UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-37747
MEDALLION FINANCIAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
04-3291176
(State of Incorporation)
(IRS Employer
Identification No.)
437 MADISON AVENUE, 38th Floor
NEW YORK, New York 10022
(Address of Principal Executive Offices) (Zip Code)
(212) 328-2100
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbols
Name of each exchange
on which registered
Common Stock, par value $0.01 per share
MFIN
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of August 6, 2021 was 25,061,764.
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
3
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
43
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
67
ITEM 4. CONTROLS AND PROCEDURES
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
68
ITEM 6. EXHIBITS
69
SIGNATURES
70
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our financial statements and the notes to those statements and other financial information appearing elsewhere in this report.
This report contains forward-looking statements relating to future events and future performance applicable to us within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words expects, anticipates, intends, believes, or similar language. In connection with certain forward-looking statements contained in this Form 10-Q and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward-looking statements contained in this Form 10-Q were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict, and many of which are beyond control of the Company. In particular, any forward-looking statements are subject to the risks and great uncertainties associated with the ongoing COVID-19 pandemic and the related impact on the US and global economies, as well as risks related to the SEC investigation described in this report.
All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statements. The statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form 10-Q should consider these facts in evaluating the information contained herein. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-Q. The inclusion of the forward-looking statements contained in this Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-Q will be achieved.
In light of the foregoing, readers of this Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein. You should consider these risks and those described under Risk Factors in the Company’s Annual Report on Form 10-K, in this Quarterly Report on Form 10-Q, and others that are detailed in the other reports that the Company files from time to time with the Securities and Exchange Commission.
Page 2 of 70
BASIS OF PREPARATION
We, Medallion Financial Corp., or the Company, are a finance company, organized as a Delaware corporation that includes Medallion Bank, our primary operating subsidiary. In recent years, our strategic growth has been through Medallion Bank, which originates consumer loans for the purchase of recreational vehicles, boats, and home improvements, along with providing loan origination and other services to fintech partners. We historically have had a leading position in originating, acquiring, and servicing loans that finance taxi medallions and various types of commercial businesses.
Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17%. In January 2017, we announced our plans to transform our overall strategy. We have transitioned away from medallion lending and have placed our strategic focus on our growing consumer finance portfolio. Total assets under management, which includes assets serviced for third-party investors, were $1.8 billion as of June 30, 2021 and December 31, 2020, and have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996.
We conduct our business through various wholly-owned subsidiaries including:
•
Medallion Bank, or the Bank, an FDIC-insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activities, and has a separate board of directors with a majority of independent directors;
Medallion Funding LLC, or Medallion Funding, a Small Business Investment Company, or SBIC, our primary taxi medallion lending company;
Medallion Capital, Inc., or Medallion Capital, an SBIC which conducts a mezzanine financing business;
Freshstart Venture Capital Corp., or Freshstart, an SBIC which originates and services taxi medallion and commercial loans; and
Medallion Servicing Corp., or MSC, which provides loan services to the Bank.
Our other consolidated subsidiaries are comprised of Medallion Fine Art, Inc., CDI-LP Holdings, Inc., Medallion Motorsports, LLC, and RPAC Racing LLC, or RPAC. In addition, we make both marketable and nonmarketable equity investments, primarily as a function of our mezzanine lending business.
Our consolidated balance sheet as of June 30, 2021, and the related consolidated statements of operations, consolidated statements of other comprehensive income/(loss), consolidated statements of stockholders’ equity and cash flows for the three months then ended included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the US have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the three and six months ended June 30, 2021 may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Page 3 of 70
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands, except share and per share data)
June 30, 2021
December 31, 2020
Assets
Cash and cash equivalents(1)
$
31,389
54,743
Federal funds sold
60,164
57,297
Investment securities
48,307
46,792
Equity investments
10,090
9,746
Loans
1,340,567
1,229,838
Allowance for loan losses
(46,946
)
(57,548
Net loans receivable
1,293,621
1,172,290
Accrued interest receivable
9,525
10,338
Income tax receivable
1,072
1,757
Property, equipment, and right-of-use lease asset, net
11,439
12,404
Loan collateral in process of foreclosure(2)
49,039
54,560
Goodwill
150,803
Intangible assets, net
50,368
51,090
Other assets
23,930
20,591
Total assets
1,739,747
1,642,411
Liabilities
Accounts payable and accrued expenses(3)
19,515
14,902
Accrued interest payable
3,883
4,673
Deposits(4)
1,152,068
1,065,398
Short-term borrowings
8,016
87,334
Deferred tax liabilities, net
8,591
807
Operating lease liabilities
9,889
11,018
Long-term debt(5)
214,971
153,718
Total liabilities
1,416,933
1,337,850
Commitments and contingencies(6)
Stockholders’ equity
Preferred stock (1,000,000 shares of $0.01 par value stock authorized-none outstanding)
—
Common stock (50,000,000 shares of $0.01 par value stock authorized- 28,013,007 shares at June 30, 2021 and 27,828,871 shares at December 31, 2020 issued)
280
278
Additional paid in capital
278,727
277,539
Treasury stock (2,951,243 shares at June 30, 2021 and December 31, 2020)
(24,919
Accumulated other comprehensive income
1,434
2,012
Retained earnings (accumulated deficit)
(4,804
(23,502
Total stockholders’ equity
250,718
231,408
Non-controlling interest in consolidated subsidiaries
72,096
73,153
Total equity
322,814
304,561
Total liabilities and equity
Number of shares outstanding
25,061,764
24,877,628
Book value per share
10.00
9.30
(1)
Includes restricted cash of $2,970 as of June 30, 2021 and December 31, 2020.
(2)
Includes financed sales of this collateral to third parties that are reported separately from the loan portfolio, and that are conducted by the Bank of $3,919 as of June 30, 2021 and $3,535 as of December 31, 2020.
(3)
Includes the short-term portion of lease liabilities of $2,106 and $2,004 as of June 30, 2021 and December 31, 2020. Refer to Note 6 for more details.
(4)
Includes $2,796 and $2,674 of deferred financing costs as of June 30, 2021 and December 31, 2020. Refer to Note 5 for more details.
(5)
Includes $4,258 and $3,131 of deferred financing costs as of June 30, 2021 and December 31, 2020. Refer to Note 5 for more details.
(6)
Refer to Note 10 for details.
The accompanying notes should be read in conjunction with these consolidated financial statements.
Page 4 of 70
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2021
2020
Interest and fees on loans
37,132
35,324
73,987
70,343
Interest and dividends on investment securities
243
264
468
734
Medallion lease income
53
Total interest income(1)
37,375
35,588
74,455
71,130
Interest on deposits
4,465
5,920
9,176
11,861
Interest on short-term borrowings
246
481
649
1,045
Interest on long-term debt
3,173
2,434
6,467
4,929
Total interest expense(2)
7,884
8,835
16,292
17,835
Net interest income
29,491
26,753
58,163
53,295
Provision (benefit) for loan losses
(682
16,941
2,336
33,482
Net interest income after provision (benefit) for loan losses
30,173
9,812
55,827
19,813
Other income (loss)
Sponsorship and race winnings, net
4,345
3,626
6,818
6,199
Gain (loss) on equity investments
3,205
(1
(3,560
Gain on extinguishment of debt
2,859
4,626
Write-down of loan collateral in process of foreclosure
(2,162
(983
(4,947
(7,269
(480
614
1
906
Total other income (loss), net
7,767
3,256
9,703
(3,724
Other expenses
Salaries and employee benefits
7,901
6,702
13,586
13,635
Race team related expenses
2,674
1,818
4,796
3,948
Loan servicing fees
1,731
1,729
3,378
3,341
Collection costs
1,641
1,461
2,874
2,690
Professional fees
2,224
1,319
2,730
4,908
Rent expense
624
631
1,299
1,328
Regulatory fees
456
236
895
601
Travel, meals, and entertainment
32
228
240
Amortization of intangible assets
361
722
2,140
1,897
3,954
4,044
Total other expenses
19,820
16,186
34,462
35,457
Income (loss) before income taxes
18,120
(3,118
31,068
(19,368
Income tax (provision) benefit
(6,528
853
(10,406
4,102
Net income (loss) after taxes
11,592
(2,265
20,662
(15,266
Less: income attributable to the non-controlling interest
1,325
1,712
1,964
2,354
Total net income (loss) attributable to Medallion Financial Corp.
10,267
(3,977
18,698
(17,620
Basic net income (loss) per share
0.42
(0.16
0.76
(0.72
Diluted net income (loss) per share
0.41
0.75
Distributions declared per share
-
Weighted average common shares outstanding
Basic
24,595,822
24,444,677
24,557,511
24,423,225
Diluted
24,950,512
24,923,023
Included in interest and investment income is $170 and $495 of paid-in-kind interest for the three and six months ended June 30, 2021 and $341 and $634 for the three and six months ended June 30, 2020.
Average borrowings outstanding were $1,342,570 and $1,320,361, and the related average borrowing costs were 2.36% and 2.49% for the three and six months ended June 30, 2021, and were $1,290,318 and $1,227,413, and 2.75% and 2.92%, for the three and six months ended June 30, 2020.
Page 5 of 70
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS)
(Dollars in thousands)
Other comprehensive income (loss), net of tax
27
981
(578
1,128
Total comprehensive income (loss)
11,619
(1,284
20,084
(14,138
Less comprehensive income attributable to the non-controlling interest
Total comprehensive income (loss) attributable to Medallion Financial Corp.
10,294
(2,996
(16,492
Page 6 of 70
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Common
Stock Shares
Stock
Capital in
Excess of
Par
Treasury
Retained
Earnings (Accumulated Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Non-
controlling
Interest
Balance at December 31, 2020
27,828,871
(2,951,243
Net income (loss)
8,431
640
9,071
Distributions to non-controlling interest
(1,511
Stock-based compensation expense
2
496
498
Issuance of restricted stock, net
163,561
Forfeiture of restricted stock, net
(7,602
Exercise of stock options
768
Net change in unrealized gains
on investments, net of tax
(605
Balance at March 31, 2021
27,985,598
278,035
(15,071
1,407
239,732
72,282
312,014
Distributions to non-controlling
interest
Stock-based compensation
576
15,514
(10,332
22,227
116
Balance at June 30, 2021
28,013,007
Page 7 of 70
Non-controlling
Balance at December 31, 2019
27,597,802
276
275,511
11,281
999
263,148
71,320
334,468
(13,643
642
(13,001
(1,507
464
466
165,674
(5,577
Net change in unrealized gains on investments, net of tax
147
Balance at March 31, 2020
27,757,899
275,975
(2,362
1,146
250,118
70,455
320,573
(1,512
520
10,416
(696
Net change in unrealized losses on investments, net of tax
Balance at June 30, 2020
27,767,619
276,495
(6,339
2,127
247,642
70,655
318,297
Page 8 of 70
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income (loss) from operations to net cash
provided by operating activities:
Provision for loan losses
Paid-in-kind interest
(495
(634
Depreciation and amortization
4,082
2,933
Increase (decrease) in deferred and other tax liabilities
8,469
(3,240
Amortization of origination fees, net
3,723
2,891
Net change in value of loan collateral in process of foreclosure
7,243
11,282
Net realized (gains) losses on investments
(3,205
3,555
987
(4,626
Decrease in accrued interest receivable
813
2,106
(Increase) decrease in other assets
(574
(5,518
Increase in accounts payable and accrued expenses
1,109
653
Increase (decrease) in accrued interest payable
(790
172
Net cash provided by operating activities
39,819
33,403
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
(365,416
(264,514
Proceeds from principal receipts, sales, and maturities of loans
225,976
137,286
Purchases of investments
(15,318
(7,796
Proceeds from principal receipts, sales, and maturities of investments
14,007
8,397
Proceeds from the sale and principal payments on loan collateral in process of foreclosure
8,941
6,179
Net cash used for investing activities
(131,810
(120,448
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from time deposits and funds borrowed
409,810
344,982
Repayments of time deposits and funds borrowed
(335,403
(218,855
Distributions to non-controlling interests
(3,019
Proceeds from the exercise of stock options
Net cash provided by financing activities
71,504
123,108
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND
RESTRICTED CASH
(20,487
36,063
Cash, cash equivalents, and restricted cash, beginning of period(1)
112,040
67,821
Cash, cash equivalents, and restricted cash, end of period(1)
91,553
103,884
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest
15,769
16,355
Cash paid during the period for income taxes
1,688
81
NON-CASH INVESTING
Loans transferred to loan collateral in process of foreclosure, net
10,663
12,125
Includes federal funds sold.
Page 9 of 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES
Medallion Financial Corp., or the Company, is a finance company organized as a Delaware corporation that reports as a bank holding company, but is not a bank holding company for regulatory purposes. The Company conducts its business through various wholly-owned subsidiaries including its primary operating company, Medallion Bank, or the Bank, a Federal Deposit Insurance Corporation, or FDIC, insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activities. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and undergoes examinations by those agencies. The Bank was initially formed for the primary purpose of originating commercial loans in three categories: 1) loans to finance the purchase of taxi medallions, 2) asset-based commercial loans, and 3) SBA 7(a) loans. Subsequent to its formation, the Bank began originating consumer loans to finance the purchases of recreational vehicles, or RVs, boats, home improvements, and to provide loan origination and other services to fintech partners. The Company also conducts business through Medallion Funding LLC, or MFC, a Small Business Investment Company, or SBIC, which originates and services medallion and commercial loans.
The Company also conducts business through its subsidiaries Medallion Capital, Inc., or MCI, an SBIC which conducts a mezzanine financing business, and Freshstart Venture Capital Corp., or FSVC, an SBIC that originated and services medallion and commercial loans. MFC, MCI, and FSVC, as SBICs, are regulated by the Small Business Administration, or SBA. MCI and FSVC are financed in part by the SBA.
The Company has a controlling ownership stake in Medallion Motorsports, LLC, the primary owner of RPAC Racing, LLC, or RPAC, a professional car racing team that competes in the Monster Energy NASCAR Cup Series, which is also consolidated with the Company.
The Company formed a wholly-owned subsidiary, Medallion Servicing Corporation, or MSC, to provide loan services to the Bank. The Company has assigned all of its loan servicing rights for the Bank, which consists of servicing medallion loans originated by the Bank, to MSC, which bills and collects the related service fee income from the Bank, and is allocated and charged by the Company for MSC’s share of these servicing costs.
In 2019, the Bank began the process to build out a strategic partnership program with financial technology, or fintech, companies. The Bank entered into an initial partnership in 2020 and a second partnership in 2021, and continues to explore opportunities with additional fintech companies.
Taxi Medallion Loan Trust III, or Trust III, was established for the purpose of owning medallion loans originated by MFC or others. Trust III is a variable interest entity, or VIE, and MFC was the primary beneficiary until the 2018 fourth quarter. As a result, the Company consolidated Trust III in its financial results until consummation of a restructuring in the 2018 fourth quarter. For a discussion of the restructuring, see Note 15. Trust III is a separate legal and corporate entity with its own creditors which, in any liquidation of Trust III, will be entitled to be satisfied out of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders. The assets of Trust III are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC.
The Company established a wholly-owned subsidiary, Medallion Financing Trust I, or Fin Trust, for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,083,000 at June 30, 2021, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.
MFC, through several wholly-owned subsidiaries, together, Medallion Chicago, purchased $8,689,000 of City of Chicago taxi medallions out of foreclosure, some of which are leased to fleet operators. The 159 taxi medallions are carried at a net realizable value of $1,284,000 in other assets on the Company’s consolidated balance sheet at June 30, 2021, compared to a net realizable value of $2,932,000 and $3,091,000 at December 31, 2020 and June 30, 2020.
Page 10 of 70
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the US, or GAAP, requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and assumptions are those that management considers to be the most critical to an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. All of these estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions change, it is reasonably possible that the judgments and estimates could change, which may result in future impairments of loans and loan collateral in process of foreclosure, goodwill and intangible assets, and investments, among other effects.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly-owned and controlled subsidiaries. All significant intercompany transactions, balances, and profits (losses) have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with GAAP. The Company consolidates all entities it controls through a majority voting interest, a controlling interest through other contractual rights, or as being identified as the primary beneficiary of VIEs. The primary beneficiary is the party who has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (2) an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third-party’s holding is recorded as non-controlling interest.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that exceed the federally insured limits. Cash includes $2,970,000 of an interest reserve associated with the private placements of debt in March and August 2019, which cannot be used for any other purpose until March 2022. Cash also includes $1,250,000 of interest-bearing funds deposited in other banks, that are mainly callable, with terms of 4 to 7 years.
Fair Value of Assets and Liabilities
The Company follows the Financial Accounting Standards Board, or FASB, FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, or FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e. a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entity’s own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 12 and 13 to the consolidated financial statements.
Equity Investments
The Company follows FASB ASC Topic 321, Investments – Equity Securities, or ASC 321, which requires all applicable investments in equity securities with a readily determinable fair value to be valued as such, and those without a readily determinable fair value, are measured at cost, less any impairment plus or minus any observable price changes. Equity investments of $10,090,000 and $9,746,000 at June 30, 2021 and December 31, 2020, comprised mainly of nonmarketable stock and stock warrants, are recorded at cost less any impairment plus or minus observable price changes. As of June 30, 2021 and December 31, 2020, the Company determined that there was no impairment or observable price change.
In the 2021 second quarter, the Company sold 1,166,667 shares of its investment in Upgrade, Inc. for proceeds of $3,816,000 and recognized a gain on the sale of $3,179,000. The Company continued to hold 1,500,000 shares of Upgrade, Inc. at a cost of $819,000 as of June 30, 2021.
Page 11 of 70
In the 2021 first quarter, the Company purchased $2,000,000 of equity securities with a readily determinable fair value. As a result, all unrealized gains and losses are included in earnings, and the fair value of these securities of $1,969,000 as of June 30, 2021 are included in other assets on the consolidated balance sheet.
The table below presents the unrealized portion related to the equity securities held as of June 30, 2021.
Three Months Ended
Six Months Ended
Net losses recognized during the period on equity securities
(3
(31
Less: Net gains (losses) recognized during the period on equity securities sold during the period
Unrealized losses recognized during the reporting period on equity securities still held at the reporting date
Investment Securities
The Company follows FASB ASC Topic 320, Investments – Debt Securities, or ASC 320, which requires that all applicable investments in debt securities be classified as trading securities, available-for-sale securities, or held-to-maturity securities. Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. The net premium on investment securities totaled $337,000 at June 30, 2021 and $278,000 at December 31, 2020, and $38,000 and $81,000 was amortized to interest income for the three and six months ended June 30, 2021 and $79,000 and $134,000 was amortized to interest income for the three and six months ended June 30, 2020. Refer to Note 3 for more details. ASC 320 further requires that held-to-maturity securities be reported at amortized cost and available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the consolidated financial statements, and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity, net of the effect of income taxes, until they are sold. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in stockholders’ equity, which were recorded net of the income tax effect, will be reversed.
The Company’s loans are currently reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan. Effective April 2, 2018, the Company withdrew its previous election to be regulated as a business development company under the Investment Company Act of 1940, and therefore changed the Company’s financial reporting from investment company accounting to bank holding company accounting. As a result, the existing loan balances were adjusted to fair value in connection with the change in reporting, and balances, net of reserves and fees, became the opening balances.
Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At June 30, 2021 and December 31, 2020, net loan origination costs were $24,074,000 and $20,684,000. Net amortization to income for the three months ended June 30, 2021 and 2020 was $2,067,000 and $1,587,000 and was $3,723,000 and $2,891,000 for the six months ended June 30, 2021 and 2020.
Page 12 of 70
Interest income is recorded on the accrual basis. Medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. The consumer loan portfolio has different characteristics, typified by a larger number of lower dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is likely the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Management considers loans that are in bankruptcy status, but have not been charged-off, to be impaired. These loans are placed on nonaccrual when they become 90 days past due, or earlier if they enter bankruptcy, and are charged-off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. For the recreation loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged-off. If the collateral is repossessed, a loss is recorded by writing the collateral down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off. Proceeds collected on charged-off accounts are recorded as recoveries. Total loans 90 days or more past due were $2,912,000 at June 30, 2021, or 0.22% of the total loan portfolio, compared to $6,878,000, or 0.57% at December 31, 2020.
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants concessions to the borrower for other than an insignificant period of time that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring, or TDR. The Company strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before they reach nonaccrual status. These modified terms may include rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize the economic loss to the Company and to avoid foreclosure or repossession of the collateral. For modifications where the Company forgives principal, the entire amount of such principal forgiveness is immediately charged off. Loans classified as TDRs are considered impaired loans. Beginning in the third quarter 2019, all consumer loans which are party to a Chapter 13 bankruptcy are immediately classified as TDRs. The Company’s policy with regard to bankrupt recreation loans is to take an immediate 40% write down of the loan balance. As a result of the Consolidated Appropriations Act, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, relief period was extended to the later of January 1, 2022 or 60 days after the date which the coronavirus, or COVID-19, national emergency terminates. During the relief period, companies may elect to (a) suspend the requirements of GAAP for loan modifications related to COVID-19 that would otherwise be categorized as TDRs and (b) suspend any determination of a loan modified as a result of the effects of COVID-19 as a TDR, including impairment for accounting purposes. Any such suspension is applicable for the term of the loan modification, but solely with respect to any modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019, and shall not apply to any adverse impact on the credit of a borrower that is not related to COVID-19. As of June 30, 2021, there were no consumer or medallion loan modifications related to COVID-19 that would have otherwise been classified as a TDR, and therefore there was no need for the Company to elect this relief under the CARES Act during 2020 and 2021. However, the Company may have loan modifications related to COVID-19 that would apply under this provision of the CARES Act in the future.
Loan collateral in process of foreclosure primarily includes medallion loans that have reached 120 days past due and have been charged-down to their net realizable value, in addition to consumer repossessed collateral in the process of being sold. The medallion loan component reflects that the collection activities on the loans have transitioned from working with the borrower, to the liquidation of the collateral securing the loans.
The Company had $0 and $15,367,000 of net loans pledged as collateral under borrowing arrangements at June 30, 2021 and December 31, 2020.
The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing, or FASB ASC 860, which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, the Company had elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $107,624,000 at June 30, 2021 and $107,131,000 at December 31, 2020. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860, which relates to servicing assets held by MFC (related primarily to the remaining assets in Trust III) and the Bank, and determined that no material servicing asset or liability existed as of June 30, 2021 and December 31, 2020.
Allowance for Loan Losses
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. In analyzing the adequacy of the allowance for loan losses, the Company uses historical delinquency and actual loss rates with a one-year lookback period for consumer loans. For commercial loans deemed nonperforming, the historical loss
Page 13 of 70
experience and other projections are looked at. For medallion loans, delinquent nonperforming loans are valued at collateral value for the most recent quarter. Collateral value for the medallion loans is generally determined utilizing factors deemed relevant under the circumstances of the market including but not limited to: actual transfers, pending transfers, median and average sales prices, discounted cash flows, market direction and sentiment, and general economic trends for the industry and economy. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. As a result of COVID-19, there was an increase in the reserve percentages of 50 basis points on the recreation subprime loan business during 2020. In addition, the Company determined that anticipated payment activity on the medallion portfolio was impossible to quantify upon exit of the six-month deferral period with borrowers, and therefore deemed all such loans as impaired in the third quarter of 2020. As a result, all medallion loans were placed on nonaccrual and written down to collateral value, net of liquidation costs, of $79,500 for New York City medallions. The Company continues to monitor the impact of COVID-19 on the consumer, commercial, and medallion loans. Had there been no payment deferrals offered to borrowers under the CARES Act, potential loans 90 days or more past due would have resulted in increased reserves and/or charge-offs. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.
Goodwill and Intangible Assets
The Company’s goodwill and intangible assets arose as a result of the excess of fair value over book value for several of the Company’s previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under the Company’s new reporting, and was subject to a purchase price accounting allocation process conducted by an independent third-party expert to arrive at the current categories and amounts. Goodwill is not amortized, but is subject to quarterly review by management to determine whether additional impairment testing is needed, and such testing is performed at least on an annual basis. Intangible assets are amortized over their useful life of approximately 20 years. As of June 30, 2021, December 31, 2020, and June 30, 2020, the Company had goodwill of $150,803,000, which all related to the Bank, and intangible assets of $50,368,000, $51,090,000, and $51,814,000, and the Company recognized $361,000 and $361,000 of amortization expense on the intangible assets for the three months ended June 30, 2021 and 2020, and $722,000 and $722,000 of amortization expense on the intangible assets for the six months ended June 30, 2021 and 2020. Additionally, loan portfolio premiums of $12,387,000 were determined as of April 2, 2018, of which $835,000, $2,717,000, and $5,251,000 were outstanding at June 30, 2021, December 31, 2020, and June 30, 2020, and of which $1,695,000 and $179,000 was amortized to interest income for the three months ended June 30, 2021 and 2020, and of which $1,882,000 and $508,000 was amortized to interest income for the six months ended June 30, 2021 and 2020. The Company engaged an expert to assess the goodwill and intangibles for impairment at December 31, 2020, who concluded there was no impairment on the Bank and on the RPAC intangible asset. The Company reviewed the goodwill related to the Bank and the RPAC intangible assets, considered whether the current COVID-19 pandemic had any effect on such goodwill, and concluded that there was no additional impairment as of June 30, 2021.
The table below shows the details of the intangible assets as of the dates presented.
Brand-related intellectual property
18,425
18,974
Home improvement contractor relationships
5,778
5,951
Race organization
26,165
Total intangible assets, net
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation and amortization, and are depreciated on a straight-line basis over their estimated useful lives of 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated economic useful life of the improvement. Depreciation and amortization expense was $75,000 and $139,000 for the three months ended June 30, 2021 and 2020, and was $159,000 and $261,000 for the six months ended June 30, 2021 and 2020.
Deferred Costs
Deferred financing costs represent costs associated with obtaining the Company’s borrowing facilities, and are amortized on a straight line basis over the lives of the related financing agreements and life of the respective pool. Amortization expense was $592,000 and $586,000 for the three months ended June 30, 2021 and 2020, and was $1,237,000 and $1,308,000 for the six months ended June 30, 2021 and 2020. In addition, the Company capitalizes certain costs for transactions in the process of completion (other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon completion or termination of the transaction, any accumulated amounts will be amortized against income over an appropriate period,
Page 14 of 70
or written off. The amount on the Company’s balance sheet for all of these purposes were $7,054,000, $5,805,000, and $4,709,000 as of June 30, 2021, December 31, 2020, and June 30, 2020.
Income Taxes
Income taxes are accounted for using the asset and liability approach in accordance with FASB ASC Topic 740, Income Taxes, or ASC 740. Deferred tax assets and liabilities reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are also recorded for net operating losses, capital losses and any tax credit carryforwards. A valuation allowance is provided against a deferred tax asset when it is more likely than not that some or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether a valuation allowance for deferred tax assets is needed. Items considered in determining the Company’s valuation allowance include expectations of future earnings of the appropriate tax character, recent historical financial results, tax planning strategies, the length of statutory carryforward periods and the expected timing of the reversal of temporary differences. The Company recognizes tax benefits of uncertain tax positions only when the position is more likely than not to be sustained assuming examination by tax authorities. The Company records income tax related interest and penalties, if applicable, within current income tax expense.
Sponsorship and Race Winnings
The Company accounts for sponsorship and race winnings revenue under FASB ASC Topic 606, Revenue from Contracts with Customers. Sponsorship revenue is recognized when the Company’s performance obligations are completed in accordance with the contract terms of the sponsorship contract. Race winnings revenue is recognized after each race during the season based upon terms provided by NASCAR and the placement of the driver.
Earnings (Loss) Per Share (EPS)
Basic earnings (loss) per share are computed by dividing net income (loss) resulting from operations available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if option contracts to issue common stock were exercised, or if restricted stock vests, and has been computed after giving consideration to the weighted average dilutive effect of the Company’s stock options and restricted stock. The Company uses the treasury stock method to calculate diluted EPS, which is a method of recognizing the use of proceeds that could be obtained upon exercise of options and warrants, including unvested compensation expense related to the shares, in computing diluted EPS. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. The table below shows the calculation of basic and diluted EPS.
Three Months Ended June 30,
Six Months Ended June 30,
Net income (loss) resulting from operations
available to common stockholders
Weighted average common shares outstanding applicable to
basic EPS
Effect of dilutive stock options
127,493
74,331
Effect of restricted stock grants
227,197
291,181
Adjusted weighted average common shares outstanding
applicable to diluted EPS
Basic income (loss) per share
Diluted income (loss) per share
Potentially dilutive common shares excluded from the above calculations aggregated 396,373 and 851,272 shares as of June 30, 2021 and 2020.
Page 15 of 70
Stock Compensation
The Company follows FASB ASC Topic 718, or ASC 718, Compensation – Stock Compensation, for its equity incentive, stock option, and restricted stock plans, and accordingly, the Company recognizes the expense of these grants as required. Stock-based employee compensation costs pertaining to stock options are reflected in net income resulting from operations for any new grants using the fair values established by usage of the Black-Scholes option pricing model, expensed over the vesting period of the underlying option. Stock-based employee compensation costs pertaining to restricted stock are reflected in net income resulting from operations for any new grants using the grant date fair value of the shares granted, expensed over the vesting period of the underlying stock.
During the six months ended June 30, 2021 and 2020, the Company issued 163,561 and 165,674 restricted shares of stock-based compensation awards, issued 317,398 and 335,773 shares of other stock-based compensation awards, and issued 16,803 restricted stock units; and recognized $576,000 and $1,074,000, or $0.02 and $0.04 per share, for the three and six months ended June 30, 2021, and $520,000 and $987,000, or $0.02 and $0.04 per share for the three and six months ended June 30, 2020, of non-cash stock-based compensation expense related to the grants. As of June 30, 2021, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $3,481,000, which is expected to be recognized over the next 15 quarters. See Note 8 for additional details.
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the bank regulators about components, risk weightings, and other factors.
FDIC-insured banks, including the Bank, are subject to certain federal laws, which impose various legal limitations on the extent to which banks may finance or otherwise supply funds to certain of their affiliates. In particular, the Bank is subject to certain restrictions on any extensions of credit to, or other covered transactions with, such as certain purchases of assets, the Company or its affiliates.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for federal deposit insurance, the FDIC ordered that the Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%, a level which could preclude its ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As of June 30, 2021, the Bank’s Tier 1 leverage ratio was 18.09%. The Bank’s actual capital amounts and ratios, and the regulatory minimum ratios are presented in the following table.
Regulatory
Minimum
Well-
Capitalized
Common equity Tier 1 capital
172,775
148,507
Tier 1 capital
241,563
217,295
Total capital
258,880
233,460
Average assets
1,335,205
1,283,664
Risk-weighted assets
1,349,840
1,243,783
Leverage ratio(1)
4.0
%
5.0
18.1
16.9
Common equity Tier 1 capital ratio(2)
7.0
6.5
12.8
11.9
Tier 1 capital ratio(3)
8.5
8.0
17.9
17.5
Total capital ratio(3)
10.5
10.0
19.2
18.8
Calculated by dividing Tier 1 capital by average assets.
Calculated by subtracting preferred stock or non-controlling interest from Tier 1 capital and dividing by risk-weighted assets.
Calculated by dividing Tier 1 or total capital by risk-weighted assets.
Page 16 of 70
In the table above, the minimum risk-based ratios as of June 30, 2021 and December 31, 2020 reflect the capital conservation buffer of 2.5%. The minimum regulatory requirements, inclusive of the capital conservation buffer, were the binding requirements for the risk-based requirements, and the “well-capitalized” requirements were the binding requirements for Tier 1 leverage capital as of both June 30, 2021 and December 31, 2020.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, or Topic 326: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. Under the FASB’s new standard, the concepts used by entities to account for credit losses on financial instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is removed. Loss estimates are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 2019 for public entities, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022. The Company is assessing the impact the update will have on its financial statements, and expects the update to have a material impact on the Company’s accounting for estimated credit losses on its loans.
Reclassifications
Certain reclassifications have been made to prior year balances to conform with the current year presentation. These reclassifications have no effect on the previously reported results of operations.
(3) INVESTMENT SECURITIES
Fixed maturity securities available for sale at June 30, 2021 and December 31, 2020 consisted of the following:
Amortized
Cost
Gross
Unrealized
Gains
Losses
Fair Value
Mortgage-backed securities, principally obligations of US
federal agencies
39,553
1,009
(239
40,323
State and municipalities
7,919
106
(41
7,984
47,472
1,115
(280
Amortized Cost
Mortgage-backed securities, principally obligations of
US federal agencies
34,929
1,495
(45
36,379
10,226
189
(2
10,413
45,155
1,684
(47
Page 17 of 70
The amortized cost and estimated market value of investment securities at June 30, 2021 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
20
Due after one year through five years
8,502
8,775
Due after five years through ten years
13,451
13,906
Due after ten years
25,499
25,606
The following tables show information pertaining to securities with gross unrealized losses at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position.
Less than Twelve Months
Twelve Months and Over
Gross Unrealized
(183
11,444
(55
1,910
(40
1,960
128
(223
13,404
(57
2,038
4,028
196
Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, and the Company has the intent and ability to hold the securities for the foreseeable future. The fair value is expected to recover as the bonds approach the maturity date.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table shows the major classification of loans, inclusive of capitalized loan origination costs, at June 30, 2021 and December 31, 2020.
Amount
As a Percent of
Gross Loans
Recreation
886,206
66
792,686
65
Home improvement
368,257
28
334,033
Commercial
69,520
5
65,327
Medallion
16,514
37,768
Strategic partnership
24
Total gross loans
100
Total net loans
Page 18 of 70
The following tables show the activity of the gross loans for the three and six months ended June 30, 2021 and 2020.
Three Months Ended June 30, 2021
Home
Improvement
Strategic Partnership
Gross loans – March 31, 2021
822,932
342,121
58,854
35,250
58
1,259,215
Loan originations
134,467
62,992
11,059
2,426
210,944
Principal payments, sales, and maturities
(70,672
(36,729
(564
(2,389
(2,414
(112,768
Charge-offs, net
916
(228
(10,869
(10,181
Transfer to loan collateral in process
of foreclosure, net
(2,980
(3,933
(6,913
Amortization of origination costs
(2,477
410
(2,067
Amortization of loan premium
(60
(90
(1,545
(1,695
FASB origination costs
4,080
(219
3,862
170
Gross loans – June 30, 2021
Six Months Ended June 30, 2021
Gross loans – December 31, 2020
228,317
111,051
15,216
4,370
358,954
Principal payments, sales and maturities
(129,100
(76,797
(11,541
(4,214
(4,324
(225,976
(1,668
(477
(10,793
(12,938
Transfer to loan collateral in process of foreclosure, net
(6,033
(4,630
(10,663
(4,639
907
11
(3,723
(101
(166
(1,615
(1,882
6,744
(294
12
6,462
495
Three Months Ended June 30, 2020
Gross loans – March 31, 2020
735,175
255,899
68,257
124,448
1,183,779
106,206
44,713
3,000
153
154,072
(49,457
(18,496
(132
(1,687
(145
(69,917
(3,565
(196
(260
(4,021
(3,003
(2,185
(5,188
(2,031
455
(13
(1,587
(51
(82
(46
(179
3,511
(221
8
(4
3,294
341
Gross loans – June 30, 2020
786,785
282,072
71,476
120,253
1,260,594
Page 19 of 70
Six Months Ended June 30, 2020
Gross loans – December 31, 2019
713,332
247,324
69,767
130,432
1,160,855
175,850
78,178
5,175
259,356
(86,529
(42,720
(4,112
(3,780
(137,286
(9,946
(832
(1,820
(12,598
(7,781
(4,344
(12,125
(3,760
896
4
(2,891
(103
(168
(237
(508
5,722
(606
33
5,157
634
The following table sets forth the activity in the allowance for loan losses for the three and six months ended June 30, 2021 and 2020.
Allowance for loan losses – beginning balance
57,809
54,057
57,548
46,093
Charge-offs
(2,672
(5,708
(7,725
(13,951
(786
(548
(1,467
(1,558
(12,791
(1,771
(13,905
(3,696
Total charge-offs
(16,249
(8,027
(23,097
(19,205
Recoveries
3,588
2,143
6,057
4,005
558
352
990
726
1,922
1,511
3,112
1,876
Total recoveries
6,068
4,006
10,159
6,607
Net charge-offs(1)
Allowance for loan losses – ending balance(2)
46,946
66,977
As of June 30, 2021, cumulative net charge-offs of loans and loan collateral in process of foreclosure in the medallion loan portfolio were $299,205, some of which may represent collection opportunities for the Company.
(2) As of June 30, 2021, there was no allowance for loan losses and net charge-offs related to the strategic partnership loans.
Page 20 of 70
The following tables set forth the allowance for loan losses by type as of June 30, 2021 and December 31, 2020.
Percentage of
Allowance
Allowance as
a Percent of
Loan Category
a Percent of Nonaccrual
30,306
64
3.42
633.25
5,890
13
1.60
NM
10,750
23
65.11
3.50
116.26
27,348
48
3.45
378.20
9
1.54
25,043
66.31
68.01
4.68
93.17
The following table presents total nonaccrual loans and foregone interest, substantially all of which is in the medallion portfolio. The fluctuation in nonaccrual interest foregone is due to past due loans and market conditions.
June 30, 2020
Total nonaccrual loans
40,381
61,767
81,539
Interest foregone quarter to date
521
2,306
1,202
Amount of foregone interest applied
to principal in the quarter
121
595
Interest foregone year to date
889
3,311
1,734
to principal year to date
253
602
57
Interest foregone life to date
4,127
5,252
4,171
to principal life to date
789
792
973
Percentage of nonaccrual loans to gross loan
portfolio
6
Percentage of allowance for loan losses to
nonaccrual loans
93
82
Page 21 of 70
The following tables present the performance status of loans as of June 30, 2021 and December 31, 2020.
Performing
Nonperforming
to Total
881,029
5,177
0.58
368,188
0.02
50,510
19,010
27.34
100.00
1,299,797
40,770
3.04
785,047
7,639
0.96
333,862
171
0.05
48,731
16,596
25.40
1,167,664
62,174
5.06
Includes medallion loan premiums of $1,615 at December 31, 2020.
For those loans aged under 90 days past due, there is a possibility that their delinquency status will continue to deteriorate and they will subsequently be placed on nonaccrual status and be reserved for, and as such, deemed nonperforming.
The following tables provide additional information on attributes of the nonperforming loan portfolio as of June 30, 2021 and 2020, and December 31, 2020, all of which had an allowance recorded against the principal balance.
Recorded
Investment
Unpaid
Principal
Balance
Related
With an allowance recorded
179
5,312
137
19,019
16,600
15,246
15,251
16,516
17,296
10,753
38,368
61,230
61,555
35,838
Total nonperforming loans
with an allowance
40,772
41,561
10,933
62,778
25,310
81,925
82,255
36,083
For the Three Months Ended June 30, 2021
For the Six Months Ended June 30, 2021
For the Three Months Ended June 30, 2020
For the Six Months Ended
Average
Income
Recognized
4,799
180
4,912
323
5,544
158
5,653
299
74
75
19,210
19,788
15,360
15,359
18,517
18,568
54,418
203
63,731
605
42,600
43,343
75,459
362
84,880
The following tables show the aging of all loans as of June 30, 2021 and December 31, 2020.
Page 22 of 70
Days Past Due
30-59
60-89
90 +
Current
Total (1)
90 Days and
Accruing
12,185
3,473
2,769
18,427
840,464
858,891
663
161
893
369,770
370,663
1,816
1,890
67,700
69,590
375
9,167
9,542
6,974
13,223
14,617
2,912
30,752
1,284,978
1,315,730
Excludes loan premiums of $835 resulting from purchase price accounting and $24,074 of capitalized loan origination costs.
22,058
7,582
5,343
34,983
732,391
767,374
218
1,201
335,684
336,885
65,265
65,340
2,019
1,290
4,282
31,871
36,153
24,890
8,773
6,878
40,541
1,165,235
1,205,776
Excludes loan premiums of $2,717 resulting from purchase price accounting and $21,345 of capitalized loan origination costs.
The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 321%, 327%, and 254% as of June 30, 2021, December 31, 2020, and June 30, 2020.
The following table shows the TDRs which the Company entered into during the three months and six months ended June 30, 2021.
Number of
Pre-
Modification
Post-
Three months ended June 30, 2021
21
302
256
Six months ended June 30, 2021
39
474
10
2,994
During the twelve months ended June 30, 2021, 43 medallion loans modified as TDRs were in default and had an investment value of $30,140,000 as of June 30, 2021, net of a $22,176,000 allowance for loan losses, 37 recreation loans modified as TDRs were in default and had an investment value of $371,000 as of June 30, 2021, net of a $13,000 allowance for loan losses, and no commercial loans modified as TDRs were in default.
Page 23 of 70
The following table shows the TDRs which the Company entered into during the three and six months ended June 30, 2020.
Three months ended June 30, 2020
231
185
17
12,519
Six months ended June 30, 2020
51
633
426
30
13,641
During the twelve months ended June 30, 2020, 20 medallion loans modified as TDRs were in default and had an investment value of $11,419,000 as of June 30, 2020, net of a $6,680,000 allowance for loan losses, and 88 recreation loans modified as TDRs were in default and had an investment value of $802,000 as of June 30, 2020, net of a $37,000 allowance for loan losses.
The following tables show the activity of loan collateral in process of foreclosure, which relate only to the recreation and medallion loans, for the three and six months ended June 30, 2021 and 2020.
Loan collateral in process of foreclosure – March 31, 2021
970
49,763
50,733
Transfer from loans, net
2,980
3,933
6,913
Sales
(1,989
(231
(2,220
Cash payments received
(3,146
Collateral valuation adjustments
(1,079
(3,241
Loan collateral in process of foreclosure – June 30, 2021
882
48,157
Loan collateral in process of foreclosure – December 31, 2020
1,432
53,128
6,033
4,630
(4,288
(4,519
(4,423
(2,295
(7,242
Loan collateral in process of foreclosure – March 31, 2020
1,717
45,100
46,817
3,003
2,185
5,188
(1,988
(185
(1,474
(2,457
Loan collateral in process of foreclosure – June 30, 2020
1,258
46,117
47,375
Loan collateral in process of foreclosure – December 31, 2019
1,476
51,235
52,711
7,781
4,344
(3,986
(300
(4,286
(1,893
(4,013
(11,282
Page 24 of 70
(5) FUNDS BORROWED
The outstanding balances of funds borrowed were as follows:
Payments Due for the Twelve Months Ending June 30,
2022
2023
2024
2025
2026
Thereafter
June 30, 2021(1)
December 31, 2020(1)
Rate (2)
Deposits(3)
469,737
182,911
226,592
143,797
131,077
1,154,114
1,067,822
1.38
Retail and privately placed
notes
36,000
31,250
53,750
121,000
68,008
7.66
SBA debentures and
borrowings
5,000
13,029
12,500
15,500
18,500
64,529
103,225
2.74
Preferred securities
33,000
2.26
Notes payable to banks
140
700
31,261
4.00
Other borrowings
8,689
2.00
478,033
188,191
275,761
156,297
177,827
105,250
1,381,359
1,312,005
2.04
Excludes deferred financing costs of $7,054 and $5,805 as of June 30, 2021 and December 31, 2020.
Weighted average contractual rate as of June 30, 2021.
Balance excludes $750 and $250 of strategic partner reserve deposits as of June 30, 2021 and December 31, 2020.
(A) DEPOSITS
Deposits are raised through the use of investment brokerage firms that package time deposits in denominations of less than $250,000 qualifying for FDIC insurance into larger pools that are sold to the Bank. The rates paid on the deposits are competitive with market rates paid by other financial institutions. Additionally, a brokerage fee is paid, depending on the maturity of the deposits, which averages less than 0.15%. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity. The Bank did not have any individual time deposits greater than $100,000 as of June 30, 2021. In October 2020, the Bank began to originate time deposits through an internet listing service. These listing service deposits are from other financial institutions, and as of June 30, 2021, totaled $4,036,000. The following table presents the maturity of the broker pools, excluding strategic partner reserve deposits, as of June 30, 2021.
Three months or less
133,194
Over three months through six months
122,023
Over six months through one year
214,520
Over one year
684,377
Total deposits
Page 25 of 70
(B) RETAIL AND PRIVATELY PLACED NOTES
In February 2021, the Company completed a private placement to certain institutional investors of $25,000,000 aggregate principal amount of 7.25% unsecured senior notes due February 2026, with interest payable semiannually. In March 2021, an additional $3,250,000 principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $3,000,000 principal amount of such notes was issued to certain institutional investors. The Company has used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.
In December 2020, the Company completed a private placement to certain institutional investors of $33,600,000 aggregate principal amount of 7.50% unsecured senior notes due December 2027, with interest payable semiannually. In February and March 2021, an additional $8,500,000 principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $11,650,000 principal amount of such notes was issued to certain institutional investors. The Company has used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.
In March 2019, the Company completed a private placement to certain institutional investors of $30,000,000 aggregate principal amount of 8.25% unsecured senior notes due 2024, with interest payable semiannually. The Company used the net proceeds from the offering for general corporate purposes, including repaying certain borrowings under its notes payable to banks at a discount which led to a gain of $4,145,000 in the 2019 first quarter. In August 2019, an additional $6,000,000 principal amount of such notes was issued to certain institutional investors.
In April 2016, the Company issued a total of $33,625,000 aggregate principal amount of 9.00% unsecured notes due 2021, with interest payable quarterly in arrears. The Company used the net proceeds from the offering of approximately $31,786,000 to make loans and other investments in portfolio companies and for general corporate purposes, including repaying borrowings under its DZ loan in the ordinary course of business. These notes were repaid at maturity on April 15, 2021.
(C) SBA DEBENTURES AND BORROWINGS
Over the years, the SBA has approved commitments for MCI and FSVC, typically for a four and half year term and a 1% fee, which was paid. During 2017, the SBA restructured FSVC’s debentures with SBA totaling $33,485,000 in principal into a new loan by the SBA to FSVC in the principal amount of $34,024,756, or the SBA Loan. In connection with the SBA Loan, FSVC executed a Note, or the SBA Note, with an effective date of March 1, 2017, in favor of SBA, in the principal amount of $34,024,756. The SBA Loan bears interest at a rate of 3.25% and all remaining unpaid principal and interest are due on April 30, 2024, the maturity date. As of June 30, 2021, $183,985,000 of commitments had been fully utilized, there were $16,500,000 commitments available, and $64,529,000 was outstanding, including $10,529,000 under the SBA Note.
On July 31, 2020, MCI accepted a commitment from the SBA for $25,000,000 in debenture financing. As part of the acceptance, MCI paid the SBA a $250,000 commitment fee. The commitment expires September 24, 2024. $8,500,000 of the commitments has been drawn as of June 30, 2021 to replace debentures which matured in 2021. The remaining balance of $16,500,000 is drawable upon the infusion of $8,250,000 of capital from either the capitalization of retained earnings or capital infusion from the Company, after the contribution of $3,500,000 of capital by the Company during the 2021 second quarter.
(D) PREFERRED SECURITIES
In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bear a variable rate of interest of 90 day LIBOR (0.15% at June 30, 2021) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third-party investor. At June 30, 2021, $33,000,000 was outstanding on the preferred securities.
(E) NOTES PAYABLE TO BANKS
The Company and its subsidiaries have entered into note agreements with a variety of local and regional banking institutions over the years. The notes are typically secured by various assets of the underlying borrower.
In the 2021 second quarter, the Company used some of the proceeds of the privately placed notes to pay off twenty five of its notes payable to banks aggregating $17,762,000 principal amount, resulting in a gain on debt extinguishment of $2,859,430.
Page 26 of 70
In March 2021, the Company used some of the proceeds of the privately placed notes to pay off two of its notes payable to banks aggregating $5,207,000 principal amount, one with a maturity of April 15, 2021 and one with a maturity of September 1, 2021, resulting in a gain on debt extinguishment of $1,767,000.
In November 2018, MFC entered into a note to the benefit of DZ Bank for $1,400,000 at a 4.00% interest rate due December 2023, as part of the restructuring of the DZ loan. The note requires a regular quarterly payment of $70,000 of principal and accrued interest and matures in December 2023, and has an outstanding balance of $700,000 as of June 30, 2021. See Note 15 for more information.
(F) OTHER BORROWINGS
In November and December 2017, RPAC amended the terms of various promissory notes with affiliate Richard Petty. (Refer to Note 11 for more details.) At June 30, 2021, the total outstanding on these notes was $7,516,000 at a 2.00% annual interest rate compounded monthly and due March 31, 2022. Additionally, RPAC has a short term promissory note to an unrelated party for $500,000 due on December 31, 2021.
On June 17, 2020, RPAC was approved for and received a Paycheck Protection Program, or PPP, loan under the CARES Act, in the amount of $747,000 at a 1.00% annual interest rate due in five years. Under the terms of the note, RPAC could be granted forgiveness for all or a portion of the balance if the loan proceeds are used in accordance with the requirements set forth in the PPP. During the quarter, RPAC applied for forgiveness of this loan, which was granted by the SBA.
(G) COVENANT COMPLIANCE
Certain of the Company’s debt agreements contain restrictions that require the Company and its subsidiaries to maintain certain financial ratios, including minimum net worth. The Company was in compliance with such restrictions as of June 30, 2021.
(6) LEASES
The Company has leased premises that expire at various dates through November 30, 2027 subject to various operating leases. The Company has implemented ASC Topic 842 under a modified retrospective approach in which no adjustments have been made to the prior year balances.
The following table presents the operating lease costs and additional information for the three and six months ended June 30, 2021 and 2020.
Operating lease costs
572
596
1,144
1,192
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
590
632
1,265
1,324
Right-of-use asset obtained in exchange for lease liability
(18
(14
(36
(28
The following table presents the breakout of the operating leases as of June 30, 2021 and December 31, 2020.
Operating lease right-of-use assets
11,737
Other current liabilities
2,111
2,004
Total operating lease liabilities
12,000
13,022
Weighted average remaining lease term
5.9 years
6.4 years
Weighted average discount rate
5.54
Page 27 of 70
At June 30, 2021, maturities of the lease liabilities were as follows:
Remainder of 2021
1,247
2,411
2,356
2,373
2,390
3,521
Total lease payments
14,298
Less imputed interest
2,298
(7) INCOME TAXES
The Company is subject to federal and applicable state corporate income taxes on its taxable ordinary income and capital gains. As a corporation taxed under Subchapter C of the Internal Revenue Code, the Company is able, and intends, to file a consolidated federal income tax return with corporate subsidiaries, in which it holds 80% or more of the outstanding equity interest measured by both vote and fair value.
The following table sets forth the significant components of our deferred and other tax assets and liabilities as of June 30, 2021 and December 31, 2020.
Goodwill and other intangibles
(44,145
(44,799
14,308
19,556
Net operating loss carryforwards(1)
25,393
30,493
Accrued expenses, compensation, and other assets
1,676
1,174
Unrealized gains on other investments
(3,528
(6,769
Total deferred tax liability
(6,296
(345
Valuation allowance
(462
Deferred tax liability, net
(8,591
(807
Taxes receivable
Net deferred and other tax assets (liabilities)
(7,519
950
As of June 30, 2021, the Company and its subsidiaries had an estimated $103,838 of net operating loss carryforwards, $1,712 of which expires at various dates between December 31, 2026 and December 31, 2035, which had a net carrying value of $23,098 as of June 30, 2021.
The components of our tax (provision) benefit for the three and six months ended June 30, 2021 and 2020 were as follows:
Federal
(795
State
(100
(137
(270
Deferred
(3,001
774
(6,054
3,299
(2,632
216
(3,287
1,026
Net (provision) benefit for income taxes
Page 28 of 70
The following table presents a reconciliation of statutory federal income tax (provision) benefit to consolidated actual income tax (provision) benefit for the three and six months ended June 30, 2021 and 2020.
Statutory Federal income tax (provision) benefit at 21%
(3,805
655
(6,524
4,067
State and local income taxes, net of federal income tax benefit
(743
122
(1,275
760
Valuation allowance against net operating losses
(1,833
Change in effective state income tax rates and accrual
(1,399
(1,369
149
Income attributable to non-controlling interest
47
50
266
Non deductible expenses
385
(198
213
(789
820
Total income tax (provision) benefit
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible pursuant to ASC 740. The Company considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company’s evaluation of the realizability of deferred tax assets must consider both positive and negative evidence. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. Based upon these considerations, the Company determined the necessary valuation allowance as of June 30, 2021.
The Company has filed tax returns in many states. Federal, New York State, New York City, and Utah state tax filings of the Company for the tax years 2018 through the present are the more significant filings that are open for examination.
(8) STOCK OPTIONS AND RESTRICTED STOCK
The Company’s Board of Directors approved the 2018 Equity Incentive Plan, or the 2018 Plan, which was approved by the Company’s stockholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to the Company’s employees and non-employee directors, including options, restricted stock, restricted stock units, and stock appreciation rights, etc. On April 22, 2020, the Company’s Board of Directors approved an amendment to the 2018 Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder, which was approved by the Company’s stockholders on June 19, 2020. A total of 2,210,968 shares of the Company’s common stock are issuable under the 2018 Plan, and 435,474 remained issuable as of June 30, 2021. Awards under the 2018 Plan are subject to certain limitations as set forth in the 2018 Plan, which will terminate when all shares of common stock authorized for delivery have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2018 Plan, whichever occurs first.
The Company’s Board of Directors approved the 2015 Employee Restricted Stock Plan, or the 2015 Restricted Stock Plan, on February 13, 2015, which was approved by the Company’s shareholders on June 5, 2015. The 2015 Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC on March 1, 2016. The terms of 2015 Restricted Stock Plan provided for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock which, at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 700,000 shares of the Company’s common stock were issuable under the 2015 Restricted Stock Plan, and 241,919 remained issuable as of June 15, 2018. Effective June 15, 2018, the 2018 Plan was approved, and these remaining shares were rolled into the 2018 Plan. Awards under the 2015 Restricted Stock Plan are subject to certain limitations as set forth in the 2015 Restricted Stock Plan. The 2015 Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the 2015 Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2015 Restricted Stock Plan, whichever occurs first.
The Company had a stock option plan, or the 2006 Stock Option Plan, available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provided for the issuance of a maximum of 800,000 shares of common stock of the Company. No additional shares are available for issuance under the 2006 Stock Option Plan. The 2006 Stock Option Plan was administered by the Compensation Committee of the Board of Directors. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. The term and vesting periods of the options were determined by the Compensation Committee, provided that the maximum term of an option could not exceed a period of ten years.
Page 29 of 70
The Company’s Board of Directors approved the 2015 Non-Employee Director Stock Option Plan, or the 2015 Director Plan, on March 12, 2015, which was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on February 29, 2016. A total of 300,000 shares of the Company’s common stock were issuable under the 2015 Director Plan, and 258,334 remained issuable as of June 15, 2018. Effective June 15, 2018, the 2018 Plan was approved, and these remaining shares were rolled into the 2018 Plan. Under the 2015 Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the 2015 Director Plan, the Company granted options to purchase 12,000 shares of the Company’s common stock to a non-employee director upon election to the Board of Directors, with an adjustment for directors who were elected to serve less than a full term. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. Options granted under the 2015 Director Plan are exercisable annually, as defined in the 2015 Director Plan. The term of the options could not exceed ten years.
The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan, or the Amended Director Plan, on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock were issuable under the Amended Director Plan. No additional shares are available for issuance under the Amended Director Plan. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company would grant options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board of Directors, with an adjustment for directors who were elected to serve less than a full term. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. Options granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options could not exceed ten years.
Additional shares are only available for future issuance under the 2018 Plan. At June 30, 2021, 1,209,642 options on the Company’s common stock were outstanding under the Company’s plans, of which 347,824 options were exercisable. Additionally, there were 442,190 unvested shares under the Company’s restricted common stock plan, and 16,803 unvested restricted stock units, and 47,472 vested restricted stock units under the Company’s restricted stock plans.
The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of options granted was $3.24 per share and $3.30 per share for the six months ended June 30, 2021 and 2020. The following assumption categories are used to determine the value of any option grants.
Risk free interest rate
0.97
1.46
Expected dividend yield
Expected life of option in years(1)
6.25
Expected volatility(2)
53.98
50.18
Expected life is calculated using the simplified method.
We determine our expected volatility based on our historical volatility.
Page 30 of 70
The following table presents the activity for the stock option programs for the 2021 first and second quarters and the 2020 full year.
Options
Exercise
Price Per
Share
Weighted
Exercise Price
Outstanding at December 31, 2019
550,040
2.14-13.53
6.58
Granted
444,557
4.89-6.68
6.24
Cancelled
(42,928
2.22-13.53
6.91
Exercised(1)
Outstanding at December 31, 2020
951,669
2.14-12.55
6.41
317,398
6.79
(3,984
6.55-7.25
6.89
(768
Outstanding at March 31, 2021
1,264,315
6.50
(32,446
4.89-7.25
5.98
(22,227
5.27-7.25
5.76
Outstanding at June 30, 2021
1,209,642
6.53
Options exercisable at June 30, 2021(2)
347,824
The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at the exercise date and the related exercise price of the underlying options, was $77,000 and $0 for the three and six months ended June 30, 2021 and 2020.
The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at June 30, 2021 and the related exercise price of the underlying options, was $2,854,000 for outstanding options and $844,000 for exercisable options as of June 30, 2021. The remaining contractual life was 8.50 years for outstanding options and 7.47 years for exercisable options at June 30, 2021.
The following table presents the activity for the restricted stock programs for the 2021 first and second quarters and the 2020 full year.
Shares
Grant
284,879
3.95-7.25
6.01
229,408
6.21
(8,755
6.93
Vested(1)
(89,392
3.95-6.55
5.37
416,140
4.39-7.25
5.96
(119,577
6.09
452,522
4.80-7.25
6.48
6.13
442,190
6.49
The aggregate fair value of the restricted stock vested was $0 and $813,000 for the three and six months ended June 30, 2021 and was $0 and $553,000 for the three and six months ended June 30, 2020.
The aggregate fair value of the restricted stock was $3,918,000 as of June 30, 2021. The remaining vesting period was 3.68 years at June 30, 2021.
Page 31 of 70
During the six months ended June 30, 2021, the Company granted 16,803 restricted stock units, or RSUs, that vest on June 17, 2022 with a grant price of $8.87, and during the year ended December 31, 2020, granted 47,156 RSUs that vested on June 19, 2021 with a grant price of $3.16. For the RSUs granted in 2020 and 2019, unitholders had the option of deferring settlement until a future date if the recipient makes a formal election under the guidelines of IRC Section 409A, which was done for 47,272 units.
The following table presents the activity for the unvested options outstanding under the plans for the 2021 first and second quarters.
Price
Per Share
773,362
6.42
(2,530
6.96
Vested
(185,278
6.67
902,952
(33,134
5.99
(8,000
5.58
861,818
The intrinsic value of the options vested was $29,000 and $77,000 for the three and six months ended June 30, 2021.
(9) SEGMENT REPORTING
The Company has six business segments, which include four lending and two non-operating segments, which are reflective of how Company management makes decisions about its business and operations.
The four lending segments reflect the main types of lending performed at the Company, which are recreation, home improvement, commercial, and medallion. The recreation and home improvement lending segments are operated by the Bank and include loans in all fifty states, with the highest concentrations in Texas, Florida, and California at 14%, 9%, and 9% of loans outstanding and with no other states over 9% as of June 30, 2021. The recreation lending segment is a consumer finance business that works with third-party dealers and financial service providers for the purpose of financing RVs, boats, and other consumer recreational equipment, of which RVs, boats, and trailers make up 60%, 20%, and 10% of the segment portfolio as of June 30, 2021. The home improvement lending segment works with contractors and financial service providers to finance residential home improvements concentrated in roofs, swimming pools, and windows at 29%, 27%, and 12% of total home improvement loans outstanding, and with no other product lines over 10% as of June 30, 2021. The commercial lending segment focuses on enterprise wide industries, including manufacturing services, and various other industries, in which 66% of these loans are made in the Midwest. The medallion lending segment arose in connection with the financing of taxi medallions, taxis, and related assets, of which 85% were in New York City as of June 30, 2021.
In addition, our non-operating segments include RPAC, which is a race car team, and our corporate and other investments segment which includes items not allocated to our operating segments such as investment securities, equity investments, intercompany eliminations, and other corporate elements. As a result of COVID-19, the prior year race season had been suspended from March 15, 2020 through May 17, 2020. As states reopened, NASCAR resumed races and completed all races scheduled in 2020. Commencing in the 2020 second quarter, the Bank began issuing loans related to its strategic partnership business, which is currently included within the corporate and other investment segment due to its small size.
As part of segment reporting, capital ratios for all operating segments have been normalized at 20%, which approximates the percentage of consolidated total equity divided by total assets, with the net adjustment applied to corporate and other investments. In addition, the commercial segment exclusively represents the mezzanine lending business, and the legacy commercial loan business (immaterial to total) has been allocated to corporate and other investments.
Page 32 of 70
The following tables present segment data as of and for the three and six months ended June 30, 2021 and 2020.
Consumer Lending
Corp.
Lending
RPAC
and
Investments
Consolidated
Total interest income
28,886
8,228
1,383
(1,475
353
Total interest expense
2,863
1,143
716
2,524
34
604
Net interest income (loss)
26,023
7,085
667
(3,999
(34
(251
Provision for loan losses (benefit)
1,017
756
(2,943
488
after loss provision
25,006
6,329
(1,056
(739
Sponsorship and race winnings
(2,674
Other income (expense), net
(7,455
(2,638
(69
(1,157
(1,862
(543
(13,724
Net income (loss) before taxes
17,551
3,691
598
(2,213
(225
(1,282
(951
(150
556
(1,521
13,032
2,740
448
(1,657
(2,803
Balance Sheet Data
Total loans, net
855,900
362,370
66,236
5,764
3,351
868,709
375,189
90,563
101,205
31,877
272,204
Total funds borrowed
712,777
295,887
72,450
80,959
212,020
1,382,109
Selected Financial Ratios
Return on average assets
2.36
(6.10
)%
(1.05
(3.85
2.43
Return on average equity
31.19
15.19
11.78
(30.51
(39.70
(1.95
12.90
Interest yield
14.03
9.48
9.16
(70.71
N/A
11.17
Net interest margin
12.64
8.16
4.42
(189.15
8.84
Reserve coverage
0.00
Delinquency status(2)
0.32
0.11
0.22
Charge-off ratio
(0.44
0.26
513.86
3.28
Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.
Loans 90 days or more past due.
Ratio is based on total commercial lending balances, and relates to the total loan business.
Page 33 of 70
56,328
16,146
2,865
(1,544
660
5,657
2,351
1,288
3,894
3,027
50,671
13,795
1,577
(5,438
(75
(2,367
1,206
(3,987
487
46,041
12,589
(1,451
(2,854
(4,796
(12,918
(4,552
(529
(3,301
(3,623
(1,858
(26,781
33,123
8,037
1,048
(4,752
(1,676
(4,712
(8,529
(2,070
(263
1,193
421
(1,158
24,594
5,967
785
(3,559
(1,255
(5,870
6.06
3.39
1.95
(6.29
(7.72
(4.08
2.08
30.32
16.96
9.77
(31.44
(244.87
(30.46
11.09
14.18
9.56
9.66
(30.90
11.50
12.76
8.17
5.32
(108.84
9.01
0.12
0.99
216.01
2.15
Page 34 of 70
27,229
6,326
1,726
(7
$ —
314
3,226
1,236
617
988
40
2,728
24,003
5,090
(995
8,292
7,889
Net interest income (loss) after loss
provision
15,711
4,330
(8,884
Sponsorship and race winning
(1,818
(6,497
(1,962
(584
(2,292
(1,378
(2,025
(14,738
9,214
2,368
525
(11,176
390
(4,439
(2,356
(131
2,785
(97
6,858
1,762
394
(8,391
293
(3,181
Balance Sheet Data as of June 30, 2020
759,764
278,000
68,140
84,369
3,344
1,193,617
775,151
288,501
86,831
190,657
30,542
280,061
1,651,743
617,066
229,237
70,567
151,614
8,615
218,695
1,295,794
Selected Financial Ratios as of June 30, 2020
3.68
2.58
1.86
(17.19
3.88
(8.96
(0.98
18.38
12.88
9.28
(85.96)
(53.94)
(38.05)
(4.97)
14.91
10.67
(0.03)
10.95
13.15
7.77
6.86
(4.08)
8.23
3.43
1.44
29.84
5.31
0.44
0.15
10.29
1.26
0.30
1.12
1.39
Page 35 of 70
53,563
12,213
3,484
995
875
6,792
2,523
1,274
2,837
80
4,329
46,771
9,690
2,210
(1,842
(80
(3,454
18,893
2,296
12,293
27,878
7,394
(14,135
(3,948
(13,869
(4,302
(1,479
(10,865
(3,223
(7,694
(41,432
14,009
3,092
731
(25,000
(1,052
(11,148
(3,582
(791
(182
6,230
262
2,165
10,427
2,301
549
(18,770
(8,983
Balance Sheet Data as of
Selected Financial Ratios as of
2.85
1.72
1.30
(18.56
(5.17
(7.14
-2.23
14.25
8.62
(92.14
81.74
(26.03
(10.82
14.98
9.58
10.97
11.31
13.08
7.58
(3.78
8.48
2.78
0.65
3.73
2.21
Page 36 of 70
(10) COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key officers for either a one-, two- or five-year term. Annually, the contracts with a five-year term will generally renew for new five-year terms unless prior to the end of the first year of each five-year term, either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current five-year term. Typically, the contracts with a one- or two-year term will renew for new one- or two-year terms unless prior to the term either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current one or two-year terms; however, there is currently one agreement that renews after two years for additional one- year terms. In the event of a change in control, as defined, during the employment period, the agreements provide for severance compensation to the executive in an amount equal to the balance of the salary, bonus, and value of fringe benefits which the executive would be entitled to receive for the remainder of the employment period.
Employment agreements expire at various dates through 2025, with future minimum payments under these agreements of approximately $11,050,000.
(B) OTHER COMMITMENTS
The Company had no commitments to extend credit or make investments outstanding at June 30, 2021. Generally, any commitments would be on the same terms as loans to or investments in existing borrowers or investees, and generally have fixed expiration dates. Since some commitments would be expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
(C) SEC MATTERS
The staff of the SEC has conducted an investigation of the Company relating to certain issues that occurred during the period 2015 to 2017, including (i) the Company’s retention of third parties in 2015 and 2016 concerning posting information about the Company on certain financial websites and (ii) the Company’s financial reporting and disclosures concerning certain assets, including Medallion Bank, in 2016 and 2017, a period when the Company had previously reported as a business development company (“BDC”) under the Investment Company Act of 1940. Since April 2018, the Company does not report as a BDC, and has not worked with such third parties since 2016. The Company does not expect to change previously reported financial results.
The Company is currently engaged in active discussions and is cooperating with the SEC staff regarding a potential settlement of all aspects of the investigation, which is expected to include a civil fine in an amount that is not currently estimable, but which may be material. There can be no assurance that a settlement will be reached, or the terms and timing of any such settlement. If a settlement is not reached, litigation may ensue. In either event, the Company could incur a loss that could be material to the Company, its results of operations or financial condition.
(D) LITIGATION
The Company and its subsidiaries become defendants to various legal proceedings arising from the normal course of business. In the opinion of management, based on the advice of legal counsel, there is no proceeding pending, or except as described above, the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse impact on the financial condition or results of operations of the Company.
(E) REGULATORY
In the ordinary course of business, the Company and its subsidiaries are subject to inquiries from certain regulators. During 2014, FSVC was examined by the SBA. The foregoing regulatory examination was resolved in January 2017 as a result of FSVC’s transfer to liquidation status and the restructure of the FSVC loan described in Note 5.
(11) RELATED PARTY TRANSACTIONS
Certain directors, officers and stockholders of the Company are also directors and officers of its main consolidated subsidiaries, MFC, MCI, FSVC, and the Bank, as well as other subsidiaries. Officer salaries are set by the Board of Directors of the Company.
Page 37 of 70
Jeffrey Rudnick, the son of one of the Company’s directors, was an officer of LAX Group, LLC (LAX), one of the Company’s equity investments that sold its assets on December 16, 2020. In January 2020, Mr. Rudnick received a salary from LAX of $178,000 per year, which was reduced to $133,000 in the 2020 second quarter, and certain equity from LAX consisting of 10% ownership in LAX Class B stock, vesting at 3.34% per year; 5% of any new equity raised from outside investors at a valuation of $1,500,000 or higher; and 10% of LAX’s profits as a year-end bonus. In addition, Mr. Rudnick provided consulting services to the Company directly for a monthly retainer of $4,200. Effective March 1, 2021, Mr. Rudnick serves as the Company’s Senior Vice President at a salary of $195,000 per year and is no longer providing consulting services to the Company.
The Company’s subsidiary RPAC, has an agreement with minority shareholder Richard Petty, in which it makes an annual payment of $700,000 per year for services provided to the entity. In addition, RPAC has a note payable to a trust controlled by Mr. Petty of $7,516,000 that earns interest at an annual rate of 2% through June 30, 2021, none of which has been paid to date.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB ASC Topic 825, “Financial Instruments,” requires disclosure of fair value information about certain financial instruments, whether assets, liabilities, or off-balance-sheet commitments, if practicable. The following methods and assumptions were used to estimate the fair value of each class of financial instrument. Fair value estimates that were derived from broker quotes cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
(a) Cash—Book value equals fair value.
(b) Equity investments and securities—The Company’s equity securities are recorded at cost less any impairment plus or minus observable price changes.
(c) Investment securities—The Company’s investments are recorded at the estimated fair value of such investments.
(d) Loans receivable—The Company’s loans are recorded at book value which approximated fair value.
(e) Floating rate borrowings—Due to the short-term nature of these instruments, the carrying amount approximated fair value.
(f) Commitments to extend credit—The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At June 30, 2021 and December 31, 2020, the estimated fair value of these off-balance-sheet instruments was not material.
(g) Fixed rate borrowings—The fair value of the debentures payable to the SBA is estimated based on current market interest rates for similar debt.
Carrying Amount
Financial assets
Cash, cash equivalents and federal funds sold(1)
Loans receivable
Accrued interest receivable(2)
Equity securities(3)
1,969
Financial liabilities
Funds borrowed(4)
1,312,255
1,312,591
Accrued interest payable(2)
Categorized as level 1 within the fair value hierarchy, excluding $1,250 and $1,500 in interest bearing deposits categorized as level 2 as of June 30, 2021 and December 31, 2020. See Note 13.
Categorized as level 3 within the fair value hierarchy. See Note 13.
Included within other assets on the balance sheet.
There were no publicly traded retail notes as of June 30, 2021. As of December 31, 2020, publicly traded retail notes traded at a premium to par of $336.
Page 38 of 70
(13) FAIR VALUE OF ASSETS AND LIABILITIES
The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.
In accordance with FASB ASC 820, the Company has categorized its assets and liabilities measured at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). Our assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.
As required by FASB ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a level 3 fair value measurement may include inputs that are observable (levels 1 and 2) and unobservable (level 3). Therefore gains and losses for such assets and liabilities categorized within the level 3 table below may include changes in fair value that are attributable to both observable inputs (levels 1 and 2) and unobservable inputs (level 3).
Assets and liabilities measured at fair value, recorded on the consolidated balance sheets, are categorized based on the inputs to the valuation techniques as follows:
Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most US Government and agency securities, and certain other sovereign government obligations).
Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
A)
Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
B)
Quoted price for identical or similar assets or liabilities in non-active markets (for example, corporate and municipal bonds, which trade infrequently);
C)
Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
D)
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).
Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, and certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).
A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur.
Page 39 of 70
Equity investments were recorded at cost less impairment plus or minus observable price changes. Commencing in 2020, the Company elected to measure equity investments at fair value on a non-recurring basis, which have been adjusted for all periods presented.
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020.
Level 1
Level 2
Level 3
Interest-bearing deposits
1,250
Available for sale investment securities
Equity securities
Total(1)
49,557
51,526
Total unrealized gain (loss) of $27 and ($578), net of tax, was included in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2021 related to these assets.
1,500
Available for sale investment securities(1)
48,292
Total unrealized loss of $1,013, net of tax, was included in accumulated other comprehensive income (loss) for the year ended December 31, 2020 related to these assets.
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2021 and December 31, 2020.
Impaired loans
Loan collateral in process of foreclosure
99,899
126,480
Page 40 of 70
Significant Unobservable Inputs
ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as level 3 within the fair value hierarchy. The tables below are not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.
The valuation techniques and significant unobservable inputs used in non-recurring level 3 fair value measurements of assets and liabilities as of June 30, 2021 and December 31, 2020.
Fair Value at 6/30/21
Valuation Techniques
Unobservable Inputs
Range
(Weighted Average)
9,271
Investee financial
analysis
Financial condition and
operating performance
of the borrower (1)
Collateral support
819
Precedent market
transaction
Offering price
$8.73 / share
Market approach
Historical and actual loss
experience
1.50% - 6.00%
60% of balance
Transfer prices (2)
$0.0 - 79.5
Collateral value
Loan collateral in process of
foreclosure
Collateral value (3)
$1.8 - 31.5
Fair Value at 12/31/20
8,291
1,455
$0.6 - 108.7
$0.7 - 32.3
Includes projections based on revenue, EBITDA, leverage, and liquidation amounts. These assumptions are based on a variety of factors, including economic conditions, industry, and market developments, market valuations of comparable companies, and company-specific developments, including exit strategies and realization opportunities.
Represents amount net of liquidation costs.
Relates to the recreation portfolio.
(14) MEDALLION BANK PREFERRED STOCK (Non-controlling interest)
On December 17, 2019, the Bank closed an initial public offering of 1,840,000 shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, with a $46,000,000 aggregate liquidation amount, yielding net proceeds of $42,485,000, which were recorded in the Bank’s shareholders’ equity. Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.
Page 41 of 70
On July 21, 2011, the Bank issued, and the US Treasury purchased 26,303 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series E, or Series E, for an aggregate purchase price of $26,303,000 under the Small Business Lending Fund Program, or SBLF, with a liquidation amount of $1,000 per share. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks. The Bank pays a dividend rate of 9% on the Series E.
(15) VARIABLE INTEREST ENTITIES
During the 2018 third quarter, the Company determined that Trust III was a VIE. Trust III had been consolidated as a subsidiary of MFC historically, although it should have been consolidated under the variable interest model, since MFC was its primary beneficiary until October 31, 2018. Trust III is a VIE since the key decision-making authority rests in the servicing agreement (where MFC is the servicer for Trust III) rather than in the voting rights of the equity interests and as a result the decision-making rights are considered a variable interest. This conclusion is supported by a qualitative assessment that Trust III does not have sufficient equity at risk. Since the inception of Trust III, MFC had also been party to a limited guaranty which was considered a variable interest because, pursuant to the guaranty, MFC absorbed variability as a result of the on-going performance of the loans in Trust III. As of October 31, 2018, the Company determined that MFC was no longer the primary beneficiary of Trust III and accordingly deconsolidated the VIE, leading to a net gain of $25,325,000 recorded as well as a new promissory note payable by MFC of $1,400,000 issued in settlement of the limited guaranty. See Note 5 for more details. The Company’s interest in Trust III is accounted for as an equity investment and has a value of $0 as of June 30, 2021 and December 31, 2020. In addition, the Company remains the servicer of the assets of Trust III for a fee.
In December 2008, Trust III entered into the DZ loan agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC, or the DZ loan. The loan, which has an outstanding balance of $85,451,000, currently terminates on August 20, 2021. Borrowings under the DZ loan are collateralized by Trust III’s assets.
(16) SUBSEQUENT EVENTS
The Company has evaluated the effects of events that have occurred subsequent to June 30, 2021, through the date of financial statement issuance. As of such date, there were no subsequent events that required disclosure.
Page 42 of 70
OBJECTIVE
The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes thereto for the three and six months ended June 30, 2021 and the year ended December 31, 2020. This section is intended to provide management’s perspective of our financial condition and results of operations. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors in the Company’s Annual Report on Form 10-K.
GENERAL
We are a finance company whose strategic focus and growth in recent years has been through Medallion Bank (a wholly-owned subsidiary), which originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, home improvements, and provides loan origination and other services to fintech partners. Historically we have had a leading position in originating, acquiring, and servicing loans that finance taxi medallions and various types of commercial businesses.
Since Medallion Bank, or the Bank, acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17%. We have transitioned away from medallion lending and have placed our strategic focus on our growing consumer finance portfolio. As a result of our change in strategy, as of June 30, 2021, our consumer loans represented 94% of our loan portfolio, with commercial loans representing 5% and medallion loans representing 1%. Total assets under management, which includes assets serviced for third-party investors, were $1.8 billion as of June 30, 2021 and December 31, 2020 and $1.6 billion as of June 30, 2020, and have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996.
Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as bank certificates of deposit, debentures issued to and guaranteed by the SBA, privately placed notes, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities.
We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Our investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.
In 2019, the Bank started building-out a strategic partnership program to provide lending and other services to financial technology, or fintech, companies. The Bank entered into an initial partnership in 2020 and began issuing its first loans and entered into another strategic partnership in 2021, and continues to explore opportunities with additional fintech companies.
In recent years, we have focused on growing our consumer lending segments and maintaining the profitability of our commercial lending segment. Since the beginning of 2020, we have taken various steps to pursue this strategy, including:
carrying-out cost-cutting measures, such as reducing our employee headcount by 21% at our parent company Medallion Financial Corp. and closing satellite offices in Long Island City, Chicago, and Boston;
exiting non-core investments, such as selling the assets of LAX Group, LLC on December 16, 2020, and selling 1,666,667 shares of our investment in Upgrade, Inc. in the 2021 second quarter, resulting in net cash proceeds of $3,816,000, and a gain of $3,179,000, as well as exiting other non-core investments when practicable to maximize our proceeds, like our remaining art investments at Medallion Fine Art, Inc., which have been written down to a net realizable value of $0 in the 2021 second quarter; and
growing the Bank by partnering with two fintech companies in our strategic partnership program.
Page 43 of 70
Our wholly-owned subsidiary, Medallion Bank, or the Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions that originates consumer loans, raises deposits, and conducts other banking activities. The Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we have referred a portion of our medallion and commercial loans to the Bank, which originated these loans, and have been serviced by Medallion Servicing Corp., or MSC. However, at this time the Bank is not originating any new medallion loans and is working with MSC to service its existing portfolio. MSC earns referral and servicing fees for these activities.
COVID-19
The ongoing coronavirus, or COVID-19, pandemic, its broad impact and preventive measures taken to contain or mitigate the outbreak have had, and may to continue to have, significant negative effects on the US and global economy, employment levels, employee productivity, and financial market conditions. This has had, and may continue to have increasingly negative effects on the ability of our borrowers to repay outstanding loans, the value of collateral securing loans, the demand for loans and other financial services products and consumer discretionary spending. As a result of these or other consequences, the outbreak has adversely and materially affected our business, results of operations and financial condition. Although we continue to see signs of recovery, it remains uncertain, and the effects of the outbreak on us could be exacerbated given that our business model is largely consumer and small business directed, which are more severely affected by COVID-19 and the preventative measures taken to contain or mitigate the outbreak, including its significant negative effects on consumer discretionary spending. The full extent to which the outbreak will continue to impact our operations will depend on future developments, including the impact of the Delta variant, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the continued outbreak, the actions taken to contain or mitigate the outbreak and how long, and to what extent the economic recovery from its effects will take.
We have taken steps to operate through this crisis, including having our workforce work remotely on a part-time basis in New York, though our employees outside of New York largely continue to work remotely. Despite elevated risks associated with a remote workforce, we implemented additional mitigating controls to help reduce such risks. In addition, we implemented a number of cost-cutting measures, such as reducing employee headcount by 21% at our parent company, Medallion Financial Corp., and closing satellite offices in Long Island City, Chicago and Boston.
In March 2020, we adjusted the payment policies and procedures with our consumer and medallion businesses, and allowed borrowers to defer payments up to 180 days. As of June 30, 2021, minimal consumer loans remained on deferral and no medallion loans remained on deferral. For our consumer loan portfolios, although we believe that our deferral programs have been effective to date in mitigating the effect of COVID-19, the ultimate effects of COVID-19 on these portfolios remains to be seen. For our medallion portfolio, we determined that anticipated payment activity on our medallion portfolio was impossible to quantify upon exit of the deferral moratorium, and therefore all medallion loans were deemed impaired, placed on nonaccrual status, and written down to each market’s net collateral value at December 31, 2020, with additional write-offs taken during 2021. We will continue to monitor our medallion portfolio and related assets, which may result in additional write-downs, charge-offs or impairments, the impact of which could be material to our results of operations and financial condition.
Substantially all our medallion loans and related assets are concentrated in New York City. As a result of the COVID-19 pandemic, economic activity and taxi ridership decreased dramatically in New York City and despite the reopening of New York City, there has not been a substantial increase in ridership and gross meter fares. The extent to which the COVID-19 pandemic will continue to adversely affect taxi medallion owners and, by extension, our medallion loans and related assets, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, actions taken by governmental authorities, and the direct and indirect impact of the pandemic on taxi medallion owners and the behaviors of people who have historically taken taxis.
In regards to our commercial business, many of our mezzanine portfolio companies were able to access the Paycheck Protection Program, providing needed liquidity during a period of depressed market demands. MCI drew on its remaining unfunded commitments and received a commitment from the SBA for $25,000,000 in debenture financing with a ten-year term, upon a capital infusion from Medallion Financial Corp. For the commercial portfolio, performance is slowly recovering although lingering impacts of COVID-19 continue to weigh on performance.
RPAC received $747,000 under the Paycheck Protection Program in the 2020 second quarter, all of which has been forgiven and accordingly recorded as Other income in the 2021 second quarter.
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Average Balances and Rates
The following table shows the Company’s consolidated average balance sheet, interest income and expense, and the average interest earning/bearing assets and liabilities, and which reflects the average yield on assets and average costs on liabilities for the three and six months ended June 30, 2021 and 2020.
Yield/Cost
Interest-earning assets
Interest-earning cash and cash equivalents
2,993
14
1.88
98,627
0.04
48,557
0.03
44,119
225
2.05
47,072
251
2.14
825,695
28,877
734,387
348,066
263,379
63,855
1,516
9.52
70,658
1,778
10.12
8,480
(1,495
93,013
(0.03
60
40.11
Total loans
1,246,156
11.95
1,161,443
35,326
12.23
Total interest-earning assets
1,341,825
1,307,142
Non-interest-earning assets
Cash
45,257
15,247
9,714
10,377
270
130
Loan collateral in process of foreclosure(1)
50,678
47,308
Goodwill and intangible assets
201,354
202,799
45,576
51,976
Total non-interest-earning assets
352,849
327,837
1,694,674
1,634,979
Interest-bearing liabilities
Deposits
1,104,935
1.62
1,074,961
Retail and privately placed notes
125,744
2,592
8.27
69,625
9.73
SBA debentures and borrowings
60,763
509
3.36
72,490
656
3.64
191
2.32
247
3.01
9,570
94
3.94
32,206
288
3.60
8,558
1.55
8,036
Total interest-bearing liabilities
1,342,570
1,290,318
2.75
Non-interest-bearing liabilities
Deferred tax liability
5,835
5,829
Other liabilities(2)
26,982
16,961
Total non-interest-bearing liabilities
32,817
22,790
1,375,387
1,313,108
Non-controlling interest
72,489
70,838
246,798
251,033
Total liabilities and stockholders' equity
Includes financed sales of this collateral to third parties reported separately from the loan portfolio, and that are conducted by Medallion Bank of $3,919 and $9,265 as of June 30, 2021 and 2020.
Includes deferred financing costs of $7,054 and $4,709 as of June 30, 2021 and 2020.
Page 45 of 70
3,198
2.02
74,348
119
43,274
4.19
43,797
427
1.97
47,183
582
2.48
801,074
56,319
719,170
340,655
256,363
63,078
3,076
9.83
69,484
3,658
10.59
10,075
(1,564
(31.30
98,023
41
49.18
1,214,923
12.28
1,143,048
70,429
12.39
1,305,192
1,264,579
51,219
16,492
9,666
10,559
52,307
49,539
201,534
202,979
Deferred tax asset
328
199
45,314
48,716
360,368
328,484
1,665,560
1,593,063
1,077,260
1,012,111
62,654
1,081
3.48
72,008
1,343
3.75
120,450
5,224
8.75
3,366
9.72
18,378
356
3.91
32,732
3.83
380
561
8,619
1.75
7,937
2.03
1,320,361
2.49
1,227,413
2.92
3,575
7,162
27,521
31,023
31,096
38,185
1,351,457
1,265,598
72,833
70,903
241,270
256,562
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During the quarter, our net loans receivable had a yield of 11.95% (compared to 12.23% in the prior year’s second quarter), mainly driven by the growth in the home improvement portfolio which has a lower yield than our recreation portfolio, offset by the new strategic partnership loans and other interest earning cash and cash equivalents. The debt, mainly certificates of deposit, helps fund our growing consumer loan business and as market rates have decreased, so has the average cost of borrowings. In addition, we issued new privately placed notes since December 31, 2020, which were at lower rates compared to the prior issuances.
Rate/Volume Analysis
The following table presents the change in interest income and expense due to changes in the average balances (volume) and average rates, calculated for the period indicated.
Increase
(Decrease)
In Volume
in Rate
Net
Change
(447
450
291
(433
(142
(15
(11
(26
(176
(153
3,264
(1,616
1,648
4,066
(1,206
2,860
(117
1,902
1,534
114
(157
(105
(262
319
(285
14,903
(16,391
(1,488
(204
(470
(674
Strategic partnerships
20,034
(18,228
1,806
5,715
(1,847
3,868
19,576
(17,789
1,787
6,029
(2,456
3,573
124
(1,579
(1,455
1,101
(665
436
(96
(147
146
132
(194
(52
(48
1,162
(254
908
(159
(154
(313
(56
(10
(1,924
1,038
(1,024
18,603
(15,865
2,738
4,991
(1,432
3,559
Page 47 of 70
In Rate
325
(505
(180
(6
(104
(110
46
(201
(155
(151
(108
5,898
(3,142
2,756
8,533
(1,819
6,714
3,903
3,045
165
3,210
(149
(582
629
(53
15,363
(17,922
(2,559
(625
(511
25,025
(21,467
3,558
11,582
(2,222
9,360
25,097
(21,772
3,325
11,950
(2,878
9,072
(2,685
(303
1,454
(127
(135
(126
(178
(243
(25
(268
(71
879
2,195
(337
1,858
(414
(227
(641
(246
(181
(229
7
(12
(5
3,225
(4,768
(1,543
2,169
(877
1,292
21,872
(17,004
4,868
9,781
(2,001
7,780
During the three and six months ended June 30, 2021, the increase in the interest earning assets was mainly driven by the increase in volume of consumer loans, even as the rates declined. The debt change similarly was driven by the increase in the borrowings, mainly driven by the deposits, which are used to fund the consumer loans, along with new privately placed notes, offset by the repayment of retail notes.
Our interest expense is driven by the interest rates payable on our bank certificates of deposit, short-term credit facilities with banks, fixed-rate, long-term debentures issued to the SBA, and other short-term notes payable. The Bank issues brokered time certificates of deposit, which are our lowest borrowing costs. The Bank is able to bid on these deposits at a wide variety of maturity levels, which allows for improved interest rate management strategies.
Our cost of funds is primarily driven by the rates paid on our various debt instruments and their relative mix, and changes in the levels of average borrowings outstanding. See Note 5 to the consolidated financial statements for details on the terms of our outstanding debt. Our debentures issued to the SBA typically have terms of ten years.
We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities outstanding during the period. The tables above show the average borrowings and related borrowing costs for the three and six months ended June 30, 2021 and 2020.
We continue to seek SBA funding through Medallion Capital, Inc., or Medallion Capital, to the extent it offers attractive rates. SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the Small Business Investment Act of 1985, as amended, or the SBIA, and SBA regulations. In July 2020, we obtained a $25,000,000 commitment from the SBA. We believe that financing operations primarily with short-term floating rate secured bank debt has generally decreased our interest expense, but has also increased our exposure to the risk of increases in market interest rates, which we mitigate with certain interest rate strategies. At June 30, 2021 and 2020, short-term adjustable rate debt constituted 2% and 4% of total debt.
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Gross loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which are amortized to interest income over the life of the loan. During the three and six months ended June 30, 2021, there was continued growth in the consumer lending segments along with recoveries on the medallion segment, which was partly offset by consumer and medallion charge-offs during the period, the continuing of loans aged over 120 days transferred to loan collateral in process of foreclosure and payments received from borrowers.
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The following table presents the approximate maturities and sensitivity to changes in interest rates for our loans as of June 30, 2021.
Loan Maturity
Within 1 year
After 1 to 5 years
After 5 to 15 years
After 15 years
Fixed-rate
34,492
160,312
1,047,744
61,843
1,304,391
2,584
80,186
763,704
4,225
850,699
17,918
20,097
275,030
57,618
8,687
50,036
9,010
67,733
5,303
9,993
15,296
Adjustable-rate
7,527
3,671
11,198
4,520
8,191
1,220
Total(1)(2)(3)
42,019
163,983
1,315,589
Excludes strategic partnership loans.
As of June 30, 2021, there were no floating rate loans.
Excludes loan premiums and capitalized loan origination costs.
Provision and Allowance for Loan Loss
During the three months ended June 30, 2021, New York City taxi medallion values remained constant at a net realizable value of $79,500, even as other markets slightly declined, whereas for the three months ended June 30, 2020 as a result of the initial impact of COVID-19, the New York City taxi medallion values had decreased from $124,500 to $119,500. In addition, the consumer and recreation loan allowance percentages had remained relatively in line for the three months ended June 30, 2021, whereas for the three months ended June 30, 2020, due to the change in economic factors due to COVID-19, the Company increased the reserve percentages for the consumer loan portfolio between 25 to 50 basis points.
During the six months ended June 30, 2021, the New York City taxi medallion values remained constant at a net realizable value of $79,500, even as other markets slightly decreased, whereas for the six months ended June 30, 2020 the NYC taxi medallion decreased to a net realizable value of $119,500 compared to $167,000 at December 31, 2019. In addition, the consumer and recreation loan allowance percentages had remained relatively in line for the six months ended June 30, 2021, whereas for the six months ended June 30, 2020, due to the potential impact of COVID-19, the Company increased the reserve percentage for the consumer loan portfolio between 25 to 100 basis points.
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As of June 30, 2021, cumulative net charge-offs of loans and loan collateral in process of foreclosure in the medallion portfolio were $299,205, some of which may represent collection opportunities for the Company.
As of June 30, 2021, there was no allowance for loan loss and net charge-offs related to the strategic partnership loans.
Percentage
of Allowance
Nonaccrual
As of June 30, 2021, the allowance for loan losses had remained relatively in line with December 31, 2020, mainly driven by the New York City medallion collateral value remaining consistent due to the economy slowly re-opening and recovering from the COVID-19 pandemic as well as the consumer rates remaining consistent.
We generally follow a practice of discontinuing the accrual of interest income on our loans that are in arrears as to payments for a period of 90 days or more. We deliver a default notice and begin foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the most appropriate course of action under the circumstances. A loan is considered to be delinquent if the borrower fails to make a payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment terms of the loan with a borrower that cannot make payments in accordance with the original loan
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agreement. For loan modifications, the loan will only be returned to accrual status if all past due interest and principal payments are brought fully current. For credit that is collateral based, we evaluate the anticipated net residual value we would receive upon foreclosure of such collateral, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequate in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install a new operator to run the business and reduce the debt. We cannot predict the ultimate impact that the ongoing COVID-19 pandemic will have on the loan portfolios due to the greater than typical uncertainty surrounding COVID-19 and its related significant negative effects on the economy and financial markets.
For the consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged-off to realized losses. If the collateral is repossessed, a realized loss is recorded to write the collateral down to its net realizable value, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off as a realized loss, and any excess proceeds are recorded as a recovery. Proceeds collected on charged off accounts are recorded as recoveries. All collection, repossession, and recovery efforts are handled on behalf of the Bank by the contracted servicer.
The following table shows the trend in loans 90 days or more past due as of the dates indicated.
March 31, 2021
%(1)
0.2
3,152
0.5
3,365
0.3
0.0
107
742
0.1
11,967
1.0
Total loans 90 days or more
past due
2,911
4,118
0.6
15,576
1.3
Percentages are calculated against the total loan portfolio.
We estimate that the weighted average loan-to-value ratio of our medallion loans was approximately 321%, 327%, and 254% as of June 30, 2021, December 31, 2020, and June 30, 2020.
Recreation and medallion loans that reach 120 days past due are charged down to collateral value and reclassified to loan collateral in process of foreclosure. The following tables show the activity of loan collateral in process of foreclosure for the three months ended June 30, 2021 and 2020.
(164
(2,153
(3,214
(2,161
(4,452
(4,489
(4,948
(7,243
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SEGMENT RESULTS
We manage our business under four operating segments: recreation lending, home improvement lending, commercial lending, and medallion lending. We also show results for two non-operating segments; RPAC and corporate and other investments. All results are for the three and six months ended June 30, 2021 and 2020.
Recreation Lending
The recreation lending segment is a high-growth prime and non-prime consumer finance business which is a significant source of income for us, accounting for 77% and 77% of our interest income for the three months ended June 30, 2021 and 2020, and accounted for 76% and 75% for the six months ended June 30, 2021 and 2020. The loans are secured primarily by RVs, boats, and trailers, with RV loans making up 60% of the portfolio, boat loans making up 20% of the portfolio, and trailer loans 10% as of June 30, 2021, compared to 60%, 19% and 13% as of June 30, 2020. Recreation loans are made to borrowers residing in all fifty states, with the highest concentrations in Texas, California, and Florida, at 16%, 10%, and 9% of loans outstanding, compared to 18%, 10%, and 10% as of June 30, 2020, and with no other states over 10%.
During the three and six months ended June 30, 2021, the recreation portfolio continued its growth compared to the three and six months ended June 30, 2020. Additionally, reserves were strengthened while the delinquencies and charge-offs improved. Also, the allowance percentages remained in line whereas in the prior period there had been an increase due to the uncertainty regarding the COVID-19 pandemic.
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The following table presents certain financial data and ratios as of and for the three and six months ended June 30, 2021 and 2020.
Selected Earnings Data
Net interest income after loss provision
Net income before taxes
Income tax provision
Net income after taxes
Total loans, gross
Total loan allowance
27,021
Total borrowings
Delinquency status(1)
Charge-off %
Home Improvement Lending
The home improvement lending segment works with contractors and financial service providers to finance residential home improvements and is concentrated in roofs, swimming pools, and windows at 29%, 27%, and 12% of total loans outstanding as of June 30, 2021, as compared to 22%, 22%, and 14% as of June 30, 2020, with no other collateral types over 10%. Home improvement loans are made to borrowers residing in all fifty states, with the highest concentrations in Florida, Texas, and Ohio at 11%, 10%, and 8% of loans outstanding June 30, 2021, compared to 10%, 11%, and 11% as of June 30, 2020, and with no other states over 6%.
For the three and six months ended June 30, 2021, the home improvement loan portfolio continued to grow rapidly, leading to an increase in interest income and overall net income, while maintaining its high net interest margin. Additionally, loan loss reserves were strengthened while charge-offs and delinquencies improved.
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4,072
362,367
0.01
Commercial Lending
We originate both senior and subordinated loans nationwide to businesses in a variety of industries, more than 68% of which are located in the Midwest region, with the rest scattered across the country. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $2,000,000 to $5,000,000 at origination, and typically include an equity component as part of the financing. The commercial lending business has concentrations in manufacturing and administrative and support services, making up 47% and 15% of the loans outstanding as of June 30, 2021, compared to 56% and 13% as of June 30, 2020.
The following table presents certain financial data and ratios as of and for the three and six months ended June 30, 2021 and 2020. The commercial segment encompasses the mezzanine lending business, and the other legacy commercial loans (immaterial to total) have been allocated to corporate and other investments. The commercial segment decreased as early payoffs exceeded new loans recorded during the quarter. Net income improved as expenses decreased and credit quality remained solid.
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Reserve coverage(1)
Delinquency status(1) (2)
Charge-off %(3)
Ratio is based off of total commercial balances, and relates solely to the legacy commercial loan balances.
Geographic Concentrations (Dollars in thousands)
Total Gross
% of Market
Illinois
16,689
25
9,353
Michigan
10,794
16
10,383
15
Minnesota
8,086
5,732
North Carolina
5,847
5,348
Texas
5,569
5,556
New Jersey
4,164
5,041
California
5,008
4,988
Kansas
4,107
Other(1)
5,972
17,632
Includes four other states, which were all under 6% as of June 30, 2021, and seven other states, all under 6% as of June 30, 2020.
Medallion Lending
The medallion lending segment operates mainly in the New York City, Newark, and Chicago markets. We have a long history of owning, managing, and financing taxi fleets, taxi medallions, and corporate car services. During the three and six months ended June 30, 2021, taxi medallion values remained consistent in the New York City market even as other markets saw declines. We continue to experience a decline in interest income due to all loans being placed on nonaccrual as of September 30, 2020, and by
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removing underperforming loans from the portfolio by transferring them to loan collateral in process of foreclosure with charge-offs to collateral value. All the loans are secured by taxi medallions and enhanced by personal guarantees of the shareholders and owners.
Net interest loss
Net interest loss after loss provision
Net loss before taxes
Income tax benefit
Net loss after taxes
35,884
(1.12
Geographic Concentration (Dollars in thousands)
New York City
14,056
85
107,729
90
Newark
2,393
11,795
Chicago
445
All Other
284
Total Loan Collateral in Process of Foreclosure Loans
32,411
25,117
54
6,009
3,374
2,689
6,356
7,048
11,270
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We are the majority owner and managing member of RPAC Racing, LLC, a performance and marketing company for NASCAR. Revenues are mainly earned through sponsorships and race winning activity over the ten month race season (February through November) during the year. As a result of COVID-19, the prior year race season had been suspended from March 15, 2020 through May 17, 2020. As states began to reopen, NASCAR began racing and completed all races on a revised schedule.
Sponsorship, race winnings, and other income
Race team and other expenses
4,536
3,196
8,419
7,171
Interest expense
Total expenses
4,570
3,236
8,494
7,251
Income tax (provision)
Corporate and Other Investments
This non-operating segment relates to our equity and investment securities as well as our legacy commercial business, and other assets, liabilities, revenues, and expenses not allocated to the operating segments. Commencing with the 2020 second quarter, the Bank began issuing loans related to the new strategic partnership business, which is currently included within this segment, for a total of $70,000 in net loans as of June 30, 2021. This segment also reflects the elimination of all intercompany activity among the consolidated entities.
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Summary Consolidated Financial Data
The table below presents selected financial data for the Company for the three and six months ended June 30, 2021 and 2020.
(Dollars in thousands, except per share data)
Selected financial ratios
Return on average assets (ROA)
(2.23
Return on average equity (ROE)
(4.97
12.00
Dividend payout ratio
Other income ratio(3)
1.00
1.50
0.59
Total expense ratio(4)
10.23
7.44
9.45
7.82
Equity to assets(2)
18.56
19.27
Debt to equity (1)
4.17
4.10
Loans receivable to assets
72
Net charge-offs
Net charge-offs as a % of average loans receivable
Allowance coverage ratio
Excludes the $6,523 and $4,709 related to deferred financing costs as of June 30, 2021 and 2020.
Includes $72,096 and $70,655 related to non-controlling interests in consolidated subsidiaries as of June 30, 2021 and 2020.
Other income ratio represents other income divided by average interest earning assets.
Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average interest earning assets.
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Consolidated Results of Operations
Three and Six Months Ended June 30, 2021 compared to the Three and Six Months Ended June 30, 2020
Net income attributable to shareholders was $10,267,000, or $0.41 per share, and $18,698,000, or $0.75 per share, for the three and six months ended June 30, 2021, compared to net loss attributable to shareholders of $3,977,000, or $0.16 per share, and $17,620,000, or $0.72 per share, for the three and six months ended June 30, 2020.
Total interest income was $37,375,000 for the three months ended June 30, 2021, compared to $35,588,000 for the three months ended June 30, 2020. The increase in interest income reflected the continued growth in the consumer lending segments, which was offset by contraction in the medallion lending segment, driven by all medallion loans being on nonaccrual status, and higher premium amortization in the current period as well as an overall lower yield due to growth in the home improvement lending segment. For the six months ended June 30, 2021, total interest income was $74,455,000, compared to $71,130,000 for the six months ended June 30, 2020 similarly reflective of growth in the consumer lending segments, and offset by contraction in the medallion lending segment and higher amortization. The yield on interest earning assets was 11.17% and 11.50% for the three and six months ended June 30, 2021, compared to 10.95% and 11.31% for the three and six months ended June 30, 2020. Average interest earning assets were $1,341,825,000 for the three months ended June 30, 2021, an increase from $1,307,142,000 for the three months ended June 30, 2020. For the six months ended June 30, 2021, average interest earning assets were $1,305,192,000, an increase from $1,264,579,000 for the six months ended June 30, 2020.
Loans before allowance for loan losses were $1,340,567,000 as of June 30, 2021, comprised of recreation ($886,206,000), home improvement ($368,257,000), commercial ($69,520,000), medallion ($16,514,000), and strategic partnership ($70,000) loans. The Company had an allowance for loan losses as of June 30, 2021 of $46,946,000, which was attributable to the recreation (64%), medallion (23%), and home improvement (13%) loan portfolios. As of December 31, 2020, loans before allowance for loan losses were $1,229,838,000, comprised of recreation ($792,686), home improvement ($334,033,000), commercial ($65,327,000), medallion ($37,768,000), and strategic partnership ($24,000) loans. The Company had an allowance for loan losses as of December 31, 2020 of $57,548,000, which was attributable to recreation (48%), medallion (43%), and home improvement (9%) loans.
Loans increased $110,729,000, or 9%, from December 31, 2020 as a result of $358,954,000 of loan originations, offset by principal payments, transfers to loan collateral in process of foreclosure and net charge-offs. The provision for loan losses was a benefit of $682,000 for three months ended June 30, 2021, compared to a loss of $16,941,000 for the three months ended June 30, 2020. The improvement over the prior year is a function of a 50 basis point increase in the prior year period of reserve percentages on the recreation subprime loan businesses and in the medallion loans general reserve inputs related to the uncertainty which existed about the potential impact on the business of COVID-19, as well as lower charge-offs and higher recoveries in recreation loans. The provision for loan loss was $2,336,000 for six months ended June 30, 2021, compared to $33,482,000 for the six months ended June 30, 20120. The improvement over the prior year is reflective of an increase of reserve percentages ranging from 25 to 100 basis points on the recreation subprime loan business and an increase in the medallion loans general reserve inputs in the prior year related to the uncertainty about the potential impact on the businesses as a result of COVID-19. The charge-off ratios on the loan portfolios was 3.28% for the three months ended June 30, 2021 compared to 1.39% for the three months ended June 30, 2020, and was 2.15% for the six months ended June 30, 2021 compared to 2.21% for the six months ended June 30, 2020, both driven by the medallion segment as a result of deferrals granted and the temporary suspension of delinquencies and nonperforming treatment under the CARES Act. See Note 4 for additional information on loans and allowance for loan losses.
Interest expense was $7,884,000 and $16,292,000 for the three and six months ended June 30, 2021, compared to $8,835,000 and $17,835,000 for the three and six months ended June 30, 2020. The average cost of borrowed funds was 2.36% and 2.49% for the three and six months ended June 30, 2021, compared to 2.75% and 2.92% for the three and six months ended June 30, 2020, both mainly driven by the decline in market rates for deposits, offset to a lesser extent with the replacement of notes payable to banks with higher fixed rate private notes. Average debt outstanding was $1,342,570,000 and $1,320,361,000 for the three and six months ended June 30, 2021, up from $1,290,318,000 and $1,227,413,000 for the three and six months ended June 30, 2020, as we issued additional certificates of deposits to increase our liquidity, along with the new issuance of privately placed notes and the repayment of publicly traded retail notes. See page 44-45 for tables that show average balances and cost of funds for our funding sources.
Net interest income was $29,491,000 and $58,163,000 for the three and six months ended June 30, 2021, compared to $26,753,000 and $53,295,000 for the three and six months ended June 30, 2020. The net interest margin was 8.84% for the three months ended June 30, 2021, compared to 8.23%, for the three months ended June 30, 2020, and was 9.01%, for the six months ended June 30, 2021, compared to 8.48% for the six months ended June 30, 2020, reflecting the above.
Net other income (loss), which is comprised of sponsorship and race winnings, prepayment fees, servicing fee income, late charges, write-downs of loan collateral, impairment of equity investments, and other miscellaneous income was income of $7,767,000 for the three months ended June 30, 2021, compared to income of $3,256,000 for the three months ended June 30, 2020. The improvement was due to gains recorded on the extinguishment of debt, gains on the disposal of equity investments, as well as higher race team related income, partially offset by an increase in write-downs due to a reduction in collateral values for Chicago medallions. For the six months ended June 30, 2021, there was income of $9,703,000, compared to a loss of $3,724,000 for the six months ended
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June 30, 2020. The improvement was mainly due to gains recorded on the extinguishment of debt and gains on the disposal of equity investments in the current year, offset by lower write-downs of the loan collateral in process of foreclosure and losses of equity investing recorded in the prior year period.
Operating expenses were $19,820,000 for the three months ended June 30, 2021, compared to $16,186,000 for the three months ended June 30, 2020. Salaries and benefits were $7,901,000 for the three months ended June 30, 2021, compared to $6,702,000 for the three months ended June 30, 2020, with the increase mainly attributable to bonus accruals in connection with current year performance as well as higher race team related salaries due to a normalized race season. Professional fees were $2,224,000 for the three months ended June 30, 2021, compared $1,319,000 for the three months ended June 30, 2020, primarily reflecting higher legal costs for a variety of corporate matters. Race team costs were $2,674,000 for the three months ended June 30, 2021, compared to $1,818,000 for the three months ended June 30, 2020, reflecting the postponement of the race season in the prior year along with less travel required due to the COVID-19 pandemic and the adjusted race schedule. Loan servicing costs were $1,731,000 for the three months ended June 30, 2021, in line with $1,729,000 for three months ended June 30, 2020. Occupancy and other operating expenses were $5,290,000 for the three months ended June 30, 2021, increasing from $4,618,000 for the three months ended June 30, 2020, due to lower overall costs in the prior year as a result of the shut-downs related to COVID-19. For the six months ended June 30, 2021, operating expenses were $34,462,000 compared to $35,457,000 for the six months ended June 30, 2020. Salaries and benefits were $13,586,000 for the six months ended June 30, 2021, in line with $13,635,000 for the six months ended June 30, 2020. Professional fees were $2,730,000 for the six months ended June 30, 2021, compared $4,908,000 for the six months ended June 30, 2020, primarily reflecting lower legal costs for a variety of corporate matters. Race team costs were $4,796,000 for the six months ended June 30, 2021, compared to $3,948,000 for the six months ended June 30, 2020. Loan servicing costs were $3,378,000 for the six months ended June 30, 2021, up slightly from the prior year six months. Occupancy and other operating expenses were $9,972,000 for the six months ended June 30, 2021 compared to $9,625,000 for the six months ended June 30, 2020.
Total income tax expense was $6,528,000 for the three months ended June 30, 2021, compared to a benefit of $853,000 for the three months ended June 30, 2020. Total income tax expense was $10,406,000 for the six months ended June 30, 2021, compared to a benefit of $4,102,000 for the six months ended June 30, 2020. The 2021 three and six months included $1,833,000 of tax expense related to a valuation allowance with respect to certain tax assets which the Company believes it will not be able to realize. See Note 7 for more information.
Loan collateral in process of foreclosure was $49,039,000 at June 30, 2021, a decline from $54,560,000 at December 31, 2020. The decrease was primarily reflective of cash payments received and sales as well as the decline in collateral values offset by the additional loans having reached 120 days past due being charged-down to their collateral value and reclassified to loan collateral in process of foreclosure. See page 51 for a table that shows the changes during the quarter.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of consumer, commercial, and medallion loans, and investment securities) reprice on a different basis over time in comparison to our interest-bearing liabilities (consisting primarily of bank certificates of deposit, credit facilities and borrowings from banks and other lenders, and SBA debentures and borrowings).
Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Abrupt increases in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at the higher prevailing interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning assets and interest-bearing liabilities results in interest rate risk.
The effect of changes in interest rates is mitigated by regular turnover of the portfolio. We believe that the average life of our loan portfolio varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment. However, borrowers may prepay for a variety of other reasons, such as to monetize increases in the underlying collateral values. In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years.
A relative measure of interest rate risk can be derived from our interest rate sensitivity gap. The interest rate sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified
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intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities, and negative when repriceable liabilities exceed repriceable assets. A relative measure of interest rate sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets.
The following table presents our interest rate sensitivity gap at June 30, 2021. The principal amounts of interest earning assets are assigned to the time frames in which such principal amounts are contractually obligated to be repriced. We have not reflected an assumed annual prepayment rate for such assets in this table.
June 30, 2021 Cumulative Rate Gap(1)
Less Than 1
Year
More Than
1 and Less
Than 2
Years
2 and Less
Than 3
3 and Less
Than 4
4 and Less
Than 5
5 and Less
Than 6
Earning assets
Floating-rate
Adjustable rate
7,528
1,932
1,703
34,493
20,866
30,530
53,987
54,928
58,812
1,050,775
Cash, cash equivalents, and
federal funds sold
90,303
500
250
2,358
4,778
6,771
4,294
1,848
7,946
20,312
Total earning assets
134,682
27,576
39,004
58,792
57,300
67,008
1,071,087
1,455,449
Interest bearing liabilities
Interest rate gap
(343,351
(160,615
(236,757
(97,505
(120,527
965,837
74,090
Cumulative interest rate gap
(503,966
(740,723
(838,228
(958,755
(891,747
December 31, 2020(2)
(366,801
(570,449
(719,385
(827,236
(907,295
(860,941
52,347
December 31, 2019(2)
(260,024
(500,953
(651,546
(689,819
(748,187
(706,935
83,402
The ratio of the cumulative one year gap to total interest rate sensitive assets was (24%) as of June 30, 2021, and was (27%) as of December 31, 2020 and was (21%) as of December 31, 2019.
Excludes federal funds sold and investment securities.
Our interest rate sensitive assets were $1,455,449,000 and interest rate sensitive liabilities were $1,381,359,000 at June 30, 2021. The one-year cumulative interest rate gap was a negative $343,351,000 or 24% of interest rate sensitive assets. We seek to manage interest rate risk by originating adjustable-rate loans, by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, and by other options consistent with managing interest rate risk.
With the cessation of LIBOR at the end of 2021, we are currently reviewing the impact on our loans and borrowings. We do not have lendings tied to LIBOR and do not expect a significant impact on our loans. We expect to rely on our lenders to adjust and communicate rate adjustments; however, we do not expect a material impact on our borrowings.
Liquidity and Capital Resources
Our sources of liquidity are with a variety of local and regional banking institutions, unfunded commitments to sell debentures to the SBA, loan amortization and prepayments, private issuances of debt securities, participations or sales of loans to third parties, the disposition of other assets of the Company, and dividends from Medallion Capital and the Bank, and are subject to compliance with regulatory ratios. As of June 30, 2021, we had unfunded commitments from the SBA of $16,500,000, drawable upon the infusion of $8,250,000 of capital from either the capitalization of retained earnings or capital infusion from the Company.
Additionally, the Bank has access to independent sources of funds for our business originated there, primarily through brokered certificates of deposit. The Bank has up to $45,000,000 available under Fed Funds lines with several commercial banks. In addition, the Bank can retain earnings in its business to fund future growth.
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In February 2021, we completed a private placement to certain institutional investors of $25,000,000 aggregate principal amount of 7.25% unsecured senior notes due February 2026, with interest payable semiannually. Follow-on offerings of these notes in March and April 2021 raised an additional $3,250,000 and $3,000,000.
In December 2020, we completed a private placement to certain institutional investors of $33,600,000 aggregate principal amount of 7.50% unsecured senior notes due December 2027, with interest payable semiannually. Follow-on offerings of these notes in February and March 2021 raised an additional $8,500,000. An additional follow-on offering of these notes in April 2021 raised an additional $11,650,000.
The net proceeds from the December 2020, February 2021, March 2021 and April 2021 private placements have been used for general corporate purposes, including repayment of outstanding debt such as the repayment of our 9.00% retail notes at maturity in April 2021 and to pay down other borrowings, including some borrowings at a discount.
In December 2019, the Bank closed an initial public offering of $46,000,000 aggregate liquidation amount, yielding net proceeds of $42,485,000, of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F. Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.
In March 2019, we completed a private placement to certain institutional investors of $30,000,000 aggregate principal amount of 8.25% unsecured notes due 2024, with interest payable semiannually. A follow-on offering of these notes in the 2019 third quarter raised an additional $6,000,000.
The table below presents the components of our debt at June 30, 2021, exclusive of deferred financing costs of $7,054,000. See Note 5 to the consolidated financial statements for details of the contractual terms of our borrowings.
Rate (1)
Deposits(2)
1,154,864
84
0
Total outstanding debt
Balance includes $750 of strategic partner reserve deposits as of June 30, 2021.
Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all contractual obligations at June 30, 2021.
Payments due by period
Less than
1 year
1 – 2 years
2 – 3 years
3 – 4 years
4 – 5 years
More than
5 years
Privately placed notes
Operating lease obligations
Total debt is exclusive of deferred financing costs of $7,054.
Balance excludes $750 of strategic partner reserve deposits as of June 30, 2021.
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Approximately $666,000,000 of our borrowing relationships have maturity dates during the next two years, including almost $653,000,000 of brokered CDs. Additionally, on April 15, 2021, we paid off the $33,625,000 aggregate principal amount of our retail notes, and repaid substantially all notes payable to banks which had maturities in less than one year. We have arranged for changes to the terms of the notes, and payment and borrowing base calculations which we anticipate will facilitate our operations for the foreseeable future.
In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of them at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of our portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net interest income.
We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity a hypothetical immediate 1% increase in interest rates would result in an increase to net income as of June 30, 2021 by $951,000 on an annualized basis, and the impact of such an immediate increase of 1% over an one year period would have been ($1,279,000) at June 30, 2021. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net income from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.
We continue to work with investment banking firms and other financial intermediaries to investigate the viability of a number of other financing options which include, among others, the sale or spinoff of certain assets or divisions, the development of a securitization conduit program, and other independent financing for certain subsidiaries or asset classes. These financing options would also provide additional sources of funds for both external expansion and continuation of internal growth.
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The following table illustrates sources of available funds for us and each of our subsidiaries, and amounts outstanding under credit facilities and their respective end of period weighted average interest rates at June 30, 2021. See Note 5 to the consolidated financial statements for additional information about each credit facility.
Financial
MB
MFC
MCI
FSVC
RPAC and
June 30,
2021(1)
December 31,
2020(1)
Cash and cash equivalents
15,750
61,463
9,689
396
2,526
Brokered CDs & other funds
borrowed
1,068,072
Average interest rate
1.71
Maturity
7/21-6/26
1/21-12/25
8.25
3/24-12/27
4/21-12/27
79,000
10,529
89,529
93,008
Amounts undisbursed
25,000
Amounts outstanding
54,000
2.64
3.25
3/23- 9/31
4/30/2024
3/21-9/30
Bank loans
3.67
12/29/23
12/23
2/21-12/23
2.35
9/37
1.91
12/31/21
12/21-6/25
Total cash
Total debt outstanding
154,000
Total debt is exclusive of deferred financing costs of $7,054 and $5,805 as of June 30, 2021 and December 31, 2020.
Includes $2,970 of an interest reserve associated with the 2019 private placement, which can be used for no other purpose for three years.
Loan amortization, prepayments, and sales also provide a source of funding for us. Prepayments on loans are influenced significantly by general interest rates, medallion loan market values, economic conditions, and competition.
We also generate liquidity through deposits generated at the Bank, borrowing arrangements with other banks, and through the issuance of SBA debentures, as well as from cash flow from operations. In addition, we may choose to participate a greater portion of our loan portfolio to third parties. We are actively seeking additional sources of liquidity; however, given current market conditions, there can be no assurance that we will be able to secure additional liquidity on terms favorable to us or at all. If that occurs, we may decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become more favorable; or we may be required to dispose of assets when we would not otherwise do so, and at prices which may be below the net book value of such assets in order for us to repay indebtedness on a timely basis.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, or Topic 326: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. Under the new standard, the concepts used by entities to account for credit losses on financial instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is removed. Loss estimates are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 2019 for public entities, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such as us, to fiscal years beginning after December 15, 2022. We are assessing the impact the update will have on our financial statements, and expect the update to have a material impact on our accounting for estimated credit losses on our loans.
Dividends
We have not paid dividends on our common stock since 2016 and do not currently anticipate paying dividends. We may, however, re-evaluate paying dividends in the future depending on market conditions.
Control Statutes
Because the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly, the Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations. Although the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act, your investment in the Company is not insured or guaranteed by the FDIC, or any other agency, and is subject to loss. Under the Utah Financial Institutions Act, control is defined as the power directly or indirectly or through or in concert with one or more persons to (1) direct or exercise a controlling influence over the management or policies of us or the election of a majority of the directors of us, or (2) to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an individual. If any holder of any series of the Bank’s preferred stock is or becomes entitled to vote for the election of the Bank’s directors, such series will be deemed a class of voting stock, and any other person will be required to obtain the non-objection of the FDIC under the Change in Bank Control Act to acquire or maintain 10% or more of that series. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval.
In addition to the regulations detailed above, our operations are subject to supervision and regulation by other federal, state, and local laws and regulations. Additionally, our operations may be subject to various laws and judicial and administrative decisions. This oversight may serve to:
regulate credit granting activities, including establishing licensing requirements, if any, in various jurisdictions;
establish maximum interest rates, finance charges and other charges;
require disclosures to customers;
govern secured transactions;
set collection, foreclosure, repossession, and claims handling procedures and other trade practices;
prohibit discrimination in the extension of credit and administration of loans; and
regulate the use and reporting of information related to a borrower’s credit experience and other data collection.
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Changes to laws of states in which we do business could affect the operating environment in substantial and unpredictable ways. We cannot predict whether such changes will occur or, if they occur, the ultimate effect they would have upon our financial condition or results of operations.
There has been no material change in disclosure regarding quantitative and qualitative disclosures about market risk since we filed our Annual Report on Form 10-K for the year ended December 31, 2020.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a—15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, and have concluded that they are effective as of June 30, 2021 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our internal control over financial reporting to determine whether any changes occurred during the 2021 second quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, and have concluded that there have been no changes that occurred during the 2021 second quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See Note 10 “Commitments and Contingencies” subsections (c) and (d) to the consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for details of the Company’s legal proceedings.
Except as described below, there have been no material changes in our risk factors from those disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the Securities and Exchange Commission on March 16, 2021.
We are subject to an SEC investigation, which could result in charges and material fines or other sanctions and accordingly have a material adverse effect on our business, reputation, financial condition, results of operations or stock price.
As described in Note 10 “Commitments and Contingencies” to the consolidated financial statements included in this Quarterly Report on Form 10-Q, the staff of the SEC has conducted an investigation of the Company relating to certain issues that occurred during the period 2015 to 2017, including (i) the Company’s retention of third parties in 2015 and 2016 concerning posting information about the Company on certain financial websites and (ii) the Company’s financial reporting and disclosures concerning certain assets, including Medallion Bank, in 2016 and 2017, a period when the Company had previously reported as a business development company (“BDC”) under the Investment Company Act of 1940. Since April 2018, the Company does not report as a BDC, and has not worked with such third parties since 2016. The Company does not expect to change previously reported financial results.
Although the Company is currently engaged in active discussions and is cooperating with the SEC staff regarding a potential settlement of all aspects of the investigation, there can be no assurance that a settlement will be reached, or the terms and timing of any such settlement. Any such settlement is expected to include a civil fine in an amount that is not currently estimable, but which may be material. If a settlement is not reached, litigation may ensue and result in charges and material fines or other sanctions against the Company and/or one or more of its officers. In either event, the Company could incur a loss that could be material to the Company, its results of operations or financial condition.
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We did not repurchase any of our shares during the three months ended June 30, 2021. Accordingly, under our Stock Repurchase Program previously authorized by our Board of Directors, up to $22,874,509 of shares remain authorized for repurchase under the program.
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EXHIBITS
Number
Description
31.1
Certification of Alvin Murstein pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2
Certification of Larry D. Hall pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1
Certification of Alvin Murstein pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.2
Certification of Larry D. Hall pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
August 9, 2021
By:
/s/ Alvin Murstein
Alvin Murstein
Chairman and Chief Executive Officer
/s/ Larry D. Hall
Larry D. Hall
Senior Vice President and
Chief Financial Officer
Signing on behalf of the registrant as principal financial and accounting officer.
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