Operator
Good morning, and welcome to the Medallion Financial Corp. Third quarter, 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star than 1 on a touch-tone phone. To withdraw your question, please press star than 2. 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 Corps' third quarter 2026 earnings call. Joining me today are Andrew Mr. Merstein, 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 and 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 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 the 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 of 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 direct 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 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 brokered deposits. The advantage of using brokered deposits is that they have predictable maturities without any run risk. Using brokered deposits This 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. However, we also grew our high-yield savings balances from $2.5 million in Q2-2026 to $101 million as of September 30th. When we have these opportunities, we 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 a consumer lending business, and with it, our earnings. I'd like to note that the 9% coupon in the interim, we appreciate that investors view us as a safe... Our strategic partnership program continues to evolve. Originations remain strong. We're partnered 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 differs. 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 time. Final comments are related to capital allocation priorities. This continues to be the focal point of delivery. One priority is to continue to grow. The second is our dividend. We have always been and continue to be committed to an appropriate tangible capital. As we reinstated our dividend in 2022, our priority is to continue to opportunistically buy back our stock. Since reinstating our stock repurchase plan in 2022, we have repurchased $40 million of stock. Our board of directors approved a new $40 million stock. We look at this as a reload and gives us the ability to buy our stock back since we believed it is undervalued. A few weeks ago, when we incur it is 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 of our reach and allowing us to serve 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 superprime 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 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 a 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 one provisioning, and changes in allowance coverage on our loans due to a variety of economic and portfolio inputs. The day one 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 the provision for credit loss in the quarter. These two 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 non-interest 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 one 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 30th 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
We will now begin the question and answer session. To ask a question, you may press star than 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star than 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Ken Kohut with Raymond James. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions. I hope you're doing well. Yeah. 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 link quarter was pretty large. From my perspective, it looked like big driver was maybe the home improvement portfolio. I think the average balances were up 80 million, and the portfolio yield was down 76 basis points. I'm just wondering, was there any one-time items impacting results in the quarter that might reverse going forward? And what was the yield on new originations during the quarter?
Sure, yeah. Yeah, no, you hit it on the head. It was, you know, and this is, you know, consistent with what we've been saying for a while now, you know, as the portfolio of the mix changes and we shift towards more of these super prime loans with a better credit, you know, the yield is going to be impacted. You know, originations during the quarter, a home improvement was 9-14 was the coupon. You know, a year ago, we were originating around north of 10-1⁄2, so it's a pretty big drop. But again, you know, we think that, you know, 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, you know, beginning of the year, we lowered rates in REC, you know, 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, you know, it takes us a while to deploy this capital. We can't, you know, just put it to work day one. 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, you know, that should lower the impact that it has on them.
Great. Thanks for the color there.
And then maybe switching gears to the new partnership that you added during the quarter, our finance relationship. You know, 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?
Hi, 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, be 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.
Operator
Thank you. The next question comes from Manuel Navas with Piper Sandler. Please go ahead.
Good morning. 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 two quarters have been really strong, and it should drive that momentum. Should that continue to 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, you know, they're down from the peak seasons that we experience in Q2 and, you know, 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, you know, we're not necessarily projecting that, but it's certainly different now than it was six months ago, we won't see the same level of growth. If the economy is strong, then we would anticipate the kinds of growth that we've experienced this year.
Yeah. 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 five-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.
Yeah, and I'd also add to, you know, both of those is that, you know, in Q4, we're actually raising rates across the board on our loans, particularly just given, you know, what the Fed decision was and, you know, what, you know, we anticipate it to be, you know, going forward. That'll slow the volume, you know, a little bit, we think. But again, you know, we dropped rates at the beginning of the year for a better credit. The rate environment is what it is. We don't control that, 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? You gave some balances, but I don't think you gave the rate, unless I missed it, and I'm sorry. Um, but can you kind of say the difference between your, your broker deposit costs today versus insourcing or sourcing your own money market in CDs?
Hi, this is, uh, this is Justin again. Yeah, we're, 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. And in this case, you know, if you're comparing to similar brokered CDs to the CDs we're able to get 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 broker 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 are just higher than they will. We can get brokered, and sometimes we can't, 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.
I appreciate some of the description on the growth math, on the provision, but there was still an increase in the low-loss reserve, kind of the high-teams basis points in each portfolio, and I think that seemed 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?
Yeah, that's exactly what it is. 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 year, that causes us to have to take more allowances. There's historic charge-offs, you know, 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.
I appreciate that. There was 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.
Yeah, it was just around, just below $40 million across four different pools, pools of loans. About 75% of them were home improvement, 25% of them were REC. And, you know, we net around a three, when you factor in the cost, the third cost that, you know, we have to write off, we net about a 3% gain.
That's what I was looking for. Thank you. 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 timeline, but 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 mixed shift also a part of that recurring process?
Yeah, we're interested in selling 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 in our stable of buyers 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.
Yeah, we're talking with several right now. We don't have any documents signed, nothing scheduled to close in Q4, but that could change if it falls to Q1 or later. I mean, that's always possible. But, you know, there's always ongoing conversations with us.
I appreciate the commentary. I'll step back into Q. Thank you.
Operator
The next question comes from Christopher Nolan with Ledenberg-Polman. Please go ahead.
Is it correct to say that you're prioritizing balance sheet growth over the earnings to cover the dividend?
Yeah, I think that's fair, Particularly just given, you know, the type of assets we originate and that, you know, the gap impact to originating those with a day one provision immediately, you know, and we've spoken about this, you know, in the past, you know, in these years where we're growing significantly, the bottom line is not going to paint a picture of how successful or not we're being. So, again, you know, you quantify that growth penalty. Last quarter it was $0.18. This quarter it's around $0.16. But, yeah, you know, growth is a priority for us.
And 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. You know, we're able to, through brokerage EDs, 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.
You know, I think that, you know, as we said, the portfolio, the mix shift that we're experiencing now, you know, we're cognizant of what's going on in the economy and where these loans are, you know, where they're performing. You know, it's something we talk about, you know, 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, you know, we do like this paper. We've operated here for a long time, but we do want a better performing, you know, asset. So we think of things like that and, you know, shifting more towards and focusing more on growing our home improvement portfolio with the NIM impact, you know, 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 them next, or our 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 zero track record that are getting approved at 10% to 12%. You know, 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.
Operator
Thank you. And we have a follow-up from Manuel Navas with Piper Sandler. Please go ahead.
Hey, so I'm back. The NIM declined this quarter. Is the cash deployment and continued growth enough to have it stabilized from here, or is the continued trend down?
You know, I think it's a wait and see.
We wouldn't expect a large step down from here. But again, you know, where interest rates go, particularly on our cost of borrowing, that could impact it, how quickly we could 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 Q2 to Q3 and Q4.
Yeah, I mean, it's practical that it could go down a little bit, as Anthony's saying, because 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 quarters? The pace has been very accelerated. Just kind of any updated thoughts on the buyback pace?
We were fortunate that in the last six 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 in that we could accomplish all three 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 anytime it's been below tangible book, which is 12 and change or so. So at these price levels, I think we 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? There was a little bit of a savings this quarter. Just kind of think of 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.
Yeah, I would expect Q4 to look fairly similar to Q3. And then, you know, incremental creases 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, you know, 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 was being talked about that's been tabled. I think the sponsor couldn't get the price they wanted, so it's being tabled for now. If it sold next year, it wouldn't surprise me, but if it dragged out another two 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.
Okay. I just wanted to check. I appreciate it. Thank you guys for the commentary.
Operator
Sure. Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Andrew Merstein for any closing remarks.
Thank you again for joining us this morning. We remain pleased with our business momentum and our confidence 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 any other time to speak or meet. Thank you for your continued support, and I hope you have a great rest of your day.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now No disconnect.
