Executive Summary / Key Takeaways

• Net Interest Margin Expansion in Progress: Medallion Financial has achieved an 8.21% net interest margin in Q3 2025, a level management describes as "a pretty high standard compared to where other banks are getting their net interest margins these days," driven by strategic shift toward higher-yielding secured consumer loans and a well-capitalized banking subsidiary with 17.5% Tier 1 leverage.

• Strategic Partnership Program as Unique Growth Vector: The fintech partnership initiative, launched in 2019, reached a record $208.4 million in originations during Q3 2025, generating yields around 20% with minimal balance sheet impact, creating a capital-light growth engine that competitors lack.

• Credit Quality Inflection on Newer Vintages: While recreation loan delinquencies remain elevated at 4.79% due to pre-mid-2023 originations, management emphasizes that newer vintages with tightened underwriting (average FICO 688) are performing better, suggesting credit costs should moderate as older loans roll off.

• Attractive Valuation with Capital Returns: Trading at $10.51 with a price-to-book ratio of 0.60, P/E of 6.18, and dividend yield of 4.55%, MFIN appears undervalued relative to specialty finance peers while returning capital through dividends and a $40 million buyback program with $14.4 million remaining.

• Leadership Transition with Continuity: The planned January 2026 transition of Andrew Murstein to CEO from President, with founder Alvin Murstein moving to Executive Chairman, signals continuity of the strategic vision while positioning the next generation to execute on accelerated growth opportunities.

Setting the Scene: From Taxi Medallions to Secured Consumer Lending

Medallion Financial Corp., incorporated in 1995 and headquartered in New York City, spent its first two decades building a specialty finance empire centered on an asset class that would nearly destroy it: taxi medallions. The company ceased originating new medallion loans in 2014 at its banking subsidiary and 2015 at the parent level, but the legacy portfolio's collapse left deep scars, including SEC litigation that was only resolved in May 2025 with a $3 million civil penalty. This history explains both the company's current risk-averse posture and its strategic pivot toward secured consumer lending segments that offer collateral protection and more predictable cash flows.

Today, Medallion Financial operates through two primary engines: Medallion Bank, an FDIC-insured industrial bank in Utah that originates consumer loans for recreational vehicles, boats, collector cars, and home improvements while gathering low-cost deposits; and Medallion Capital, a Small Business Investment Company (SBIC) that provides mezzanine financing to commercial businesses, often with equity components. This structure creates a unique hybrid model in specialty finance, combining the funding advantages of a bank with the higher-return potential of commercial lending and equity investments. The company sits in a $100+ billion U.S. consumer lending market, competing against larger but less specialized players by focusing on niche asset classes where its expertise and secured lending model provide durable advantages.

The strategic partnership program, launched in 2019 with first loans issued in 2020, represents the most significant evolution in this model. By originating loans for fintech partners and selling them back within three business days, Medallion Bank earns origination fees and brief interest income without taking long-term credit risk. This capital-light approach generates yields around 20% on the brief hold period, a structure that no direct competitor replicates at scale. The program's growth to $208.4 million in quarterly originations demonstrates its viability as a distinct growth vector that diversifies revenue while preserving capital for higher-return opportunities.

Technology, Products, and Strategic Differentiation

Medallion Financial's competitive moat rests on three pillars that larger competitors cannot easily replicate: niche market expertise in secured asset classes, a banking subsidiary that provides stable low-cost funding, and the strategic partnership program's unique capital-light structure. The recreation lending segment, which generated 66% of total interest income in Q3 2025, exemplifies this specialization. With $1.60 billion in loans focused on RVs (54% of portfolio), boats (21%), and collector cars (12%), the company has developed deep relationships with dealers and financial service providers that create switching costs and pricing power. Average FICO scores of 688 on new originations place the book in the non-prime segment, but the collateral backing and 15.17% average interest rate provide substantial loss cushions.

The home improvement lending segment, while smaller at $804 million, operates at even higher credit quality with average FICO scores of 779 and delinquencies of just 0.92%, down from 1.02% a year ago. Management's recent hiring of a "significant group" of home improvement lending professionals is expected to "supercharge" this segment, leveraging the same dealer-centric origination model that works in recreation. The 9.87% average interest rate reflects prime borrower quality, creating a stable, low-loss component that balances the higher-yielding recreation book.

Medallion Capital's commercial lending, at $135 million, operates in a different risk-return spectrum. With 13.71% average rates and industry concentrations in manufacturing (56%), construction (16%), and wholesale trade (10%), this segment generates not just interest income but meaningful equity gains—$15.8 million year-to-date in 2025. The 13.99% delinquency rate warrants monitoring, but the equity upside provides asymmetric return potential that pure lenders cannot match. This mezzanine approach, with warrants and equity participation, has historically generated substantial gains, such as the February 2025 exit that returned over $10 million on a $750,000 equity investment.

The strategic partnership program represents the most innovative element of Medallion's model. By originating loans for fintech partners—primarily employee benefits and medical procedures—and selling them back within three days, the company captures origination fees of 15-65 basis points plus interest on the brief hold. The $208.4 million in Q3 originations generated $990,000 in fees, a small but rapidly growing income stream that carries minimal credit risk. Management notes that competitors have "grown too fast and have stumbled a bit" with consent orders, creating an opportunity for Medallion to be selective and maintain pricing discipline. The program's durability, with four straight quarters over $120 million, suggests it has reached a steady-state scale that can support $800+ million in annual originations.

Financial Performance as Evidence of Strategy

Medallion Financial's Q3 2025 results provide clear evidence that the strategic pivot is working, with net interest margin expanding to 8.21% despite rising funding costs. The yield on interest-earning assets reached 11.92%, up from 11.75% in the prior year period, as older lower-rate loans amortize and new originations price at current market rates. This margin expansion is particularly impressive given that the average cost of borrowed funds increased 23 basis points to 4.28%, reflecting higher rates on newly issued certificates of deposit. Management expects this trend to continue, with yields rising as the portfolio reprices and funding costs potentially stabilizing as the Fed's rate cutting cycle progresses.

The company's net interest income grew 6% year-over-year to $55.7 million in Q3, driven by the recreation segment's 4% increase to $53.6 million. This growth occurred despite intentional origination slowdowns in both consumer segments during the first nine months, as management focused on "originating loans expected to perform better during economic downturns" and aligning volumes with capital levels. The recreation segment's originations fell from $454.4 million in the first nine months of 2024 to $371.3 million in 2025, while home improvement originations declined from $289.5 million to $162.8 million. This discipline, while dampening near-term growth, positions the company for better credit performance when economic conditions deteriorate.

Credit costs are rising but remain manageable within the secured lending framework. The provision for credit losses increased to $62.1 million for the nine months ended September 30, 2025, up from $55.9 million in the prior year period, driven by "rising loss rates, fluctuation in delinquencies, and expected losses in our recreation loans." However, management emphasizes that these losses are concentrated in older vintages originated before mid-2023 credit tightening. The recreation allowance increased 12% to $78.9 million, representing 5.10% of loans, while home improvement allowances grew only 4% to $20.5 million (2.55% of loans). This divergence reflects the different risk profiles and the impact of underwriting improvements.

Operating expenses increased to $20.7 million in Q3, up from $19 million in the prior year, driven by higher headcount, incentive compensation, and technology investments. Anthony Cutrone noted that "costs associated with technological initiatives surrounding our servicing platform and capabilities" contributed to the increase, along with $700,000 in higher employee costs "as a function of retaining talent as well as enhancing our talent pool." These investments, while pressuring near-term efficiency, build the infrastructure needed to support accelerated growth now that capital is ample.

The balance sheet strength is undeniable. Medallion Bank's Tier 1 leverage ratio of 17.50% as of September 30, 2025, provides $63.5 million in excess capital over the 15% minimum requirement. The successful $73.1 million Series G preferred stock offering in May 2025, followed by the redemption of $46 million in Series F preferred in July, demonstrates access to capital markets and active balance sheet management. The $3.5 million charge related to this redemption reduced reported Q3 net income to $7.8 million ($0.32 per share), but adjusted earnings of $11.3 million ($0.46 per share) better reflect operational performance.

Outlook and Execution Risk

Management's guidance for 2025 and beyond reveals a company poised for acceleration after a period of deliberate caution. Andrew Murstein stated that with "ample capital to continue growth now" after the May 2025 offering, the company expects "growth higher than what we've seen in the past 2 quarters." This confidence stems from the excess capital position and the completion of credit tightening measures that temporarily slowed originations. The home improvement segment, in particular, is expected to benefit from the newly hired lending team, which Murstein believes "should really be a supercharge for us" and could "accelerate the home improvement lending" if they perform as expected.

The strategic partnership program is projected to maintain its $100+ million quarterly run rate, with management working through a "growing pipeline of new partner prospects." The program's yields of approximately 20% and fee income of 15-65 basis points create a high-return, low-risk income stream that diversifies revenue away from traditional balance-sheet lending. Competitor missteps have opened doors, with Murstein noting that "some of our competitors... have grown too fast and have stumbled a bit" with consent orders, allowing Medallion to be selective and maintain pricing discipline. The company has deliberately avoided partners writing loans "north of 36%," preserving its risk profile.

Funding cost pressure remains a persistent challenge. With $1.30 billion in borrowings maturing over the next two years, primarily brokered CDs, the company must refinance at current market rates that are 200+ basis points higher than historical levels. While management expects some relief as the Fed cuts rates, Anthony Cutrone cautioned that "not sure exactly where we end" and that rates might "bounce around a little." If funding costs remain elevated or increase further, the net interest margin expansion story could stall, limiting earnings growth.

Credit performance remains the key execution variable. While newer vintages show improvement, recreation delinquencies at 4.79% remain elevated, and commercial lending delinquencies have spiked to 13.99%. Management has taken specific provisions of $7.4 million year-to-date on commercial loans based on "borrower underperformance and the current economic environment." The commercial segment's equity gains ($15.8 million YTD) have offset some credit pain, but sustained deterioration could pressure earnings. The company's disciplined approach—"we're not going to chase growth at the expense of the type of loan that we want to hold"—suggests it will sacrifice volume to maintain quality if economic conditions worsen.

Risks and Asymmetries

The most material risk to the investment thesis is credit deterioration in the recreation portfolio, where 4.79% delinquencies and 5.10% allowance levels indicate stress. While management attributes this to pre-2023 vintages, a severe economic downturn could push newer loans into loss as well. The recreation segment represents 66% of interest income and $1.60 billion of assets, making it systemically important. If unemployment rises significantly or RV and boat values decline, loss rates could exceed current allowances, requiring substantial provisions that would compress margins and ROE.

Commercial lending presents a second risk vector, with 13.99% delinquencies far exceeding other segments. While the equity component provides upside, the $135 million portfolio could generate meaningful losses if manufacturing and construction borrowers face stress. The $7.4 million in specific provisions year-to-date suggests management sees individual credit problems, and a broader commercial real estate or industrial downturn could amplify these losses. However, the segment's small size relative to the overall balance sheet limits systemic risk.

Funding cost pressure remains a persistent challenge. With $1.30 billion in borrowings maturing over the next two years, primarily brokered CDs, the company must refinance at current market rates that are 200+ basis points higher than historical levels. While management expects some relief as the Fed cuts rates, Anthony Cutrone cautioned that "not sure exactly where we end" and that rates might "bounce around a little." If funding costs remain elevated or increase further, the net interest margin expansion story could stall, limiting earnings growth.

On the positive side, the strategic partnership program offers meaningful upside asymmetry. If the company can add one or two major partners and push quarterly originations toward $300 million, fee income could double without adding proportional risk. The program's 20% yields and minimal capital requirements create a high-return growth vector that could drive ROE above 15% while diversifying revenue. Similarly, the home improvement segment's new lending team could accelerate originations from the current $162.8 million annual pace toward $300 million, leveraging the lower-risk profile (0.92% delinquencies) to drive profitable growth.

The taxi medallion wind-down, while largely complete, still holds recovery potential. With over $150 million in charged-off loans and $6.1 million in cash collected in Q3, the $5.1 million in remaining net medallion assets could generate periodic gains if New York City medallion values stabilize or improve. Andrew Murstein believes "there continues to be recovery opportunities," providing a non-core but potentially material source of upside that competitors lack entirely.

Competitive Context and Positioning

Medallion Financial occupies a distinct niche in specialty finance, competing against larger but less focused players. OneMain Financial (OMF), with $8.28 billion market cap and 1,300 branches, dominates subprime personal lending but lacks Medallion's secured asset focus and banking subsidiary. OMF's 6.03% dividend yield and 11.80 P/E reflect its scale, but its unsecured model exposes it to higher loss rates in downturns. Medallion's secured lending approach, while smaller, provides better downside protection and higher yields (15.17% in recreation vs OMF's typical rates).

Oportun Financial (OPRT) and Regional Management (RM) compete in similar non-prime segments but without Medallion's strategic partnership advantage. OPRT's 8.60% ROE and 7.90 P/E suggest similar valuation compression, but its lack of a banking subsidiary forces reliance on higher-cost funding. RM's 11.43% ROE and 9.63 P/E reflect stronger performance, but its geographic concentration and unsecured focus differ from Medallion's diversified, collateral-backed model. Consumer Portfolio Services (CPSS), focused on auto finance, shows the limitations of single-asset concentration with 6.58% ROE and 11.55 P/E.

The strategic partnership program is Medallion's true differentiator. No peer offers a similar capital-light, high-yield origination platform that can generate $800+ million in annual volume with minimal credit risk. This program, combined with the banking subsidiary's deposit funding advantage, creates a moat that larger competitors cannot easily replicate. While scale disadvantages exist—Medallion's $2.90 billion in assets pale next to OMF's $29.96 billion enterprise value—the company's focus and structure allow for superior margins and returns on equity.

Valuation Context

Trading at $10.51 per share, Medallion Financial carries a market capitalization of $245.83 million and an enterprise value of $2.45 billion. The valuation metrics present a compelling picture for a company achieving 11.31% ROE with improving fundamentals. The price-to-book ratio of 0.60 represents a 40% discount to tangible net asset value, while the P/E ratio of 6.18 sits well below the 9.63-11.80 range of direct peers OPRT, RM, and OMF. The price-to-operating cash flow ratio of 2.03 indicates that the market is pricing the stock at just over 2x annual cash generation.

The dividend yield of 4.55% provides immediate income while investors wait for the margin expansion and growth thesis to play out. With a payout ratio of 26.90%, the dividend appears well-covered and has room for further increases, consistent with management's pattern of multiple hikes since reinstatement in March 2022. The remaining $14.4 million on the $40 million buyback authorization offers additional capital return potential, with management expecting "additional purchases in the quarters to come."

Relative to peers, Medallion trades at a significant discount despite superior net interest margins and a unique growth vector. OMF's price-to-book of 2.44 and P/E of 11.80 reflect its scale but also its unsecured risk profile. RM's 1.05 price-to-book and 9.63 P/E are more comparable but lack Medallion's partnership program upside. The valuation discount appears unwarranted given the company's improving credit trends, capital position, and growth prospects.

The balance sheet strength supports the valuation case. With Medallion Bank's Tier 1 leverage at 17.50% and $63.5 million in excess capital, the company has ample firepower to grow assets without diluting equity. The debt-to-equity ratio of 4.74 is manageable for a financial institution, and the company's sources of liquidity—including brokered CDs, SBA debentures, and loan sales—provide funding flexibility. The hypothetical 1% increase in interest rates would increase annualized net income by $1.7 million, demonstrating positive asset sensitivity that should benefit as older lower-rate loans mature.

Conclusion

Medallion Financial stands at an inflection point where strategic discipline meets capital efficiency. The company's 8%+ net interest margin, achieved through a pivot toward secured consumer lending and a well-capitalized banking subsidiary, demonstrates that the medallion wind-down is complete and the new model is working. The strategic partnership program provides a unique, capital-light growth engine generating 20% yields that no peer can replicate, while newer loan vintages with tightened underwriting suggest credit costs should moderate ahead.

Trading at 0.6x book value and 6.2x earnings with a 4.55% dividend yield, the stock offers attractive risk-adjusted returns for patient investors. The key variables to monitor are net interest margin expansion, strategic partnership originations, and commercial credit performance. If management executes on its plan to accelerate growth with available capital while maintaining credit discipline, the valuation discount to peers should narrow, driving meaningful upside. The leadership transition planned for January 2026 provides continuity while positioning the company for its next growth phase. For investors seeking exposure to a well-capitalized, niche-focused specialty finance company at a cyclical trough valuation, Medallion Financial presents a compelling opportunity where margin inflection meets partnership-driven growth.