are all good things and it gives you some flexibility on what's the thinking in terms of managing both the reserves.
And the <unk>.
Capital levels going forward.
Yeah, so the capital.
Particularly at the bank our capital went up significantly during the quarter and that's driven by the the offering we did in in May raising $77 5 million perpetual.
Preferred stock.
<unk>.
We think we think we've got ample capital to continue growth now we should expect growth higher than what we've seen in the past two quarters and we still we still target on average high single digits.
<unk> growth rate.
Long term.
In terms of allowance yes.
That's more of a function of us managing.
Our growth.
And really ties to the economics.
Overall economy as well as you know the performance of the portfolio.
Okay. That's it for me thank you.
Thanks, Chris.
Thank you.
Our next question comes from Mike Grondahl with Northland Securities. Please go ahead.
Hey, guys. This is Logan on for Mike Thanks for taking our question.
Logan.
Hey, guys.
It appears like rack loan delinquency.
Trending up year over year is there anything to call out on that thanks.
No nothing to call out I mean, we've spoken about it in the past probably halfway through 2023, we took a big step up in the credit and the type of loans that we wanted to write.
While maintaining the yield that we get on these loans I think what we're seeing in terms of delinquency is that are those older vintages pre that big step up in credit.
The charge offs to remain slightly elevated in the performance isn't as good.
Were definitely seeing improved performance in our newer vintages and Thats. The type of loans that were writing currently so we would expect that to improve as <unk>.
As the quarters and years go by.
Great. That's good to hear and then when excluding strategic partnership loans originations were down about 78 million year over year is this just due to a tightening of underwriting any color there would be great. Yes.
Yes, I think it is.
Our underwriting standards.
It's managing capital one of the things that we've got to do is make sure that we've got enough capital not just for today, but based upon our projections I think.
I think with this additional capital that we've raised will be able to grow and put more originations and more loans on the book.
Wouldn't expect it all happened in Q3, it's a slow process, but we do think that with the capital.
We can see that origination number go up.
Yes, yes that makes sense.
For clarification purposes can you walk us through unit economics of these strategic partnership loans and how they compare to consumer alone.
Sure. So the way that works is we have about five Fintech partners, we hope to sign another large one in the next.
90 days or so.
But the ones that we have they'll send us their loans.
We'll fund them will charge a fee of ranges from 20 basis points to 50 basis points.
And then we will get the float for a couple of days as Anthony mentioned about five days or so so the float it adds nicely to our numbers because these yields are about 20% interest rates there are a lot higher than our typical consumer loans.
Yes.
Thanks for the color there and one last one from us anything else to call out in terms of outlook for loan growth margin and credit quality going forward. Thanks.
Yes, no I don't think theres anything to call out.
I think we just spoke about.
We would expect to maintain our current credit standards.
Not looking to reduce rates, although we do want to.
We are mindful of competition and we don't want to price ourselves out of the market.
In terms of margin, we were hovering around that eight ish, where we've been for a number of quarters now we would expect it to remain in that realm.
Over the next few quarters.
With some expansion coming when we start to see interest rates eventually fall.
Hey, This is a this is you know is a big number is.
800 basis points, or so which is.
Pretty high standard compared to where other banks are getting their net interest margins. These days.
Okay.
Great. Thank you guys congrats on the quarter.
Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Andrew <unk> for any closing remarks.
Thank you as mentioned, we're pleased with our performance through the first half of the year as we move into the second half of the year and beyond we will remain focused on delivering value to our shareholders.
Execution of our prudent growth strategy.
To our shareholders remains strong evidenced by our ongoing delivery of earnings are opportunistic buybacks and our recently increased dividend as.
As always if you have any questions. Please feel free to contact our investor relations team. The contact info is on the last page of our earnings supplement as well as the IR section of our website.
Thank you again for your time and interest in medallion and have a great rest of your day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.