MEDALLION FINANCIAL CORP (MFIN) stock intrinsic value fair value estimate & owner earnings analysis

Medallion Financial is the parent of Medallion Bank, a Utah-chartered, FDIC-insured bank that primarily lends against recreational purchases -- boats and RVs -- along with home-improvement projects financed at the point of sale and a smaller book of small-business commercial loans. The taxi-medallion lending that once defined the company, and that produced heavy losses through the 2010s, has been wound down to a sliver of the balance sheet (well under 1% of assets), confined to the New York City and Newark markets. Because this is a lender, we build owner earnings from the cash generated by operations rather than from reported net income, since loan originations and collections run through a different part of the cash flow statement here and don't distort the operating cash figure the way loan growth can distort other measures. From that starting point we remove genuinely timing-related swings in working capital, add back stock-based compensation as a real cost, and subtract the cash paid out each year to outside investors in Medallion Bank -- the bank periodically raises capital directly from outside preferred investors to stay well capitalized, and the return on that capital belongs to those investors, not to Medallion Financial's common shareholders. Most recently, in May 2025 the bank replaced an older, smaller series of this preferred stock with a larger one -- $77.5 million, at a fixed 9% annual rate through mid-2030 -- a real and now-recurring cost to common shareholders that we've built into the figures. The most consequential judgment in this analysis concerns loan losses. Lending inherently means some loans won't be repaid, and Medallion Bank sets aside a reserve for expected losses when it makes a loan, which reduces reported earnings but not, in the way it's normally accounted for, the cash the business reports as generated from operations. Not all of that reserve represents a current-period cost, though: part of it simply reflects growing the loan book (setting aside more reserve because there are more loans, not because each loan has gotten riskier), which is closer to an investment in future earning power than an expense. But the portion of that reserve that corresponds to loans actually going bad and being written off each year is a real, recurring cost of running this kind of lending business, year after year, and needs to be treated as one. Our previous estimate for this company did not make that distinction and effectively treated the entire loss reserve as a bookkeeping item with no bearing on cash earning power, which overstated the profitability of the business, especially in the two most recent years when loan losses rose sharply. This revision corrects that: it subtracts the actual amount of loans written off as uncollectible each year, while still not penalizing the company for the extra reserve required simply to support a larger, growing loan book. On this corrected basis, owner earnings per share ran from roughly $2.01 to $3.44 across 2021 through 2025 -- a period that included both a low-loss year (2021, coming out of the pandemic) and the credit-cost increase of 2024-2025, when company-wide loan losses rose from under 1% of the loan book in 2022 to just under 3% in 2025, concentrated in the recreation-lending segment. We anchored the valuation on the median of that five-year span, about $2.49 per share, which we think fairly represents a full swing of the credit cycle rather than only its better or worse years. That said, the pace of the increase in loan losses appears to be leveling off: in the first half of 2026, the reserve set aside for expected losses grew only about 3% year-over-year, even though the loan book itself grew a much faster 12.5%, which is the opposite of what would happen if credit quality were still deteriorating. On the strength of that, we've assumed modest, roughly 2% growth in owner earnings for the coming year -- below the already-modest growth actually achieved between 2024 and 2025 -- before growth gradually recovers toward the mid-single digits later in the decade as loan losses fully stabilize and the loan book, now over $2.8 billion, continues its recent growth. Our three cases: - Bear case (roughly a one-in-ten outcome): the recent stabilization in loan losses reverses, a recession or a downturn in discretionary spending on boats and RVs pushes loan losses back toward the levels seen in the 2020 pandemic year (about 5% of the loan book, more than triple 2023's level), and Medallion Bank needs to raise another round of outside preferred capital -- as it did as recently as May 2025 -- on similarly expensive terms, further diluting the return to common shareholders. Owner earnings per share falls by roughly half over the first two years and only partially recovers over the following decade. - Base case: the stabilization already visible in the first half of 2026 holds, loan losses plateau rather than keep climbing, and the loan book continues growing at a mid-single-digit pace as recreation and home-improvement lending keep expanding. - Bull case (roughly a one-in-ten outcome the other way): loan losses improve back toward the low levels of 2022-2023 as the more selective underwriting the company adopted in 2025 proves effective, loan growth continues at something close to the double-digit pace of the past year, and the company keeps repurchasing its own stock at prices well below the roughly $17.60 per share of net worth behind each share, which further boosts the value of each remaining share. Discounting those cases over the next ten years and treating the years beyond that as a continuing lending business generating roughly its year-ten level of owner earnings indefinitely (rather than assuming further growth, since we have no specific evidence for what would drive it), we get a base-case value of about $57.72 per share, a bear case of about $25.42, and a bull case of about $70.05. Given this is a leveraged, non-prime consumer lender with real exposure to a downturn in discretionary recreational spending, and no strong competitive moat protecting it from competitors -- other banks, credit unions and specialty lenders -- the margin-of-safety price carries a wide margin of safety, and assumes confirmation, through a couple more quarters, that the recent stabilization in loan losses holds and that Medallion Bank doesn't need another dilutive round of outside capital. On that basis, the margin-of-safety price is around $30 per share. Two items worth noting plainly. First, a lawsuit the SEC filed against the company in 2021 over conduct from 2015-2017 was fully resolved in a court judgment in May 2025, with a $3 million penalty already paid; it's a closed matter, not an ongoing risk. Second, the operating cash flow the company reported for 2024 in its 2025 annual report was about 6% lower than the figure it originally reported for that same year in its 2024 annual report; we used the more recent figure, as is standard practice, but could not determine from the filings exactly what was reclassified between the two presentations.