Medallion Financial Corp. Q2 FY2025 earnings call

• Medallion Financial is a specialty finance company with subsidiaries Medallion Bank (industrial bank) and Medallion Capital (SBIC).
• Second quarter net income increased 56% to $11.1 million, earnings per share $0.46, net interest income up 7% to $53.4 million, net interest margin 8.09%.
• Consumer lending: Recreation loan book $1.55B (62% of total), originations $142.8M vs $209.6M y/y, interest income $51.1M; home improvement loan book $803.5M (32% of total), originations $54.3M vs $68M y/y, interest income $20.1M. Average FICOs for new originations: 687 for recreation, 781 for home improvement.
• Commercial segment: Generated $3.3M income this quarter, portfolio $121.4M, average interest rate 13.43%, over 30 equity investments with book value $8.1M.
• Strategic partnership program: Third straight quarter over $120M originations, reaching $168.6M this quarter, diversifying income sources.
• Capital allocation: Repurchased over 48,000 shares, $14.4M remaining under $40M repurchase program; quarterly dividend $0.12 per share, 20% increase y/y.

Medallion Financial Corp. has two main subsidiaries: Medallion Bank and Medallion Capital. In the second quarter, the consumer lending segment is the largest and most profitable. The recreation loan book grew modestly to $1.55 billion, representing 62% of total loans, with originations at $142.8 million and interest income at $51.1 million. The home improvement loan book was $803.5 million, 32% of total loans, with originations $54.3 million and interest income $20.1 million. The commercial segment had a portfolio of $121.4 million, generating $3.3 million in income this quarter. The strategic partnership program had originations of $168.6 million in the quarter. Taxi medallion assets collected $2.3 million in cash during the quarter, with net assets at $5.9 million, less than 0.3% of total assets.

• Expect continued growth across business lines.
• Committed to returning capital to shareholders via share repurchases and dividends.
• Anticipate new partners in strategic partnership program as pipeline of prospects is developed.
• Expect origination numbers to increase with additional capital raised.

• Uncertainties in taxi medallion asset recoveries given over $150M of charge-off medallion loans.
• Market fluctuations could impact fair value of loans, potentially requiring charge-downs if exits are not possible.
• Economic conditions could affect credit quality and delinquency rates in loan portfolios.

Q: What were the strategic partners that you sold the loans to identified?

A: Those weren't the strategic partnership loans; they were typical rec loans, with a sale of about $53M in April.

Q: And the strategic loan, those remain on the balance sheet, if I understand it correctly. Is that right?

A: They remain on the balance sheet only for 5 days on average as the hold period.

Q: Were there any nonrecurring items in the quarter aside from the gains?

A: Other than the $1.3M gain on the loan sale, nothing else is nonrecurring.

Q: With the fair value loans, should we start seeing more regular gains and losses on the income statement as the values of those fluctuate?

A: We hold them at lower of amortized cost or fair value; currently fair value is higher, only expect gains upon exit.

Q: Your reserve ratio is going up. Your capital ratios are going up, which are all good things, and it gives you some flexibility. What's the thinking in terms of managing both the reserves and the capital levels going forward?

A: Capital went up significantly from the May offering; expect higher growth, still target high single digits long term; allowance tied to growth and economic performance.

Q: It appears like rec loan delinquency seems to be trending up year-over-year. Is there anything to call out on that?

A: Older vintages pre credit step-up have slightly elevated charge-offs, newer vintages are improving.

Q: 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.

A: It's underwriting standards and capital management; with additional capital raised, expect origination numbers to increase.

Q: Can you walk us through the unit economics of these strategic partnership loans and how they compare to consumer loans?

A: We have fintech partners, fund loans, charge 20-50 basis points fee, hold for ~5 days, yields are higher than typical consumer loans.

Q: Anything else to call out in terms of outlook for loan growth, margin and credit quality going forward?

A: Maintain credit standards, mindful of competition; margin around 8% currently, expect to remain with expansion when interest rates fall.