Medallion Financial (MFIN) - 2020 Q4 - Annual Report

Part I Our Business The company has strategically shifted from taxi medallion financing to consumer lending, which now constitutes the majority of its loan portfolio - The company has transitioned its strategic focus away from medallion lending towards its growing consumer finance portfolio, originated through Medallion Bank[15] - Effective April 2, 2018, the company withdrew its election to be regulated as a Business Development Company (BDC), leading to a change in financial reporting to consolidate its subsidiaries, including Medallion Bank[19][20] Net Loans Receivable by Segment (as of Dec 31, 2020) | Segment | Loans ($ thousands) | Allowance for Loan Loss ($ thousands) | Net Loans Receivable ($ thousands) | | :--- | :--- | :--- | :--- | | Recreation | 792,686 | 27,348 | 765,338 | | Home improvement | 334,033 | 5,157 | 328,876 | | Commercial | 65,327 | — | 65,327 | | Medallion | 37,768 | 25,043 | 12,725 | | Total | 1,229,838 | 57,548 | 1,172,290 | Consumer Loans This primary growth segment, comprising 93% of net loans, focuses on recreation and home improvement lending - Combined consumer loans outstanding grew to $1.09 billion at the end of 2020, making up 93% of the company's net loans receivable, compared to $940 million (84%) at the end of 2019[23] - Recreation lending is a significant source of income, accounting for 76% of the company's interest income for the twelve months ended December 31, 2020[24] Recreation Lending Portfolio Characteristics (as of Dec 31, 2020) | Metric | Value | | :--- | :--- | | Average Loan Size | ~$14,700 | | Average Term at Origination | ~11 years | | Weighted Average Remaining Term | 8.9 years | | Average Payoff Time | 3.3 years | | Top Collateral Types | RVs (60%), Boats (19%) | | Top State Concentrations | Texas (17%), California (10%), Florida (9%) | Home Improvement Lending Portfolio Characteristics (as of Dec 31, 2020) | Metric | Value | | :--- | :--- | | Average Loan Size | ~$16,000 | | Average Term at Origination | ~14 years | | Weighted Average Remaining Term | 11.5 years | | Average Payoff Time | 2.9 years | | Top Collateral Types | Swimming pools (27%), Roofs (24%) | | Top State Concentrations | Florida (11%), Texas (11%), Ohio (9%) | Commercial Loans The commercial loan segment provides higher-yielding mezzanine financing to businesses and comprised 6% of net loans receivable at year-end 2020 - Commercial loans totaled $65.3 million, or 6% of net loans receivable, as of December 31, 2020[33] - The company focuses its marketing on manufacturing, professional, scientific, and technical services, with over 53% of these loans located in the Midwest[35] - These loans generally range from $2 million to $5 million at origination and often include an equity or partnership stake[35] Medallion Loans The legacy medallion loan portfolio has significantly declined to 1% of net loans and is entirely on nonaccrual status due to market challenges - The net medallion loan portfolio decreased to $12.7 million (1% of net loans) at year-end 2020 from $105.0 million (10% of net loans) at year-end 2019[37] - The entire medallion loan portfolio has been placed on nonaccrual, and an allowance for loan losses has been recorded to mitigate potential future losses[39] Estimated Medallion Values (Net of Liquidation Costs, as of Dec 31, 2020) | Market | Estimated Value | | :--- | :--- | | New York City | $79,500 | | Newark | $108,700 | | Chicago | $18,500 | | Boston | $18,500 | | Cambridge | $3,250 | Our Strategy The company's strategy centers on niche industries, disciplined underwriting, cost reduction, and leveraging fintech partnerships - Core strategies include capitalizing on dealer/broker relationships, focusing on niche industries, disciplined underwriting, and leveraging management experience[47][48][49][50] - Recent strategic initiatives include launching a fintech partnership program, implementing cost-cutting measures (e.g., 21% headcount reduction at parent company), and exiting non-core investments[52][53][55] Regulation The company and its subsidiaries operate under a complex regulatory framework, with oversight from the FDIC, Utah DFI, and the SBA - Medallion Bank is regulated by the FDIC and the Utah Department of Financial Institutions (Utah DFI)[85] - The Bank is subject to US Basel III capital rules and must maintain a capital conservation buffer of 2.5% to avoid restrictions on capital distributions; a 2003 agreement with the FDIC also requires it to maintain a 15% leverage ratio[86][89][97] - The Bank relies heavily on brokered deposits for funding, which requires it to remain "well-capitalized" under FDIC regulations to accept them without limitation[100] - Subsidiaries Medallion Funding, Medallion Capital, and Freshstart are licensed and regulated by the Small Business Administration (SBA) as SBICs[122] Risk Factors The company faces significant risks from the COVID-19 pandemic, its concentration in consumer lending, and its reliance on brokered deposits - The COVID-19 pandemic poses a material risk to the business, particularly given the concentration in consumer lending, which is sensitive to unemployment and discretionary spending; the pandemic has also severely impacted the taxi industry, leading to all medallion loans being placed on nonaccrual[141][145][146] - Heavy concentration in consumer lending makes the company susceptible to macroeconomic downturns affecting consumer credit and spending[150] - Competition from ride-sharing apps has materially and adversely affected the taxi industry, leading to significant decreases in the value of taxi medallions, which serve as collateral for the legacy loan portfolio[160][162] - Medallion Bank's reliance on brokered deposits for funding is a key risk; an inability to accept these deposits, which would occur if the Bank fails to remain "well-capitalized," would materially harm liquidity and operations[185][186][187] - The company operates in a highly regulated environment, and changes in banking or consumer protection laws could significantly increase costs and adversely affect operations[189][194] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ, dividends are suspended to support growth, and a stock repurchase program remains authorized - The company's common stock is quoted on NASDAQ under the symbol "MFIN"[249] - No dividends have been paid since 2016, and the company does not anticipate paying dividends in the near future[250] - The company did not repurchase any shares in the fourth quarter of 2020; approximately $22.9 million remains authorized for repurchase under its existing program[254] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic shift to consumer lending, the financial impact of COVID-19, and key areas of focus like liquidity and risk management - The company's strategic focus is on its growing consumer loan portfolios (recreation and home improvement), which represented 93% of the net loan portfolio as of December 31, 2020[257] - Due to the impact of COVID-19, all medallion loans were deemed impaired, placed on nonaccrual, and written down to net collateral value in the third quarter of 2020, resulting in a provision increase of approximately $25.9 million and a collateral write-down of $20.1 million[271] Consolidated Results of Operations Comparison | Metric ($ thousands) | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Total Interest Income | 144,962 | 132,562 | | Net Interest Income | 110,811 | 97,517 | | Provision for Loan Losses | 69,817 | 47,386 | | Net Loss Attributable to Shareholders | (34,783) | (1,762) | | Diluted EPS | ($1.42) | ($0.07) | Critical Accounting Policies and Estimates Key accounting policies involve significant management judgment, particularly for the Allowance for Loan Losses and valuation of assets - The Allowance for Loan Losses requires complex judgments based on historical loss rates, collateral values, economic conditions, and other qualitative factors; this evaluation is inherently subjective[278][279] - Medallion Loan Collateral Valuation is derived from analyzing recent market transfer activity and, when necessary, discounted cash flow models, due to low transaction volumes[282] - Goodwill and Intangible Assets, which arose from the 2018 change in accounting, are tested annually for impairment using qualitative and quantitative analyses[284] Segment Results Consumer lending segments were profitable in 2020, while the legacy Medallion Lending segment incurred a substantial net loss Net Income (Loss) by Segment (FY 2020) | Segment | Net Income (Loss) ($ thousands) | | :--- | :--- | | Recreation Lending | 34,612 | | Home Improvement Lending | 6,077 | | Commercial Lending | 893 | | Medallion Lending | (58,250) | | RPAC | 2,651 | | Corporate and Other Investments | (12,890) | Liquidity and Capital Resources The company relies on brokered deposits and debt for liquidity and faces significant near-term debt maturities - Primary liquidity sources include brokered CDs, bank credit facilities, SBA debentures, and private debt placements[382][383] - The company faces significant near-term maturities, with approximately $730 million due in 2021-2022, including almost $635 million in brokered CDs[395] - In late 2020 and early 2021, the company completed several private placements of senior notes to raise capital for general corporate purposes and debt repayment[384][386] Total Debt Outstanding (as of Dec 31, 2020) | Debt Type | Balance ($ thousands) | Percentage | Weighted Avg. Rate | | :--- | :--- | :--- | :--- | | Deposits | 1,068,072 | 81% | 1.71% | | Retail and privately placed notes | 103,225 | 8% | 8.25% | | SBA debentures and borrowings | 68,008 | 5% | 3.36% | | Preferred securities | 33,000 | 3% | 2.35% | | Notes payable to banks | 31,261 | 2% | 3.67% | | Other borrowings | 8,689 | 1% | 1.91% | | Total | 1,312,255 | 100% | 2.37% | Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal controls over financial reporting were effective - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[412] - Management assessed internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2020[415] - The independent auditor, Mazars USA LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[420] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Required disclosures on governance, compensation, and ownership are incorporated by reference from the company's Proxy Statement - Information for the following sections is incorporated by reference from the company's forthcoming Definitive Proxy Statement: * Item 10: Directors, Executive Officers and Corporate Governance * Item 11: Executive Compensation * Item 12: Security Ownership of Certain Beneficial Owners and Management * Item 13: Certain Relationships and Related Transactions, and Director Independence * Item 14: Principal Accountant Fees and Services[427][428][429] Part IV Exhibits and Financial Statement Schedules This section provides an index to the consolidated financial statements and a list of all exhibits filed with the report - This section provides the index to the audited consolidated financial statements, which begin on page F-1 of the report[429] - A detailed list of all exhibits filed with the report is provided, including material contracts, corporate documents, and certifications by the CEO and CFO[432][433][434][435]