Medallion Financial Corp. Q3 FY2026 earnings call

• Growth Strategy and Asset Target: Management reaffirmed the goal to grow assets from $3 billion to $5 billion over the next few years. They believe they have the necessary business model, team, and market positioning to achieve this.
• Credit Quality Focus: The strategy prioritizes gaining market share with superior credit profiles rather than chasing volume at any cost. The shift toward Home Improvement lending targets borrowers with FICO scores around 760, strengthening the overall portfolio quality.
• Funding Diversification: To reduce reliance on more expensive brokered deposits, Medallion Bank diversified its funding sources. Non-brokered time deposits grew from $27.2 million in Q2 to $117.5 million in Q3, and high-yield savings balances increased from $2.5 million to $101 million. These opportunistic moves aim to lower the cost of funds by 10-15 basis points where available.
• Capital Raise: The bank reopened its Series G preferred stock program, issuing an additional $55 million in Tier 1 capital. The 9% coupon remains unchanged despite rising market rates, indicating investor confidence.
• Strategic Partnerships: A sixth partner was added near the end of the quarter, marking the first captive finance relationship. The pipeline for future partners is strong, though each requires significant time and process investment.
• Capital Allocation Priorities: The three core priorities remain: (1) Business growth, (2) Dividend payments (which have grown 75% since reinstatement in 2022), and (3) Stock repurchases. A new $40 million no-expiration stock buyback plan was approved in October. Additionally, $15 million of trust preferred securities were retired at a discount, with the gain recognized in Q4.

The company operates two primary lending segments: Recreation (REC) and Home Improvement.

1. Home Improvement Segment: This segment experienced rapid growth, with originations totaling 146.3 million units, an increase of 86.6 million over the prior year quarter, representing an 18% growth rate. The credit profile is described as 'super prime' with strong performance metrics.
2. REC Segment: Originations reached 198.2 million units, an increase of 56.5 million compared to the prior year. While growing nicely, this segment's growth rate is slower than the Home Improvement segment.

Revenue Contribution and Margins: The Home Improvement segment now constitutes a larger portion of the overall business mix, which has contributed to a compression in Net Interest Margin (NIM). NIM decreased from 8.21% year-over-year to 7.34% in Q3 2026. The average interest yield on loans was 11.87%, down 52 basis points year-over-year, reflecting the shift toward lower-yielding but higher-quality Home Improvement loans and strategic rate reductions in REC to attract better borrowers.

• Asset Growth: Maintains the long-term target of reaching $5 billion in assets within five years; currently on track.
• Net Interest Margin (NIM): Expects NIM compression to continue in the short term due to the mix shift toward Home Improvement loans and the addition of better-quality, lower-yielding credits. However, management anticipates that the steep decline seen between Q2 and Q3 will not repeat in Q4. Rates across all loan products are being raised in Q4 to help stabilize margins.
• Operating Expenses: Anticipates operating costs to remain relatively stable in Q4, similar to Q3 levels, with incremental increases expected in 2027 as the origination platform scales.
• Loan Pipeline: Pipelines are slightly ahead of last year but down from peak seasons in H1 2026. Future growth depends on economic conditions; strong economy supports current volumes, while weakness may slow growth.
• Loan Sales: No specific transactions scheduled for Q4 closing, but ongoing conversations with buyers suggest potential recurring sales opportunities in both REC and Home Improvement pools.

• NIM Compression: Continued pressure on net interest margin due to the strategic shift toward lower-yielding, higher-quality Home Improvement loans and rising cost of borrowings.
• Credit Loss Provisions: Increased provision for credit losses ($30.8 million vs $18.6 million YoY) driven by day-one provisioning on new originations and increased allowance coverage ratios (14 bps for REC, 17 bps for Home Improvement) due to macroeconomic inputs and seasonal delinquencies.
• Economic Sensitivity: Loan pipelines and origination volumes are sensitive to broader economic conditions; a shaky economy could dampen growth expectations.
• Regulatory Capital Requirements: Currently subject to a 15% leverage ratio requirement at the bank level. Management plans to petition regulators to lower this based on strong historical performance and credit quality, but approval is uncertain.

Q: Analyst asked about the drivers of the sequential NIM drop, specifically if home improvement mix changes or one-time items impacted results, and what yields on new originations were. / A: CFO confirmed the drop was primarily due to the portfolio mix shifting toward super-prime Home Improvement loans with lower yields (originating around 9-10% vs >10.5% previously) and rate cuts in REC to secure better borrowers. Additionally, holding excess cash from a recent notes offering diluted NIM temporarily until deployed.