Medallion Financial Corp. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons below are primarily with the year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter earnings report. Amounts are in U.S. dollars unless noted.
Business context
Medallion Financial is a specialty finance company whose principal operating subsidiary, Medallion Bank, originates loans for recreational vehicles, boats, trailers and home improvements. The company has shifted away from taxi medallion lending: consumer loans were 93% of net loans at year-end, commercial loans 6%, and medallion loans 1%. Assets under management, including assets serviced for third parties, were $1.8 billion, versus $1.7 billion in 2019.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total interest income | $145.0 million | $132.6 million |
| Net interest income | $110.8 million | $97.5 million |
| Net interest margin | 8.65% | 8.64% |
| Provision for loan losses | $69.8 million | $47.4 million |
| Net loss attributable to Medallion Financial | $34.8 million, or $1.42 per share | $1.8 million, or $0.07 per share |
| Net charge-offs | $58.4 million; 5.00% of average loans | $37.7 million; 3.60% |
Interest income grew with consumer-loan expansion, while lower funding costs helped limit interest expense to $34.2 million, down from $35.0 million. The company nevertheless recorded a $37.0 million pretax loss. The $10.1 million income-tax benefit reduced the consolidated net loss after tax to $26.9 million; the loss attributable to the parent was $34.8 million after noncontrolling-interest allocations.
Operating expenses were $72.0 million, compared with $68.2 million. Other income was a net loss of $5.9 million, compared with $20.4 million of income in 2019. The year-over-year decline included collateral write-downs, a $3.5 million write-off of a non-core sports-related investment, and the absence of 2019’s $4.1 million debt-extinguishment gain.
At December 31, 2020, total assets were $1.642 billion, net loans were $1.172 billion, and total equity was $304.6 million, including $73.2 million of noncontrolling interest. Book value per share was $9.30, down from $10.68. Cash and cash equivalents were $54.7 million, with a further $57.3 million in federal funds sold. Operating cash flow was $78.7 million; investing activities used $171.0 million and financing activities provided $136.5 million.
Total debt was $1.312 billion, at a 2.37% weighted-average contractual rate; debt-to-equity was 4.3x. Deposits were approximately $1.065 billion on the balance sheet and brokered deposits were a major funding source. About $730 million of borrowing relationships, including nearly $635 million of brokered CDs, had maturities in 2021–2022. The Bank’s Tier 1 leverage ratio was 16.9%, above the 15% requirement under its FDIC capital-maintenance agreement.
Material changes and credit quality
- Recreation and home-improvement loans continued to expand. Gross balances rose to $792.7 million and $334.0 million, respectively, from $713.3 million and $247.3 million.
- Gross medallion loans fell to $37.8 million from $130.4 million; net medallion loans fell to $12.7 million from $105.0 million. All medallion loans were deemed impaired and placed on nonaccrual. New York City medallion collateral value, net of liquidation costs, was estimated at $79,500, versus $167,000 a year earlier.
- The allowance for loan losses increased to $57.5 million from $46.1 million. Net charge-offs rose to $58.4 million, principally reflecting medallion losses. The company also reported $54.6 million of loan collateral in process of foreclosure.
- Consumer loans were 93% of net loans; approximately 55% of recreation loans were non-prime. Management raised certain consumer reserve factors in response to pandemic uncertainty.
Outlook, risks and unusual items
- Management provided no quantified earnings or origination guidance. It intends to continue growing consumer lending, develop fintech partnerships, maintain commercial lending, reduce costs and exit non-core investments. The strategic partnership program began issuing loans in 2020; balances were still immaterial at year-end.
- COVID-19 caused economic disruption and borrower payment deferrals. Management reported minimal consumer loans on deferral at year-end but said the eventual credit effects remained uncertain. Taxi activity and medallion-loan collections were particularly affected.
- Liquidity and refinancing are material risks. The company said lenders had extended facilities as they matured to that date, but it could not assure continued extensions or access to replacement funding. Failure to refinance could constrain originations or require asset sales. The company also relies substantially on brokered deposits and must maintain regulatory capital to retain unrestricted access.
- After year-end, the company issued $25.0 million of 7.25% senior notes due 2026, followed by $3.25 million; it also issued $33.6 million of 7.50% notes due 2027 in December 2020, followed by $8.5 million in February and March 2021. Proceeds were intended for general corporate purposes and debt repayment, including maturing 9.00% notes due April 2021.
- The company had not paid common dividends since 2016 and did not anticipate paying them currently. It reported ordinary-course legal proceedings, but management did not expect a material adverse outcome. The financial-statement and internal-control audits received unqualified opinions; management and the auditor reported effective internal control over financial reporting.
Key facts for investors to verify
- Whether the 2021–2022 deposit and debt maturities were refinanced or extended, and the resulting funding costs and liquidity position.
- Subsequent consumer-loan delinquencies, deferrals, charge-offs and allowance adequacy, particularly for non-prime recreation loans.
- Recoveries and further losses on medallion loans and foreclosed collateral, including the assumptions behind medallion valuations.
- Progress, economics and regulatory treatment of fintech partnerships, including the “true lender” and third-party oversight risks.
- The effects of higher leverage, the debt maturity schedule, and the post-year-end note issuances on parent-company liquidity and debt service.
- Future earnings and cash generation excluding large credit provisions, tax benefits and other unusual or nonrecurring items.