Medallion Financial Corp (MFIN) is a specialty finance company that has established itself as a leading player in the consumer and commercial lending landscape. With a diverse portfolio spanning recreational vehicle (RV), boat, collector car, home improvement, and commercial loans, as well as strategic partnerships with fintech companies, Medallion has demonstrated its adaptability and forward-thinking approach in an evolving financial services industry.
Company Background
Founded in 1995 as a Delaware corporation, Medallion Financial Corp. initially focused on lending to finance the purchase of taxi medallions, which were licenses required to operate taxi cabs in certain major metropolitan areas. In 2002, the company established its primary operating subsidiary, Medallion Bank, as an FDIC-insured industrial bank chartered in Utah. This strategic move allowed Medallion to expand its lending activities beyond taxi medallion financing into consumer loans for the purchase of recreational vehicles, boats, and home improvements.
Over the next decade, Medallion Financial grew its consumer lending business at Medallion Bank while continuing to service its legacy taxi medallion loan portfolio. However, the company faced significant challenges starting in the mid-2010s as increased competition from ride-sharing services like Uber and Lyft caused a decline in the value of taxi medallions, leading to losses on Medallion Financial's taxi medallion loan portfolio.
Strategic Pivot
In response to these challenges, Medallion Financial underwent a strategic pivot in 2018, transitioning away from taxi medallion lending and towards expanding its consumer finance and commercial lending operations. This included growing the recreation and home improvement lending businesses at Medallion Bank, as well as launching a new commercial mezzanine lending segment through its subsidiary Medallion Capital. The company also began offering loan origination services to financial technology (fintech) companies through strategic partnerships.
Despite the challenges of the taxi medallion business, Medallion Financial was able to weather the storm and transform itself into a diversified specialty finance company focused on higher-growth consumer and commercial lending segments. This shift in strategic focus, while not without its own challenges, has allowed Medallion Financial to return to profitability and strengthen its balance sheet in recent years.
Key Business Segments
Consumer Lending
One of Medallion's key strengths lies in its consumer lending segment, which comprises the recreation and home improvement lending divisions. The recreation loan portfolio, which includes financing for RVs, boats, and collector cars, has experienced impressive growth in recent years. As of the end of 2024, the recreation loan portfolio stood at $1.5 billion, up from just under $800 million just four years ago. This growth has been accompanied by a steady increase in the average interest rate, which reached 15.07% as of the end of 2024, up 28 basis points from the prior year and 15 basis points from the previous quarter.
The recreation lending segment is a significant source of income for Medallion, accounting for 67% of the company's interest income for both the three and nine months ended September 30, 2024. This segment focuses on originating prime and non-prime recreation loans, which include loans for the purchase of recreational vehicles (RVs), boats, collector cars, and other recreational equipment. The recreation loan portfolio consists of thousands of geographically distributed loans with an average loan size of approximately $21,000 as of September 30, 2024. These loans are fixed-rate with an average term at origination of approximately 14 years. The portfolio is diversified, with RV loans making up 55%, boat loans 20%, and collector cars 11% as of September 30, 2024. The highest concentrations of these loans are in Texas and Florida, at 16% and 10% of the portfolio, respectively.
Similarly, the home improvement lending segment has demonstrated robust expansion, with the loan book growing 9% year-over-year to $827 million as of the end of 2024. The average interest rate on home improvement loans also increased, reaching 9.81%, up 30 basis points from the previous year and 5 basis points from the prior quarter.
The home improvement lending segment works with contractors and financial service providers to finance home improvements, such as roofs, swimming pools, and windows, which make up 38%, 24%, and 13% of the total home improvement loan portfolio, respectively, as of September 30, 2024. These loans are made to borrowers nationwide, with the highest concentrations in Texas and Florida, each representing 11% of the portfolio. The weighted average FICO score of the home improvement loans outstanding was 766 as of September 30, 2024, with the weighted average FICO score for loans originated in the first nine months of 2024 being 781.
Commercial Lending
Medallion's commercial lending division, which focuses on serving a diverse range of industries, has maintained a strong presence, ending 2024 with $111 million in loans. While the average interest rate in this segment increased by 10 basis points to 12.97%, the division's ability to generate attractive yields and realize gains on the equity investments typically included in these loans has been a consistent contributor to Medallion's overall performance.
The commercial lending segment originates both senior and subordinated loans nationwide to businesses in a variety of industries, with concentrations in manufacturing, construction, and wholesale trade. These mezzanine loans generally range from $2.50 million to $6.00 million at origination and typically include an equity component. During the nine months ended September 30, 2024, the commercial segment originated $7.00 million in new loans, compared to $16.70 million in the prior year period.
Strategic Partnerships
The company's strategic partnership program, launched in 2019, has also gained traction, with loan volumes in this segment growing from $40 million in the third quarter of 2024 to $124 million in the fourth quarter. While the impact on net interest income and earnings per share is currently limited due to the short-term nature of these partnerships, the program represents a promising avenue for Medallion to leverage its expertise and expand its reach in the fintech ecosystem.
Taxi Medallion Lending
The taxi medallion lending segment operates in the New York City metropolitan area and has been a challenging business for Medallion. All taxi medallion loans were placed on nonaccrual status as of the third quarter of 2020, except for settled loans with interest being paid in excess of the loan balance. During the three and nine months ended September 30, 2024, Medallion collected $4.10 million and $9.50 million related to taxi medallion and related assets, which resulted in net recoveries and gains of $2.80 million and $5.60 million in those periods. The amount of cash collected and recoveries recorded can vary greatly from period to period due to the circumstances surrounding each of the underlying assets.
Risk Management and Resilience
Despite the challenges posed by the ongoing pandemic and broader economic uncertainties, Medallion has demonstrated its resilience and adaptability. The company's prudent risk management, evidenced by its maintenance of high credit standards, has been a key factor in its ability to navigate these turbulent times. As of the end of 2024, the weighted average FICO scores for the recreation and home improvement loan portfolios stood at 685 and 781, respectively, reflecting Medallion's commitment to disciplined underwriting.
Financials
Medallion's financial performance has been strong, with the company reporting annual revenue of $213.9 million and net income of $35.9 million for the most recent fiscal year. The company's annual operating cash flow and free cash flow both stood at $113.76 million. For the most recent quarter, Medallion reported revenue of $56.25 million and net income of $10.1 million.
Furthermore, Medallion's capital allocation strategy, which includes a recently increased quarterly dividend and an active share repurchase program, underscores the company's confidence in its long-term prospects and its dedication to delivering value to its shareholders. The company's net book value per share as of the end of 2024 was $16, up from $14.63 a year earlier, and its adjusted tangible book value per share stood at $10.50, an increase from $9.15 in the prior year.
Medallion's total assets were $2.90 billion and $2.60 billion as of September 30, 2024 and December 31, 2023, respectively. The company's loan portfolio, before the allowance for credit losses, was $2.50 billion as of September 30, 2024, consisting of $1.60 billion in recreation loans, $814.10 million in home improvement loans, $110.10 million in commercial loans, $3.20 million in taxi medallion loans, and $3.20 million in strategic partnership loans. Medallion maintained an allowance for credit losses of $96.50 million, or 3.88% of total loans, as of September 30, 2024.
Liquidity
Medallion's liquidity position remains strong, with $187.93 million in cash on hand as of the most recent reporting period. The company has a debt-to-equity ratio of 0.7971, indicating a balanced capital structure. Medallion also has access to additional liquidity through a $75 million SBA debenture commitment and $35 million in Federal Reserve discount window capacity. The company's current ratio and quick ratio both stand at 31.25, reflecting a robust ability to meet short-term obligations.
Legal Matters
It's worth noting that Medallion is currently involved in pending litigation with the SEC. On December 29, 2021, the SEC filed a civil complaint alleging certain violations of federal securities laws related to the company's financial reporting and disclosures during 2015-2017, as well as the company's retention of third parties to post information about the company on financial websites in 2015-2016. While Medallion intends to defend itself vigorously, the outcome and potential impact, including any penalties, are uncertain at this time.
Future Outlook
Looking ahead, Medallion remains well-positioned to capitalize on the evolving landscape of the financial services industry. The company's diversified business model, strategic partnerships, and emphasis on innovation position it to navigate the challenges and seize the opportunities that lie ahead.
For 2025, Medallion expects to continue executing a similar strategy of prudent growth in its lending businesses while maintaining its current credit standards. The company anticipates loan growth in the mid-to-high single-digit range for 2025, which is lower than previous years but appropriate given the size of its $1.5 billion loan book. Medallion expects its net interest margin to continue increasing as its cost of funds plateaus, with new loan originations in January and February 2025 at rates above 16% for recreational loans and above 11% for home improvement loans.
The company estimates its quarterly operating expenses will be around $21-$21.5 million going forward, higher than previous quarters, to support its growth initiatives and infrastructure enhancements. Medallion remains committed to returning capital to shareholders through its dividend, which was recently increased by 10%, and its share repurchase program.
As Medallion continues to execute its strategic vision, investors can look forward to the company's continued growth and the potential for sustained long-term value creation in the dynamic and evolving financial services landscape.