Medallion Financial (MFIN) - 2019 Q4 - Annual Report

Part I Our Business Medallion Financial Corp. has strategically shifted its focus from taxi medallion lending to consumer lending through its primary subsidiary, Medallion Bank, which now originates the majority of the company's loan portfolio Business Overview and Strategic Shift Medallion Financial Corp. has transitioned its strategic focus from taxi medallion financing to consumer lending via Medallion Bank, consolidating financials as a bank holding company since April 2018 - The company's strategic focus has shifted to consumer loans (recreational vehicles, boats, home improvements) originated by its subsidiary, Medallion Bank[15] - Effective April 2, 2018, the company withdrew its BDC status and began consolidating Medallion Bank's results, reporting as a bank holding company for accounting purposes[18][20] Net Loans Receivable Composition (as of Dec 31, 2019) | Loan Type | Amount (in thousands) | % of Total Net Loans | | :--- | :--- | :--- | | Recreation | $695,257 | 62% | | Home Improvement | $244,716 | 22% | | Commercial | $69,767 | 6% | | Medallion | $105,022 | 10% | | Total | $1,114,762 | 100% | Loan Portfolio Segments The company's loan portfolio is primarily consumer loans (84%), with a smaller commercial segment (6%) and a reduced legacy medallion loan portfolio (10%) - Consumer loans (recreation and home improvement) grew to $939.9 million outstanding at year-end 2019, representing 84% of net loans receivable, up from 77% in 2018[23] - The recreation lending segment accounted for 75% of the company's interest income for the year ended December 31, 2019[24] - The medallion loan portfolio has decreased to $105.0 million (10% of net loans receivable) as of Dec 31, 2019, down from $155.9 million (16%) at the end of 2018[35] Estimated Medallion Values (Net of Liquidation Costs) as of Dec 31, 2019 | Market | Estimated Value | | :--- | :--- | | New York City | $167,000 | | Newark | $149,500 | | Chicago | $19,500 | | Boston | $24,500 | | Cambridge | $4,000 | Our Strategy and Operations The company's strategy focuses on niche consumer finance markets, leveraging dealer relationships, disciplined underwriting, and an experienced management team, primarily funded by brokered certificates of deposit - The company's core strategy is to identify and lead in profitable niche markets, with a current focus on consumer loans for RVs, boats, and home improvements[45][47] - A new Strategic Partnership program is expected to launch in 2020, where the company will originate loans marketed by partners and then sell them to those partners[51] - The primary source of funding is FDIC-insured brokered certificates of deposit from Medallion Bank, which provides a lower cost of funds[62] Sources of Funds as of December 31, 2019 | Source | Amount (in thousands) | Average Interest Rate | | :--- | :--- | :--- | | Brokered CDs & other funds | $954,245 | 2.35% | | SBA debentures and borrowings | $71,746 | 3.42% | | Retail and privately placed notes | $69,625 | 8.61% | | Bank loans | $33,183 | 4.11% | | Preferred securities | $33,000 | 4.01% | | Other borrowings | $7,794 | 2.00% | | Total Debt Outstanding | $1,169,593 | | Regulation Medallion Financial operates under a 1940 Act exception, with its subsidiary Medallion Bank subject to extensive federal and state banking laws, including Basel III capital requirements and restrictions on brokered deposits - The company operates under the Section 3(c)(6) exception of the 1940 Act, which requires it to be primarily engaged in specific banking and lending activities[70] - Medallion Bank is subject to strict capital standards under Basel III and must remain "well-capitalized" to accept brokered deposits, which are a substantial portion of its funding[74][90] - As a condition of its FDIC insurance, Medallion Bank must maintain a 15% Tier 1 leverage ratio[85] - Subsidiaries Medallion Funding, Medallion Capital, and Freshstart are licensed SBICs, subject to SBA regulations regarding investment size, type, and financing terms[109] Risk Factors The company faces significant risks from the COVID-19 pandemic, concentration in high-risk consumer lending, declining taxi medallion values, and regulatory compliance, particularly regarding brokered deposits and its 1940 Act exception - The COVID-19 pandemic is identified as a major risk, expected to negatively affect borrowers' ability to repay loans, collateral values, and demand for the company's financial products, with a potentially material adverse impact[124][125] - The business is heavily concentrated in consumer lending, which carries a higher risk of loss, and a significant portion consists of non-prime loans, making it susceptible to economic downturns[127][131] - Increased competition from ride-sharing apps has materially and adversely affected the taxi industry, leading to significant declines in taxi medallion collateral values and losses in the medallion loan portfolio[137][140] - Medallion Bank's reliance on brokered deposits for funding is a key risk, as the ability to accept these deposits is contingent on maintaining a "well-capitalized" status under FDIC regulations[159][160][161] - The company must maintain its exception from the 1940 Act, which could limit its ability to pursue certain investment opportunities, such as growing its mezzanine lending business, Medallion Capital, Inc[187] Unresolved Staff Comments The company reports that it has no unresolved comments from the SEC staff - There are no unresolved staff comments[233] Properties The company leases all its office spaces, including its corporate headquarters in New York City and various loan origination and subsidiary offices - The company leases all its office spaces, with its corporate headquarters in New York City under a lease expiring in April 2027[234] - Medallion Bank's main office is in Salt Lake City, Utah, under a lease expiring in November 2027[234] Legal Proceedings The company is involved in various legal proceedings, primarily collection matters, which are not expected to materially affect its financial condition or operations - The company is involved in various legal proceedings incident to the ordinary course of its business[235] - Management does not expect any pending or threatened legal proceeding to have a material adverse effect on the company's financial condition or results[235] Mine Safety Disclosures This item is not applicable to the company - Not applicable[236] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'MFIN', has not paid dividends since 2016, and has a stock repurchase program with $22.9 million remaining authorized - The company's common stock is traded on NASDAQ under the symbol 'MFIN'[240] - No dividends have been paid since 2016, and the company does not currently anticipate paying dividends[241] - As of December 31, 2019, $22,874,509 of shares remained authorized for repurchase under the company's stock repurchase program[244] Selected Financial Data The selected financial data reflects the company's accounting methodology change, showing a net loss of $1.8 million in 2019 under Bank Holding Company Accounting and historical fluctuations under Investment Company Accounting Selected Financial Data (Bank Holding Company Accounting) | (Dollars in thousands, except per share data) | Twelve Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net interest income | $97,517 | $71,987 | | Provision for loan losses | $47,386 | $59,008 | | Net loss | $(1,762) | $(10,172) | | Net loss per diluted share | $(0.07) | $(0.42) | | Total assets | $1,541,667 | $1,381,846 | | Total equity | $334,468 | $290,204 | Selected Financial Data (Investment Company Accounting) | (Dollars in thousands, except per share data) | Year Ended Dec 31, 2017 | Year Ended Dec 31, 2016 | | :--- | :--- | :--- | | Net investment income (loss) after income taxes | $(7,121) | $119 | | Net increase (decrease) in net assets from operations | $278 | $23,515 | | Total assets | $635,522 | $689,377 | | Total shareholders' equity | $287,159 | $286,096 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights the company's strategic pivot to consumer lending, resulting in a reduced net loss for 2019, driven by growth in higher-yielding consumer loans and stable taxi medallion values, with liquidity primarily from brokered deposits Critical Accounting Policies The company's critical accounting policies involve significant judgment in determining the Allowance for Loan Losses and valuing Medallion Loan Collateral due to low trading volumes - The Allowance for Loan Losses is based on historical loss rates, collateral values, economic conditions, and concentration risks, an inherently subjective evaluation[266] - Medallion loan collateral valuation uses recent market transfers and discounted cash flow models when trading activity is insufficient or unreliable[271] Results of Operations For 2019, the company reported a net loss of $1.8 million, a significant improvement, driven by increased net interest income from higher-yielding consumer loans and a lower provision for loan losses Consolidated Operations Summary (Bank Holding Company Accounting) | (Dollars in thousands) | Twelve Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net Interest Income | $97,517 | $71,987 | | Provision for Loan Losses | $47,386 | $59,008 | | Non-interest Income (Expense), net | $(47,794) | $(20,135) | | Net Loss Attributable to Stockholders | $(1,762) | $(10,172) | - The net interest margin improved to 8.64% in 2019 from 8.19% in the comparable 2018 period, reflecting growth in higher-yielding consumer loans and a decrease in lower-yielding medallion loans[349] - The provision for loan losses was $47.4 million for 2019, an improvement from $59.0 million in the nine months of 2018, reflecting lower net charge-offs on the medallion portfolio and stable medallion values[347] - Gross loans increased by 14% to $1.16 billion at year-end 2019, driven by $462.1 million in originations, primarily in the consumer segments[287][347] Segment Results In 2019, Recreation Lending was the primary profit driver, while the Medallion Lending segment recorded a significant net loss due to provisions for loan losses and negative net interest income Net Income (Loss) by Segment (Year Ended Dec 31, 2019) | Segment | Net Income (Loss) After Taxes (in thousands) | | :--- | :--- | | Recreation Lending | $25,218 | | Home Improvement Lending | $4,496 | | Commercial Lending | $2,153 | | Medallion Lending | $(23,525) | | RPAC | $2,316 | | Corporate and Other Investments | $(8,662) | - The Recreation Lending segment accounted for 75% of the company's total interest income in 2019[311] - The Medallion Lending segment's loss was driven by a $16.3 million provision for loan losses and a net interest loss of $4.3 million, as interest income declined due to non-accruing loans[324][326] Liquidity and Capital Resources The company's liquidity primarily stems from brokered certificates of deposit, SBA debentures, and private debt issuances, with total debt outstanding at $1.17 billion as of December 31, 2019 - Primary liquidity sources include brokered CDs, SBA debentures, loan amortization, and private debt placements[388] - In December 2019, Medallion Bank closed a $46 million public offering of its Series F Preferred Stock, yielding net proceeds of $42.5 million[390] - In March and August 2019, the company completed private placements of 8.25% senior notes due 2024, raising a total of $36 million[391][590] Debt Composition as of December 31, 2019 | Debt Type | Balance (in thousands) | Percentage | | :--- | :--- | :--- | | Deposits | $954,245 | 81% | | SBA debentures and borrowings | $71,746 | 6% | | Retail and privately placed notes | $69,625 | 6% | | Notes payable to banks | $33,183 | 3% | | Preferred securities | $33,000 | 3% | | Other borrowings | $7,794 | 1% | | Total Outstanding Debt | $1,169,593 | 100% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, where a hypothetical 1% increase in rates would increase annualized net income by $780 thousand but negatively impact a one-year period by $1.12 million - The principal market risk is interest rate fluctuations due to the mismatch in repricing of assets and liabilities[413] - A hypothetical immediate 1% increase in interest rates would increase annualized net income by approximately $780,000 as of December 31, 2019[414] - The impact of a 1% interest rate increase over a one-year period would have been approximately ($1,116,000) at December 31, 2019[414] Financial Statements and Supplementary Data This section incorporates by reference the consolidated financial statements of Medallion Financial Corp. and the Report of Independent Public Accountants, found under Item 15 - This item refers to the financial statements located in Item 15(A)(1) of the report[415] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None reported[416] Controls and Procedures As of December 31, 2019, management concluded that disclosure controls and internal control over financial reporting were effective, a conclusion affirmed by the independent auditor - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2019[418] - Management assessed internal control over financial reporting as effective as of December 31, 2019, based on the COSO framework[420] - The independent auditor, Mazars USA LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[425] - No changes occurred during the 2019 fourth quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[422] Other Information The company reports no other information for this item - None[431] Part III Directors, Executive Officers, Compensation, Security Ownership, and Accountant Fees Information for Items 10 through 14, covering directors, executive officers, compensation, security ownership, and accountant fees, is incorporated by reference from the company's 2020 Annual Meeting of Shareholders Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's Definitive Proxy Statement for its 2020 Annual Meeting of Shareholders[432][433][434] Part IV Exhibits and Financial Statement Schedules This section includes the consolidated financial statements, the independent auditor's report, and a comprehensive list of all exhibits filed with the Form 10-K - The consolidated financial statements and the Report of Independent Public Accountants are included as part of this item, indexed on page F-1[434] - A comprehensive list of exhibits is provided, including amendments to debt agreements, employment agreements, and equity incentive plans[437] Form 10-K Summary This item is not applicable to the company's filing - Not applicable[442]