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MFIN Medallion Financial

Filed: 5 Nov 20, 5:22pm

 

 

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 September 30, 2020

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

9.000% Senior Notes due 2021

 

MFIN

MFINL

 

NASDAQ Global Select Market

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 November 3, 2020 was 24,814,103.

 

 

 


 

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

 

 

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.

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, the Company’s Quarterly Reports on Form 10-Q for the Quarters ended March 30, 2020 and June 30, 2020, and in this Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2020, 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 71


 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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 trailers and to finance small-scale home improvements. 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% (19% if there had been no loan sales during 2016, 2017, and 2018). 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 $1,717,000,000 as of September 30, 2020, and were $1,660,000,000 as of December 31, 2019, 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 September 30, 2020, 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 and nine months then ended included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the 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 nine months ended September 30, 2020 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, 2019.

 

Page 3 of 71


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

UNAUDITED

 

(Dollars in thousands, except share and per share data)

 

September 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents(1)

 

$

12,592

 

 

$

17,700

 

Federal funds sold

 

 

37,139

 

 

 

50,121

 

Equity investments

 

 

10,284

 

 

 

10,079

 

Investment securities

 

 

45,991

 

 

 

48,998

 

Loans

 

 

1,281,054

 

 

 

1,160,855

 

Allowance for losses

 

 

(90,510

)

 

 

(46,093

)

Net loans receivable

 

 

1,190,544

 

 

 

1,114,762

 

Accrued interest receivable

 

 

10,590

 

 

 

8,662

 

Property, equipment, and right-of-use lease asset, net

 

 

12,621

 

 

 

14,375

 

Loan collateral in process of foreclosure(2)

 

 

48,742

 

 

 

52,711

 

Goodwill

 

 

150,803

 

 

 

150,803

 

Intangible assets, net

 

 

51,452

 

 

 

52,536

 

Income tax receivable

 

 

1,639

 

 

 

1,516

 

Deferred tax assets

 

 

1,648

 

 

 

 

Other assets

 

 

30,230

 

 

 

19,404

 

Total assets

 

$

1,604,275

 

 

$

1,541,667

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses(3)

 

$

25,735

 

 

$

16,234

 

Accrued interest payable

 

 

3,784

 

 

 

4,398

 

Deposits(4)

 

 

1,057,499

 

 

 

951,651

 

Short-term borrowings

 

 

87,696

 

 

 

38,223

 

Deferred tax liabilities

 

 

 

 

9,341

 

Operating lease liabilities

 

 

11,159

 

 

 

12,738

 

Long-term debt(5)

 

 

121,195

 

 

 

174,614

 

Total liabilities

 

 

1,307,068

 

 

 

1,207,199

 

Commitments and contingencies(6)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock (1,000,000 shares of $0.01 par value stock authorized-0ne outstanding)

 

 

 

 

 

Common stock (50,000,000 shares of $0.01 par value stock authorized- 27,765,346 shares at September 30, 2020 and 27,597,802 shares at December 31, 2019 issued)

 

 

278

 

 

 

276

 

Additional paid in capital

 

 

277,003

 

 

 

275,511

 

Treasury stock (2,951,243 shares at September 30, 2020 and December 31, 2019)

 

 

(24,919

)

 

 

(24,919

)

Accumulated other comprehensive income

 

 

2,074

 

 

 

999

 

Retained earnings (deficit)

 

 

(29,969

)

 

 

11,281

 

Total stockholders’ equity

 

 

224,467

 

 

 

263,148

 

Non-controlling interest in consolidated subsidiaries

 

 

72,740

 

 

 

71,320

 

Total equity

 

 

297,207

 

 

 

334,468

 

Total liabilities and equity

 

$

1,604,275

 

 

$

1,541,667

 

Number of shares outstanding

 

 

24,814,103

 

 

 

24,646,559

 

Book value per share

 

$

9.05

 

 

$

10.68

 

 

(1)

Includes restricted cash of $2,970 as of September 30, 2020 and December 31, 2019.

(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 $9,701 as of September 30, 2020 and $8,163 as of December 31, 2019.

(3)

Includes the short-term portion of lease liabilities of $2,086 and $2,085 as of September 30, 2020 and December 31, 2019. Refer to Note 6 for more details.

(4)

Includes $2,638 and $2,594 of deferred financing costs as of September 30, 2020 and December 31, 2019.

(5)

Includes $2,157 and $2,511 of deferred financing costs as of September 30, 2020 and December 31, 2019.

(6)

Refer to Note 10 for details.

 

The accompanying notes should be read in conjunction with these consolidated financial statements.

Page 4 of 71


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

(Dollars in thousands, except share and per share data)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest and fees on loans

 

$

37,201

 

 

$

34,081

 

 

$

107,544

 

 

$

94,833

 

Interest and dividends on investment securities

 

 

239

 

 

 

521

 

 

 

973

 

 

 

1,756

 

Medallion lease income

 

 

 

 

 

38

 

 

 

53

 

 

 

109

 

Total interest income(1)

 

 

37,440

 

 

 

34,640

 

 

 

108,570

 

 

 

96,698

 

Interest on deposits

 

 

5,454

 

 

 

6,003

 

 

 

17,315

 

 

 

16,409

 

Interest on short-term borrowings

 

 

520

 

 

 

730

 

 

 

1,565

 

 

 

2,616

 

Interest on long-term debt

 

 

2,410

 

 

 

2,492

 

 

 

7,339

 

 

 

6,743

 

Total interest expense(2)

 

 

8,384

 

 

 

9,225

 

 

 

26,219

 

 

 

25,768

 

Net interest income

 

 

29,056

 

 

 

25,415

 

 

 

82,351

 

 

 

70,930

 

Provision for loan losses

 

 

39,749

 

 

 

8,337

 

 

 

73,231

 

 

 

36,851

 

Net interest income after provision for loan losses

 

 

(10,693

)

 

 

17,078

 

 

 

9,120

 

 

 

34,079

 

Other income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sponsorship and race winnings

 

 

8,962

 

 

 

7,940

 

 

 

15,161

 

 

 

16,008

 

Write-down of loan collateral in process of foreclosure

 

 

(8,559

)

 

 

(113

)

 

 

(15,828

)

 

 

(4,204

)

Gain (loss) on equity investments

 

 

137

 

 

 

 

 

 

(3,423

)

 

 

 

Gain on the extinguishment of debt

 

 

23

 

 

 

 

 

 

23

 

 

 

4,145

 

Other income (loss)

 

 

397

 

 

 

1,047

 

 

 

1,303

 

 

 

1,471

 

Total other income (loss), net

 

 

960

 

 

 

8,874

 

 

 

(2,764

)

 

 

17,420

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,081

 

 

 

6,795

 

 

 

20,716

 

 

 

18,457

 

Race team related expenses

 

 

2,636

 

 

 

2,663

 

 

 

6,584

 

 

 

7,211

 

Professional fees

 

 

1,651

 

 

 

2,277

 

 

 

6,559

 

 

 

5,961

 

Loan servicing fees

 

 

1,729

 

 

 

1,364

 

 

 

5,070

 

 

 

3,851

 

Collection costs

 

 

1,516

 

 

 

1,698

 

 

 

4,206

 

 

 

4,589

 

Rent expense

 

 

676

 

 

 

592

 

 

 

2,004

 

 

 

1,769

 

Amortization of intangible assets

 

 

362

 

 

 

361

 

 

 

1,084

 

 

 

1,084

 

Regulatory fees

 

 

348

 

 

 

252

 

 

 

949

 

 

 

1,147

 

Other expenses

 

 

2,682

 

 

 

2,350

 

 

 

6,966

 

 

 

7,169

 

Total other expenses

 

 

18,681

 

 

 

18,352

 

 

 

54,138

 

 

 

51,238

 

Income (loss) before income taxes

 

 

(28,414

)

 

 

7,600

 

 

 

(47,782

)

 

 

261

 

Income tax (provision) benefit

 

 

8,381

 

 

 

(165

)

 

 

12,483

 

 

 

1,926

 

Net income (loss) after taxes

 

 

(20,033

)

 

 

7,435

 

 

 

(35,299

)

 

 

2,187

 

Less: income attributable to the non-controlling interest

 

 

3,597

 

 

 

2,460

 

 

 

5,951

 

 

 

3,484

 

Total net income (loss) attributable to Medallion Financial Corp.

 

$

(23,630

)

 

$

4,975

 

 

$

(41,250

)

 

$

(1,297

)

Basic net income (loss) per share

 

$

(0.97

)

 

$

0.20

 

 

$

(1.69

)

 

$

(0.05

)

Diluted net income (loss) per share

 

$

(0.97

)

 

$

0.20

 

 

$

(1.69

)

 

$

(0.05

)

Distributions declared per share

 

$

 

 

$

 

 

$

 

 

$

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,461,488

 

 

 

24,361,680

 

 

 

24,440,067

 

 

 

24,336,677

 

Diluted

 

 

24,461,488

 

 

 

24,607,167

 

 

 

24,440,067

 

 

 

24,336,677

 

 

(1)

Included in interest and investment income is $306 and $940 of paid-in-kind interest for the three and nine months ended September 30, 2020, and $212 and $637 for the three and nine months ended September 30, 2019.

(2)

Average borrowings outstanding were $1,309,787 and $1,255,053, and the related average borrowing costs were 2.55% and 2.79%, for the three and nine months ended September 30, 2020, and were $1,169,182 and $1,121,693 and 3.13% and 3.07% for the three and nine months ended September 30, 2019.    

 

  

The accompanying notes should be read in conjunction with these consolidated financial statements.

 

Page 5 of 71


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS)

(UNAUDITED)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss) after taxes from operations

 

$

(20,033

)

 

$

7,435

 

 

$

(35,299

)

 

$

2,187

 

Other comprehensive income (loss), net of tax

 

 

(53

)

 

 

95

 

 

 

1,075

 

 

 

1,322

 

Total comprehensive income (loss)

 

 

(20,086

)

 

 

7,530

 

 

 

(34,224

)

 

 

3,509

 

Less comprehensive income attributable to the non-controlling interest

 

 

3,597

 

 

 

2,460

 

 

 

5,951

 

 

 

3,484

 

Total comprehensive income (loss) attributable to Medallion Financial Corp.

 

$

(23,683

)

 

$

5,070

 

 

$

(40,175

)

 

$

25

 

 

The accompanying notes should be read in conjunction with these consolidated financial statements.

 

Page 6 of 71


 

 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

(Dollars in thousands)

 

Common

Stock Shares

 

 

Common

Stock

 

 

Preferred

Stock

 

 

Capital in

Excess of

Par

 

 

Treasury

Stock Shares

 

 

Treasury

Stock

 

 

Retained

Earnings (Deficit)

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders’

Equity

 

 

Non-

controlling

Interest

 

 

Total

Equity

 

Balance at December 31, 2019

 

 

27,597,802

 

 

$

276

 

 

 

 

 

$

275,511

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

11,281

 

 

$

999

 

 

$

263,148

 

 

$

71,320

 

 

$

334,468

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,643

)

 

 

 

 

 

(13,643

)

 

 

642

 

 

 

(13,001

)

Distributions to non-

   controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,507

)

 

 

(1,507

)

Stock-based compensation

 

 

 

 

 

2

 

 

 

 

 

 

464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

466

 

 

 

 

 

 

466

 

Issuance of restricted stock, net

 

 

165,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

 

 

(5,577

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains

   on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

147

 

 

 

147

 

 

 

 

 

 

147

 

Balance at March 31, 2020

 

 

27,757,899

 

 

 

278

 

 

 

 

 

 

275,975

 

 

 

(2,951,243

)

 

 

(24,919

)

 

 

(2,362

)

 

 

1,146

 

 

 

250,118

 

 

 

70,455

 

 

 

320,573

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,977

)

 

 

 

 

 

(3,977

)

 

 

1,712

 

 

 

(2,265

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,512

)

 

 

(1,512

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

520

 

 

 

 

 

 

520

 

Issuance of restricted stock, net

 

 

10,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

 

 

(696

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains

   on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

981

 

 

 

981

 

 

 

 

 

 

981

 

Balance at June 30, 2020

 

 

27,767,619

 

 

 

278

 

 

 

 

 

 

276,495

 

 

 

(2,951,243

)

 

 

(24,919

)

 

 

(6,339

)

 

 

2,127

 

 

 

247,642

 

 

 

70,655

 

 

 

318,297

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,630

)

 

 

 

 

 

(23,630

)

 

 

3,597

 

 

 

(20,033

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,512

)

 

 

(1,512

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

508

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

508

 

 

 

 

 

 

508

 

Issuance of restricted stock, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

 

 

(2,273

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains

   on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(53

)

 

 

(53

)

 

 

 

 

 

(53

)

Balance at September 30, 2020

 

 

27,765,346

 

 

$

278

 

 

 

 

 

$

277,003

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

(29,969

)

 

$

2,074

 

 

$

224,467

 

 

$

72,740

 

 

$

297,207

 

 

 

.

Page 7 of 71


 

 

(Dollars in thousands)

 

Common

Stock Shares

 

 

Common

Stock

 

 

Preferred

Stock

 

 

Capital in

Excess of

Par

 

 

Treasury

Stock Shares

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders’

Equity

 

 

Non-controlling

Interest

 

 

Total

Equity

 

Balance at December 31, 2018

 

 

27,385,600

 

 

$

274

 

 

 

 

 

$

274,292

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

13,043

 

 

$

(82

)

 

$

262,608

 

 

$

27,596

 

 

$

290,204

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,228

 

 

 

 

 

 

1,228

 

 

 

167

 

 

 

1,395

 

Distributions to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(592

)

 

 

(592

)

Stock-based compensation expense

 

 

 

 

 

1

 

 

 

 

 

 

164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

165

 

 

 

 

 

 

165

 

Issuance of restricted stock, net

 

 

163,098

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Forfeiture of restricted stock, net

 

 

(1,699

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Net change in unrealized gains on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

669

 

 

 

669

 

 

 

 

 

 

669

 

Balance at March 31, 2019

 

 

27,546,999

 

 

 

275

 

 

 

 

 

 

274,456

 

 

 

(2,951,243

)

 

 

(24,919

)

 

 

14,271

 

 

 

587

 

 

 

264,670

 

 

 

27,171

 

 

 

291,841

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,500

)

 

 

 

 

 

(7,500

)

 

 

857

 

 

 

(6,643

)

Distributions to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

(592

)

 

 

(592

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

340

 

 

 

 

 

 

340

 

Issuance of restricted stock, net

 

 

4,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

��

 

(949

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized losses on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

558

 

 

 

558

 

 

 

 

 

 

558

 

Balance at June 30, 2019

 

 

27,550,801

 

 

 

275

 

 

 

 

 

 

274,796

 

 

 

(2,951,243

)

 

 

(24,919

)

 

 

6,771

 

 

 

1,145

 

 

 

258,068

 

 

 

27,436

 

 

 

285,504

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,975

 

 

 

 

 

 

4,975

 

 

 

2,460

 

 

 

7,435

 

Distributions to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

(592

)

 

 

(592

)

Stock-based compensation

 

 

 

 

 

1

 

 

 

 

 

 

347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

348

 

 

 

 

 

 

348

 

Issuance of restricted stock, net

 

 

10,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

 

 

(679

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized losses on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95

 

 

 

95

 

 

 

 

 

 

95

 

Balance at September 30, 2019

 

 

27,560,539

 

 

$

276

 

 

 

 

 

$

275,143

 

 

$

(2,951,243

)

 

$

(24,919

)

 

$

11,746

 

 

$

1,240

 

 

$

263,486

 

 

$

29,304

 

 

$

292,790

 

 

The accompanying notes should be read in conjunction with these consolidated financial statements.

 

Page 8 of 71


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

For the Nine Months Ended September 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(35,299

)

 

$

2,187

 

Adjustments to reconcile net loss from operations to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

73,231

 

 

 

36,851

 

Paid-in-kind interest

 

 

(940

)

 

 

(637

)

Depreciation and amortization

 

 

5,060

 

 

 

6,014

 

Decrease in deferred and other tax liabilities

 

 

(11,113

)

 

 

(1,375

)

Amortization of origination fees, net

 

 

4,572

 

 

 

3,753

 

Net change in value of loan collateral in process of foreclosure

 

 

21,235

 

 

 

9,126

 

Net realized losses (gains) on investments

 

 

3,754

 

 

 

(1,810

)

Net change in unrealized appreciation on investments

 

 

 

 

 

1,299

 

Stock-based compensation expense

 

 

1,495

 

 

 

853

 

Gain on extinguishment of debt

 

 

 

 

 

(4,145

)

Increase in accrued interest receivable

 

 

(1,928

)

 

 

(627

)

Increase in other assets

 

 

(7,878

)

 

 

(4,890

)

Increase (decrease) in accounts payable and accrued expenses

 

 

4,883

 

 

 

(1,763

)

Decrease in accrued interest payable

 

 

(504

)

 

 

(341

)

Net cash provided by operating activities

 

 

56,568

 

 

 

44,495

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Loans originated

 

 

(404,006

)

 

 

(374,642

)

Proceeds from principal receipts, sales, and maturities of loans

 

 

222,592

 

 

 

188,226

 

Purchases of investments

 

 

(11,480

)

 

 

(6,849

)

Proceeds from principal receipts, sales, and maturities of investments

 

 

12,983

 

 

 

5,902

 

Proceeds from the sale and principal payments on loan collateral in process

   of foreclosure

 

 

8,303

 

 

 

12,714

 

Net cash used for investing activities

 

 

(171,608

)

 

 

(174,649

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from time deposits and funds borrowed

 

 

515,982

 

 

 

450,192

 

Repayments of time deposits and funds borrowed

 

 

(414,501

)

 

 

(324,960

)

Purchase of federal funds

 

 

 

 

 

4,000

 

Repayments of federal funds

 

 

 

 

 

 

Distributions to non-controlling interests

 

 

(4,531

)

 

 

(1,776

)

Net cash provided by financing activities

 

 

96,950

 

 

 

127,456

 

NET DECREASE IN CASH AND CASH EQUIVALENTS AND

   RESTRICTED CASH

 

 

(18,090

)

 

 

(2,698

)

Cash, cash equivalents, and restricted cash, beginning of period(1)

 

 

67,821

 

 

 

57,713

 

Cash, cash equivalents, and restricted cash, end of period(1)

 

$

49,731

 

 

$

55,015

 

SUPPLEMENTAL INFORMATION

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

24,769

 

 

$

24,252

 

Cash paid during the period for income taxes

 

 

100

 

 

 

135

 

NON-CASH INVESTING

 

 

 

 

 

 

 

 

Loans transferred to loan collateral in process of foreclosure, net

 

$

25,569

 

 

$

25,884

 

Loans transferred to other foreclosed property

 

 

1,800

 

 

 

 

  

(1)

Includes federal funds sold.

The accompanying notes should be read in conjunction with these consolidated financial statements.

Page 9 of 71


 

MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(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, and other related items, and to finance home improvements. 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.

Beginning 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 began issuing its first loans, while continuing 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 September 30, 2020, 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 medallions are carried at a net realizable value of $3,091,000 in other assets on the Company’s consolidated balance sheet at September 30, 2020, December 31, 2019, and September 30, 2019.

Page 10 of 71


 

(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 $2,500,000 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 readily determinable fair value to be valued as such, and those that do not to be measured at cost, less any impairment plus or minus any observable price changes. Equity investments of $10,284,000 and $10,079,000 at September 30, 2020 and December 31, 2019, comprised mainly of nonmarketable stock and stock warrants, are recorded at cost less any impairment plus or minus observable price changes. As of September 30, 2020 and December 31, 2019, the Company determined that there was no impairment or observable price change.

Page 11 of 71


 

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 $298,000 at September 30, 2020 and $248,000 at December 31, 2019, and $85,000 and $219,000 was amortized to interest income for the three and nine months ended September 30, 2020 and $21,000 and $46,000 was amortized to interest income for the three and nine months ended September 30, 2019. 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.

Loans

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 September 30, 2020 and December 31, 2019, net loan origination costs were $20,806,000 and $17,839,000. Net amortization to income for the three months ended September 30, 2020 and 2019 was $1,681,000 and $1,364,000, and was $4,572,000 and $3,753,000 for the nine months ended September 30, 2020 and 2019.

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 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 to write 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 a recovery. Total loans 90 days or more past due were $13,402,000 at September 30, 2020, or 1.07% of the total loan portfolio, compared to $8,663,000, or 0.76% at December 31, 2019.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law to address the economic impacts of the COVID-19 pandemic. Under the CARES Act and related guidance from the FDIC, the Company had temporarily suspended its delinquency and nonperforming treatment for certain loans that have been granted a payment accommodation that facilitates the borrowers’ ability to work through the immediate impact of the virus. Borrowers who were current prior to becoming affected by COVID-19 and then receive payment accommodations as a result of the effects of the COVID-19 pandemic, generally are not reported as past due if all payments are current in accordance with the revised terms of the loans. The Company had chosen to apply this part of the CARES Act in connection with eligible accommodations and did not report the applicable loans as past due for any payments not made during the deferment period. As of September 30, 2020, the deferment period ended for all of the medallion loans and for 95% of the consumer loans that were placed on deferment, which, as a result, were returned to the general loan pool. The Company has continued to age these loans based the Company’s standard aging policy.

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

Page 12 of 71


 

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 loans is take an immediate 40% write down of the loan balance. Under the CARES Act, during the applicable period beginning March 1, 2020 and ending on the earlier of December 31, 2020 or 60 days after the date which the coronavirus, or COVID-19, national emergency terminates, companies may elect to (a) suspend the requirements of US 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 September 30, 2020, 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 the 2020 third quarter. However, we expect to 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 $18,908,000 and $28,833,000 of net loans pledged as collateral under borrowing arrangements at September 30, 2020 and December 31, 2019.

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 $107,809,000 at September 30, 2020 and $113,581,000 at December 31, 2019. 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 to the remaining assets in Trust III) and the Bank, and determined that no material servicing asset or liability existed as of September 30, 2020 and December 31, 2019. The Company assigned its servicing rights of the Bank’s portfolio to MSC. The costs of servicing were allocated to MSC by the Company, and the servicing fee income was billed to and collected from the Bank by MSC.

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 experience and other projections are looked at. For medallion loans, delinquent nonperforming loans are valued at the median sales price for the collateral over the most recent quarter, historically non-delinquent nonperforming loans are valued at either the median sales price for the collateral over the most recent quarter or the discounted cash flow if such loans were modified and it is clear that sources other than the taxi business were instrumental in keeping such loans current, and performing medallion loans are reserved utilizing historical loss ratios over a three-year lookback period. 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 recreational subprime loan business during the nine months ended September 30, 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. As a result, all medallion loans were written down to collateral value, net of liquidation costs, of $90,300 for New York City medallions. This write-down, together with a decline in most other markets in accordance with prior methodology, consistently applied, resulted in an increased provision for loan losses of $24,749,000 during the 2020 third quarter, which included the reversal of the general reserves that had been previously recorded for the Company and the Bank.  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.

Page 13 of 71


 

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 change to bank holding company accounting, 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 September 30, 2020, December 31, 2019, and September 30, 2019, the Company had goodwill of $150,803,000, which all related to the Bank, and intangible assets of $51,452,000, $52,536,000 and $52,898,000, and the Company recognized $362,000 and $361,000 of amortization expense on the intangible assets for the three months ended September 30, 2020 and 2019, and $1,084,000 of amortization expense on the intangible assets for both the nine months ended September 30, 2020 and 2019. Additionally, loan portfolio premiums of $12,387,000 were determined as of April 2, 2018, of which $4,358,000, $5,758,000, and $6,161,000 were outstanding at September 30, 2020, December 31, 2019, and September��30, 2019, and of which $893,000 and $713,000 were amortized to interest income for the three months ended September 30, 2020 and 2019, and of which $1,401,000 and $2,886,000 was amortized to interest income for the nine months ended September 30, 2020 and 2019. The Company engaged an expert to assess the goodwill and intangibles for impairment at December 31, 2019, who concluded there was 0 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 0 additional impairment as of September 30, 2020.

The table below shows the details of the intangible assets as of the dates presented.

 

(Dollars in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Brand-related intellectual property

 

$

19,249

 

 

$

20,075

 

Home improvement contractor relationships

 

 

6,038

 

 

 

6,296

 

Race organization

 

 

26,165

 

 

 

26,165

 

Total intangible assets

 

$

51,452

 

 

$

52,536

 

 

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 $142,000 and $109,000 for the three months ended September 30, 2020 and 2019, and was $403,000 and $313,000 for the nine months ended September 30, 2020 and 2019.

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 $648,000 and $613,000 for the three months ended September 30, 2020 and 2019, and was $1,957,000 and $1,731,000 for the nine months ended September 30, 2020 and 2019. 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, or written off. The amount on the Company’s balance sheet for all of these purposes were $4,795,000, $5,105,000, and $5,589,000 as of September 30, 2020, December 31, 2019, and September 30, 2019.

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.

Page 14 of 71


 

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 September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands, except share and per share data)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss) resulting from operations

   available to common stockholders

 

$

(23,630

)

 

$

4,975

 

 

$

(41,250

)

 

$

(1,297

)

Weighted average common shares outstanding applicable to

   basic EPS

 

 

24,461,488

 

 

 

24,361,680

 

 

 

24,440,067

 

 

 

24,336,677

 

Effect of dilutive stock options

 

 

 

 

 

16,543

 

 

 

 

 

 

 

Effect of restricted stock grants

 

 

 

 

 

228,944

 

 

 

 

 

 

 

Adjusted weighted average common shares outstanding

   applicable to diluted EPS

 

 

24,461,488

 

 

 

24,607,167

 

 

 

24,440,067

 

 

 

24,336,677

 

Basic income (loss) per share

 

$

(0.97

)

 

$

0.20

 

 

$

(1.69

)

 

$

(0.05

)

Diluted income (loss) per share

 

 

(0.97

)

 

 

0.20

 

 

 

(1.69

)

 

 

(0.05

)

 

Potentially dilutive common shares excluded from the above calculations aggregated 834,684 and 468,055 shares as of September 30, 2020 and 2019.

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 nine months ended September 30, 2020 and 2019, the Company issued 165,674 and 178,266 of restricted shares of stock-based compensation awards, issued 335,773 and 375,481 shares of other stock-based compensation awards, and issued 47,156 and 26,040 restricted stock units and recognized $508,000 and $1,495,000, or $0.02 and $0.06 per share, for the three and nine months ended September 30, 2020, and $348,000 and $853,000, or $0.01 and $0.03 per share, for the three and nine months ended September 30, 2019, of non-cash stock-based compensation expense related to the grants. As of September 30, 2020, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $2,484,000, which is expected to be recognized over the next 14 quarters. (See Note 8 for more 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

Page 15 of 71


 

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%, which could preclude its ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As of September 30, 2020, the Bank’s Tier 1 leverage ratio was 15.47%. The Bank’s actual capital amounts and ratios, and the regulatory minimum ratios are presented in the following table.

 

 

 

Regulatory

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Minimum

 

 

Well-

Capitalized

 

 

September 30, 2020

 

 

December 31, 2019

 

Common equity Tier 1 capital

 

 

0

 

 

 

0

 

 

$

137,193

 

 

$

158,187

 

Tier 1 capital

 

 

0

 

 

 

0

 

 

 

205,981

 

 

 

226,975

 

Total capital

 

 

0

 

 

 

0

 

 

 

222,945

 

 

 

241,842

 

Average assets

 

 

0

 

 

 

0

 

 

 

1,331,077

 

 

 

1,172,866

 

Risk-weighted assets

 

 

0

 

 

 

0

 

 

 

1,275,599

 

 

 

1,144,337

 

Leverage ratio(1)

 

 

4.0

%

 

 

5.0

%

 

 

15.5

%

 

 

19.4

%

Common equity Tier 1 capital ratio(2)

 

 

7.0

 

 

 

6.5

 

 

 

10.8

 

 

 

13.8

 

Tier 1 capital ratio(3)

 

 

8.5

 

 

 

8.0

 

 

 

16.1

 

 

 

19.8

 

Total capital ratio(3)

 

 

10.5

 

 

 

10.0

 

 

 

17.5

 

 

 

21.1

 

 

(1)

Calculated by dividing Tier 1 capital by average assets.

(2)

Calculated by subtracting preferred stock or non-controlling interest from Tier 1 capital and dividing by risk-weighted assets.

(3)

Calculated by dividing Tier 1 or total capital by risk-weighted assets.

In the table above, the minimum risk-based ratios as of September 30, 2020 and December 31, 2019 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 September 30, 2020 and December 31, 2019.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12 “Income Taxes, or Topic 740: Simplifying the Accounting for Income Taxes.” The objective of this update is to simplify the accounting for income taxes by removing certain exceptions to the general principles and improve consistent application of and simplify other areas of Topic 740. The amendments in this update are effective for annual periods beginning after December 15, 2020, and for interim periods within those fiscal years. The Company does not believe this update will have a material impact on its financial condition.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, or Topic 326: Measurement of Credit Losses on Financial Instruments. 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

Page 16 of 71


 

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 as of September 30, 2020 and December 31, 2019 consisted of the following:

 

September 30, 2020

(Dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of US

   federal agencies

 

$

35,965

 

 

$

1,571

 

 

$

(8

)

 

$

37,528

 

State and municipalities

 

 

8,226

 

 

 

237

 

 

 

 

 

 

8,463

 

Total

 

$

44,191

 

 

$

1,808

 

 

$

(8

)

 

$

45,991

 

 

December 31, 2019

(Dollars in thousands)

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of

   US federal agencies

 

$

36,335

 

 

$

411

 

 

$

(112

)

 

$

36,634

 

State and municipalities

 

 

12,279

 

 

 

186

 

 

 

(101

)

 

 

12,364

 

Total

 

$

48,614

 

 

$

597

 

 

$

(213

)

 

$

48,998

 

 

The amortized cost and estimated market value of investment securities as of September 30, 2020 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.

 

(Dollars in thousands)

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

 

$

25

 

 

$

25

 

Due after one year through five years

 

 

12,480

 

 

 

12,946

 

Due after five years through ten years

 

 

12,452

 

 

 

13,221

 

Due after ten years

 

 

19,234

 

 

 

19,799

 

Total

 

$

44,191

 

 

$

45,991

 

 

The following tables show information pertaining to securities with gross unrealized losses at September 30, 2020 and December 31, 2019, 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

 

September 30, 2020

(Dollars in thousands)

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations

   of US federal agencies

 

$

(8

)

 

$

4,073

 

 

$

 

 

$

 

State and municipalities

 

 

 

 

 

 

 

 

 

 

 

197

 

Total

 

$

(8

)

 

$

4,073

 

 

$

 

 

$

197

 

 

 

 

Less than Twelve Months

 

 

Twelve Months and Over

 

December 31, 2019

(Dollars in thousands)

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of

   US federal agencies

 

$

(74

)

 

$

8,291

 

 

$

(38

)

 

$

4,939

 

State and municipalities

 

 

(17

)

 

 

2,099

 

 

 

(84

)

 

 

2,739

 

Total

 

$

(91

)

 

$

10,390

 

 

$

(122

)

 

$

7,678

 

 

Page 17 of 71


 

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 September 30, 2020 and December 31, 2019.

 

 

 

September 30, 2020

 

 

December 31, 2019

 

(Dollars in thousands)

 

Amount

 

 

As a Percent of

Gross Loans

 

 

Amount

 

 

As a Percent of

Gross Loans

 

Recreation

 

$

802,938

 

 

 

63

%

 

$

713,332

 

 

 

62

%

Home improvement

 

 

315,442

 

 

 

25

 

 

 

247,324

 

 

 

21

 

Commercial

 

 

71,369

 

 

 

5

 

 

 

69,767

 

 

 

6

 

Medallion

 

 

91,298

 

 

 

7

 

 

 

130,432

 

 

 

11

 

Strategic partnership

 

 

7

 

 

 

 

 

 

 

 

 

 

Total gross loans

 

 

1,281,054

 

 

 

100

%

 

 

1,160,855

 

 

 

100

%

Allowance for loan losses

 

 

(90,510

)

 

 

 

 

 

 

(46,093

)

 

 

 

 

Total net loans

 

$

1,190,544

 

 

 

 

 

 

$

1,114,762

 

 

 

 

 

 

The following tables show the activity of the gross loans for the three and nine months ended September 30, 2020 and 2019.

 

Three Months Ended September 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallion

 

 

Strategic Partnership

 

 

Total

 

Gross loans – June 30, 2020

 

$

786,785

 

 

$

282,072

 

 

$

71,476

 

 

$

120,253

 

 

$

8

 

 

$

1,260,594

 

Loan originations

 

 

73,534

 

 

 

62,515

 

 

 

900

 

 

 

 

 

 

142

 

 

 

137,091

 

Principal payments, sales and maturities

 

 

(54,161

)

 

 

(29,312

)

 

 

(1,318

)

 

 

(401

)

 

 

(143

)

 

 

(85,335

)

Charge-offs, net

 

 

(850

)

 

 

(65

)

 

 

3

 

 

 

(15,304

)

 

 

 

 

 

(16,216

)

Transfer to loan collateral in process of foreclosure, net

 

 

(2,833

)

 

 

 

 

 

 

 

 

(10,590

)

 

 

 

 

 

(13,423

)

Amortization of origination costs

 

 

(2,093

)

 

 

509

 

 

 

2

 

 

 

(99

)

 

 

 

 

 

(1,681

)

Amortization of loan premium

 

 

(49

)

 

 

(81

)

 

 

 

 

 

(763

)

 

 

 

 

 

(893

)

FASB origination costs

 

 

2,605

 

 

 

(196

)

 

 

 

 

 

2

 

 

 

 

 

 

2,411

 

Paid-in-kind interest

 

 

 

 

 

 

 

 

306

 

 

 

 

 

 

 

 

 

306

 

Transfer to other foreclosed property

 

 

 

 

 

 

 

 

 

 

 

(1,800

)

 

 

 

 

 

(1,800

)

Gross loans – September 30, 2020

 

$

802,938

 

 

$

315,442

 

 

$

71,369

 

 

$

91,298

 

 

$

7

 

 

$

1,281,054

 

 

Nine Months Ended September 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallion

 

 

Strategic Partnership

 

 

Total

 

Gross loans – December 31, 2019

 

$

713,332

 

 

$

247,324

 

 

$

69,767

 

 

$

130,432

 

 

$

 

 

$

1,160,855

 

Loan originations

 

 

249,383

 

 

 

140,693

 

 

 

6,075

 

 

 

 

 

 

295

 

 

 

396,446

 

Principal payments, sales and maturities

 

 

(140,688

)

 

 

(72,034

)

 

 

(5,422

)

 

 

(4,180

)

 

 

(288

)

 

 

(222,612

)

Charge-offs, net

 

 

(10,796

)

 

 

(897

)

 

 

3

 

 

 

(17,124

)

 

 

 

 

 

(28,814

)

Transfer to loan collateral in process of foreclosure, net

 

 

(10,615

)

 

 

 

 

 

 

 

 

(14,934

)

 

 

 

 

 

(25,549

)

Amortization of origination costs

 

 

(5,853

)

 

 

1,406

 

 

 

6

 

 

 

(131

)

 

 

 

 

 

(4,572

)

Amortization of loan premium

 

 

(152

)

 

 

(248

)

 

 

 

 

 

(1,001

)

 

 

 

 

 

(1,401

)

FASB origination costs

 

 

8,327

 

 

 

(802

)

 

 

 

 

 

36

 

 

 

 

 

 

7,561

 

Paid-in-kind interest

 

 

 

 

 

��

 

 

 

940

 

 

 

 

 

 

 

 

 

940

 

Transfer to other foreclosed property

 

 

 

 

 

 

 

 

 

 

 

(1,800

)

 

 

 

 

 

(1,800

)

Gross loans – September 30, 2020

 

$

802,938

 

 

$

315,442

 

 

$

71,369

 

 

$

91,298

 

 

$

7

 

 

$

1,281,054

 

Page 18 of 71


 

 

Three Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallion

 

 

Total

 

Gross loans – June 30, 2019

 

$

668,540

 

 

$

209,549

 

 

$

64,442

 

 

$

145,944

 

 

$

1,088,475

 

Loan originations

 

 

82,662

 

 

 

42,641

 

 

 

4,750

 

 

 

 

 

130,053

 

Principal payments, sales and maturities

 

 

(39,068

)

 

 

(21,096

)

 

 

(375

)

 

 

(4,013

)

 

 

(64,552

)

Charge-offs, net

 

 

(3,489

)

 

 

(51

)

 

 

(819

)

 

 

(1,535

)

 

 

(5,894

)

Transfer to loan collateral in process of foreclosure, net

 

 

(3,429

)

 

 

 

 

 

 

(3,005

)

 

 

(6,434

)

Amortization of origination costs

 

 

(1,723

)

 

 

367

 

 

 

2

 

 

 

(10

)

 

 

(1,364

)

Amortization of loan premium

 

 

(59

)

 

 

(107

)

 

 

 

 

(547

)

 

 

(713

)

FASB origination costs

 

 

2,959

 

 

 

(577

)

 

 

(3

)

 

 

120

 

 

 

2,499

 

Paid-in-kind interest

 

 

 

 

 

 

212

 

 

 

 

 

212

 

Gross loans – September 30, 2019

 

$

706,393

 

 

$

230,726

 

 

$

68,209

 

 

$

136,954

 

 

$

1,142,282

 

 

Nine Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallion

 

 

Total

 

Gross loans – December 31, 2018

 

$

587,038

 

 

$

183,155

 

 

$

64,083

 

 

$

183,606

 

 

$

1,017,882

 

Loan originations

 

 

248,989

 

 

 

102,821

 

 

 

14,520

 

 

 

 

 

366,330

 

Principal payments, sales and maturities

 

 

(112,208

)

 

 

(54,168

)

 

 

(10,180

)

 

 

(10,612

)

 

 

(187,168

)

Charge-offs, net

 

 

(10,853

)

 

 

(295

)

 

 

(819

)

 

 

(18,166

)

 

 

(30,133

)

Transfer to loan collateral in process of foreclosure, net

 

 

(10,311

)

 

 

 

 

 

 

(15,573

)

 

 

(25,884

)

Amortization of origination costs

 

 

(4,743

)

 

 

1,060

 

 

 

32

 

 

 

(102

)

 

 

(3,753

)

Amortization of loan premium

 

 

(195

)

 

 

(327

)

 

 

 

 

(2,364

)

 

 

(2,886

)

FASB origination costs

 

 

8,676

 

 

 

(1,520

)

 

 

(64

)

 

 

165

 

 

 

7,257

 

Paid-in-kind interest

 

 

 

 

 

 

637

 

 

 

 

 

637

 

Gross loans – September 30, 2019

 

$

706,393

 

 

$

230,726

 

 

$

68,209

 

 

$

136,954

 

 

$

1,142,282

 

 

The following table sets forth the activity in the allowance for loan losses for the three and nine months ended September 30, 2020 and 2019.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended

September 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Allowance for loan losses – beginning

   balance

 

$

66,977

 

 

$

40,670

 

 

$

46,093

 

 

$

36,395

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

 

(3,595

)

 

 

(5,444

)

 

 

(17,546

)

 

 

(16,366

)

Home improvement

 

 

(643

)

 

 

(568

)

 

 

(2,202

)

 

 

(1,655

)

Commercial

 

 

 

 

 

(819

)

 

 

 

 

 

(819

)

Medallion

 

 

(15,448

)

 

 

(2,378

)

 

 

(19,146

)

 

 

(20,408

)

Total charge-offs

 

 

(19,686

)

 

 

(9,209

)

 

 

(38,894

)

 

 

(39,248

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

 

2,745

 

 

 

1,955

 

 

 

6,750

 

 

 

5,513

 

Home improvement

 

 

578

 

 

 

517

 

 

 

1,304

 

 

 

1,360

 

Commercial

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Medallion

 

 

144

 

 

 

843

 

 

 

2,023

 

 

 

2,242

 

Total recoveries

 

 

3,470

 

 

 

3,315

 

 

 

10,080

 

 

 

9,115

 

Net charge-offs(1)

 

 

(16,216

)

 

 

(5,894

)

 

 

(28,814

)

 

 

(30,133

)

Provision for loan losses

 

 

39,749

 

 

 

8,337

 

 

 

73,231

 

 

 

36,851

 

Allowance for loan losses – ending balance(2) (3)

 

$

90,510

 

 

$

43,113

 

 

$

90,510

 

 

$

43,113

 

Page 19 of 71


 

 

(1)

As of September 30, 2020, cumulative net charge-offs of loans and loan collateral in process of foreclosure in the medallion loan portfolio were $268,745, representing collection opportunities for the Company.

(2)

As of September 30, 2020, the general reserves previously recorded for the Company’s medallion loan portfolio had been reversed as all loans had been deemed impaired and written down to collateral value.    

(3)

As of September 30, 2020, there was 0 allowance for loan losses and net charge-offs related to the strategic partnership loans.

The following tables set forth the allowance for loan losses by type as of September 30, 2020 and December 31, 2019.

 

September 30, 2020

(Dollars in thousands)

 

Amount

 

 

Percentage of

Allowance

 

 

Allowance as a

Percent of Loan

Category

 

Recreation

 

$

27,982

 

 

 

31

%

 

 

3.48

%

Home improvement

 

 

4,751

 

 

 

5

 

 

 

1.51

 

Commercial

 

 

 

 

 

 

 

 

 

Medallion

 

 

57,777

 

 

 

64

 

 

 

63.28

 

Total

 

$

90,510

 

 

 

100

%

 

 

7.07

 

 

December 31, 2019

(Dollars in thousands)

 

Amount

 

 

Percentage of

Allowance

 

 

Allowance as a

Percent of Loan

Category

 

Recreation

 

$

18,075

 

 

 

39

%

 

 

2.53

%

Home improvement

 

 

2,608

 

 

 

6

 

 

 

1.05

 

Commercial

 

 

 

 

 

 

 

 

 

Medallion

 

 

25,410

 

 

 

55

 

 

 

19.48

 

Total

 

$

46,093

 

 

 

100

%

 

 

3.97

%

 

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.

 

(Dollars in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

 

September 30, 2019

 

Total nonaccrual loans

 

$

111,858

 

 

$

26,484

 

 

$

27,078

 

Interest foregone quarter to date

 

 

625

 

 

 

1,121

 

 

 

403

 

Amount of foregone interest applied

   to principal in the quarter

 

 

42

 

 

 

53

 

 

 

75

 

Interest foregone year to date

 

 

1,922

 

 

 

2,152

 

 

 

915

 

Amount of foregone interest applied

   to principal in the year

 

 

86

 

 

 

254

 

 

 

244

 

Interest foregone life to date

 

 

5,491

 

 

 

2,744

 

 

 

2,432

 

Amount of foregone interest applied

   to principal in the life

 

 

2,155

 

 

 

471

 

 

 

655

 

Percentage of nonaccrual loans to gross loan

   portfolio

 

 

9

%

 

 

2

%

 

 

2

%

 

The following tables present the performance status of loans as of September 30, 2020 and December 31, 2019.

 

September 30, 2020

(Dollars in thousands)

 

Performing

 

 

Nonperforming

 

 

Total

 

 

Percentage of

Nonperforming

to Total

 

Recreation

 

$

796,369

 

 

$

6,569

 

 

$

802,938

 

 

 

0.82

%

Home improvement

 

 

315,339

 

 

 

103

 

 

 

315,442

 

 

 

0.03

 

Commercial

 

 

54,598

 

 

 

16,771

 

 

 

71,369

 

 

 

23.50

 

Medallion

 

 

 

 

 

91,298

 

(1)

 

91,298

 

 

 

100.00

 

Strategic partnership

 

 

7

 

 

 

 

 

 

7

 

 

 

 

Total

 

$

1,166,313

 

 

$

114,741

 

(2)

$

1,281,054

 

 

 

8.96

%

Page 20 of 71


 

 

December 31, 2019

(Dollars in thousands)

 

Performing

 

 

Nonperforming

 

 

Total

 

 

Percentage of

Nonperforming

to Total

 

Recreation

 

$

705,070

 

 

$

8,262

 

 

$

713,332

 

 

 

1.16

%

Home improvement

 

 

247,139

 

 

 

185

 

 

 

247,324

 

 

 

0.07

 

Commercial

 

 

57,905

 

 

 

11,862

 

 

 

69,767

 

 

 

17.00

 

Medallion

 

 

88,248

 

 

 

42,184

 

 

 

130,432

 

 

 

32.34

 

Total

 

$

1,098,362

 

 

$

62,493

 

(2)

$

1,160,855

 

 

 

5.38

%

 

 

(1)

Includes medallion loan premiums of $3,145 as of September 30, 2020.

 

(2)

Includes $429 and $36,009 of TDRs as of September 30, 2020 and December 31, 2019, which are accruing and paying currently, but which are considered nonperforming loans under GAAP.

 

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 September 30, 2020 and 2019, and December 31, 2019, all of which had an allowance recorded against the principal balance.

 

 

 

September 30, 2020

 

 

December 31, 2019

 

 

September 30, 2019

 

(Dollars in thousands)

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

$

6,569

 

 

$

6,569

 

 

$

229

 

 

$

8,262

 

 

$

8,262

 

 

$

329

 

 

$

6,708

 

 

$

6,708

 

 

$

256

 

Home improvement

 

 

103

 

 

 

103

 

 

 

2

 

 

 

185

 

 

 

185

 

 

 

3

 

 

 

239

 

 

 

239

 

 

 

4

 

Commercial

 

 

16,771

 

 

 

16,776

 

 

 

 

 

 

11,862

 

 

 

11,867

 

 

 

 

 

 

12,031

 

 

 

12,126

 

 

 

 

Medallion

 

 

91,298

 

 

 

91,579

 

 

 

57,777

 

 

 

42,184

 

 

 

42,650

 

 

 

14,824

 

 

 

8,100

 

 

 

8,660

 

 

 

3,160

 

Total nonperforming loans

  with an allowance

 

$

114,741

 

 

$

115,027

 

 

$

58,008

 

 

$

62,493

 

 

$

62,964

 

 

$

15,156

 

 

$

27,078

 

 

$

27,733

 

 

$

3,420

 

 

 

 

For the Three Months Ended September 30, 2020

For the Three Months Ended September 30, 2019

 

 

For the Nine Months Ended September 30, 2020

 

 

For the Nine Months Ended September 30, 2019

 

(Dollars in thousands)

 

Average

Investment

Recorded

 

 

Interest

Income

Recognized

 

 

Average

Investment

Recorded

 

 

Interest

Income

Recognized

 

 

Average

Investment

Recorded

 

 

Interest

Income

Recognized

 

 

Average

Investment

Recorded

 

 

Interest

Income

Recognized

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

$

6,730

 

 

$

167

 

 

$

6,687

 

 

$

152

 

 

$

6,882

 

 

$

428

 

 

$

6,921

 

 

$

366

 

Home improvement

 

 

103

 

 

 

 

 

 

243

 

 

 

2

 

 

 

103

 

 

 

2

 

 

 

245

 

 

 

2

 

Commercial

 

 

16,894

 

 

 

 

 

 

9,616

 

 

 

36

 

 

 

17,002

 

 

 

47

 

 

 

6,827

 

 

 

321

 

Medallion

 

 

90,032

 

 

 

121

 

 

 

13,418

 

 

 

27

 

 

 

90,396

 

 

 

992

 

 

 

11,279

 

 

 

39

 

Total nonperforming loans

   with an allowance

 

$

113,759

 

 

$

288

 

 

$

29,964

 

 

$

217

 

 

$

114,383

 

 

$

1,469

 

 

$

25,272

 

 

$

728

 

 

The following tables show the aging of all loans as of September 30, 2020 and December 31, 2019.

 

 

 

Days Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

(Dollars in thousands)

 

30-59

 

 

60-89

 

 

90 +

 

 

Total

 

 

Current

 

 

Total (1)

 

 

Recorded

Investment

90 Days and

Accruing

 

Recreation

 

$

16,070

 

 

$

6,092

 

 

$

4,074

 

 

$

26,236

 

 

$

750,857

 

 

$

777,093

 

 

$

0

 

Home improvement

 

 

733

 

 

 

281

 

 

 

102

 

 

 

1,116

 

 

 

317,476

 

 

 

318,592

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

1,902

 

 

 

1,902

 

 

 

69,467

 

 

 

71,369

 

 

 

0

 

Medallion

 

 

8,208

 

 

 

64,289

 

 

 

7,325

 

 

 

79,822

 

 

 

8,332

 

 

 

88,154

 

 

 

0

 

Strategic partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

7

 

 

 

0

 

Total

 

$

25,011

 

 

$

70,662

 

 

$

13,403

 

 

$

109,076

 

 

$

1,146,139

 

 

$

1,255,215

 

 

$

0

 

Page 21 of 71


 

 

(1)

Excludes loan premiums of $4,358 resulting from purchase price accounting and $21,481 of capitalized loan origination costs.

 

 

 

Days Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

(Dollars in thousands)

 

30-59

 

 

60-89

 

 

90 +

 

 

Total

 

 

Current

 

 

Total (1)

 

 

Recorded

Investment

90 Days and

Accruing

 

Recreation

 

$

27,357

 

 

$

8,426

 

 

$

5,800

 

 

$

41,583

 

 

$

648,227

 

 

$

689,810

 

 

$

0

 

Home improvement

 

 

931

 

 

 

427

 

 

 

184

 

 

 

1,542

 

 

 

249,288

 

 

 

250,830

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

107

 

 

 

107

 

 

 

69,660

 

 

 

69,767

 

 

 

0

 

Medallion

 

 

12,491

 

 

 

2,118

 

 

 

2,572

 

 

 

17,181

 

 

 

109,106

 

 

 

126,287

 

 

 

0

 

Total

 

$

40,779

 

 

$

10,971

 

 

$

8,663

 

 

$

60,413

 

 

$

1,076,281

 

 

$

1,136,694

 

 

$

0

 

 

(1)

Excludes loan premiums of $5,758 resulting from purchase price accounting and $18,403 of capitalized loan origination costs.

The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 316%, 190%, and 202% as of September 30, 2020, December 31, 2019, and September 30, 2019.

The following table shows the TDRs which the Company entered into during the three and nine months ended September 30, 2020.

 

(Dollars in thousands)

 

Number of

Loans

 

 

Pre-

Modification

Investment

 

 

Post-

Modification

Investment

 

Three months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

     Recreation

 

 

18

 

 

$

254

 

 

$

229

 

     Medallion

 

 

3

 

 

 

448

 

 

 

448

 

Nine months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

     Recreation

 

 

57

 

 

$

722

 

 

$

510

 

     Medallion

 

 

33

 

 

 

14,089

 

 

 

14,089

 

 

During the twelve months ended September 30, 2020, 69 medallion loans modified as TDRs were in default and had an investment value of $29,296,000 as of September 30, 2020, net of a $20,420,000 allowance for loan losses, and 56 recreation loans modified as TDRs were in default and had an investment value of $558,000 as of September 30, 2020, net of a $19,000 allowance for loan losses.

The following table shows the TDRs which the Company entered into during the three and nine months ended September 30, 2019.

 

(Dollars in thousands)

 

Number of

Loans

 

 

Pre-

Modification

Investment

 

 

Post-

Modification

Investment

 

Three months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

     Recreation

 

 

40

 

 

$

587

 

 

$

505

 

     Medallion

 

 

1

 

 

 

758

 

 

 

758

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

     Recreation

 

 

276

 

 

$

4,109

 

 

$

2,619

 

     Medallion

 

 

10

 

 

 

4,041

 

 

 

4,041

 

 

During the twelve months ended September 30, 2019, 3 medallion loans modified as TDRs were in default and had an investment value of $812,000 as of September 30, 2019, net of a $365,000 allowance for loan losses, and 191 recreation loans modified as TDR’s were in default and had a net investment value of $1,727,000 as of September 30, 2019, net of a $66,000 allowance for loan losses.

The following tables show the activity of the loan collateral in process of foreclosure, which relate only to the recreation and medallion loans, for the three and nine months ended September 30, 2020 and 2019.

Page 22 of 71


 

 

Three Months Ended September 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loan collateral in process of foreclosure – June 30, 2020

 

$

1,258

 

 

$

46,117

 

 

$

47,375

 

Transfer from loans, net

 

 

2,833

 

 

 

10,611

 

 

 

13,444

 

Sales

 

 

(1,697

)

 

 

 

 

 

(1,697

)

Cash payments received

 

 

 

 

 

(426

)

 

 

(426

)

Collateral valuation adjustments

 

 

(1,395

)

 

 

(8,559

)

 

 

(9,954

)

Loan collateral in process of foreclosure – September 30, 2020

 

$

999

 

 

$

47,743

 

 

$

48,742

 

 

Nine Months Ended September 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loan collateral in process of foreclosure – December 31, 2019

 

$

1,476

 

 

$

51,235

 

 

$

52,711

 

Transfer from loans, net

 

 

10,615

 

 

 

14,954

 

 

 

25,569

 

Sales

 

 

(5,684

)

 

 

(300

)

 

 

(5,984

)

Cash payments received

 

 

 

 

 

(2,318

)

 

 

(2,318

)

Collateral valuation adjustments

 

 

(5,408

)

 

 

(15,828

)

 

 

(21,236

)

Loan collateral in process of foreclosure – September 30, 2020

 

$

999

 

 

$

47,743

 

 

$

48,742

 

 

Three Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loan collateral in process of foreclosure – June 30, 2019

 

$

955

 

 

$

51,413

 

 

$

52,368

 

Transfer from loans, net

 

 

3,429

 

 

 

3,005

 

 

 

6,434

 

Sales

 

 

(1,604

)

 

 

(387

)

 

 

(1,991

)

Cash payments received

 

 

 

 

 

(1,556

)

 

 

(1,556

)

Collateral valuation adjustments

 

 

(1,603

)

 

 

(113

)

 

 

(1,716

)

Loan collateral in process of foreclosure – September 30, 2019

 

$

1,177

 

 

$

52,362

 

 

$

53,539

 

 

Nine Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loan collateral in process of foreclosure – December 31, 2018

 

$

1,503

 

 

$

47,992

 

 

$

49,495

 

Transfer from loans, net

 

 

10,311

 

 

 

15,573

 

 

 

25,884

 

Sales

 

 

(5,715

)

 

 

(899

)

 

 

(6,614

)

Cash payments received

 

 

 

 

 

(6,100

)

 

 

(6,100

)

Collateral valuation adjustments

 

 

(4,922

)

 

 

(4,204

)

 

 

(9,126

)

Loan collateral in process of foreclosure – September 30, 2019

 

$

1,177

 

 

$

52,362

 

 

$

53,539

 

 

(5) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows:

 

 

 

Payments Due for the Twelve Months Ending September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

Thereafter

 

 

September 30, 2020(1)

 

 

December 31, 2019(1)

 

 

Interest

Rate (2)

 

Deposits(3)

 

$

391,562

 

 

$

273,210

 

 

$

177,060

 

 

$

144,040

 

 

$

74,015

 

 

$

0

 

 

$

1,059,887

 

 

$

954,245

 

 

 

1.79

%

SBA debentures and

   borrowings

 

 

22,508

 

 

0

 

 

 

5,000

 

 

 

5,000

 

 

 

14,000

 

 

 

21,500

 

 

 

68,008

 

 

 

71,746

 

 

 

3.36

%

Retail and privately placed

   notes

 

 

33,625

 

 

0

 

 

0

 

 

 

36,000

 

 

0

 

 

0

 

 

 

69,625

 

 

 

69,625

 

 

 

8.61

%

Preferred securities

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

 

33,000

 

 

 

33,000

 

 

 

33,000

 

 

 

2.37

%

Notes payable to banks

 

 

31,063

 

 

 

280

 

 

 

280

 

 

 

140

 

 

0

 

 

0

 

 

 

31,763

 

 

 

33,183

 

 

 

3.67

%

Other borrowings

 

 

500

 

 

 

7,405

 

 

0

 

 

0

 

 

 

747

 

 

0

 

 

 

8,652

 

 

 

7,794

 

 

 

1.91

%

Total

 

$

479,258

 

 

$

280,895

 

 

$

182,340

 

 

$

185,180

 

 

$

88,762

 

 

$

54,500

 

 

$

1,270,935

 

 

$

1,169,593

 

 

 

2.31

%

 

(1)

Excludes deferred financing costs of $4,795 and $5,105 as of September 30, 2020 and December 31, 2019.

Page 23 of 71


 

(2)

Weighted average contractual rate as of September 30, 2020.

(3)

Balance excludes $250 of strategic partner reserve deposits as of September 30, 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 0t have any individual time deposits greater than $100,000 as of September 30, 2020. The following table presents the maturity of the broker pools, excluding strategic partner reserve deposits, as of September 30, 2020.

 

(Dollars in thousands)

 

September 30, 2020

 

Three months or less

 

$

111,000

 

Over three months through six months

 

 

91,766

 

Over six months through one year

 

 

188,796

 

Over one year

 

 

668,325

 

Total deposits

 

$

1,059,887

 

 

 

(B) 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% per annum, required a minimum of $5,000,000 of principal and interest to be paid on or before February 1, 2018 (which was paid) and a minimum of $7,600,000 of principal and interest to be paid on or before March 27, 2019 (which was paid), and all remaining unpaid principal and interest on or before February 1, 2020, the final maturity date, which was extended to the maturity date of the Company’s publicly-traded 9.000% Senior Notes, which is currently April 15, 2021; or the Public Debt, provided, however, that (1) upon the Company’s refinancing of such senior notes, the maturity date shall mean the earlier of (a) the maturity date of such refinanced debt or (b) April 30, 2024, and (2) upon the Company’s repayment of such senior notes without refinancing, the maturity date shall mean April 30, 2024. As of September 30, 2020, $175,485,000 of commitments had been fully utilized, there were 0 commitments available, and $68,008,000 was outstanding, including $14,008,000 under the SBA Note.

 

On July 31, 2020, MCI accepted a commitment from the SBA for $25,000,000 in debenture financing with a ten-year term. MCI can draw funds under the commitment, in whole or in part, until September 24, 2024. In connection with the commitment, MCI paid the SBA a leverage fee of $250,000, with the remaining $500,000 of the fee to be paid pro rata as MCI draws under the commitment. Of the committed amount, $8,500,000 has been reserved to replace $8,500,000 of debentures which mature 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. As of September 30, 2020, NaN of the commitments had been drawn.

Page 24 of 71


 

(C) 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.

The table below summarizes the key attributes of the Company’s various borrowing arrangements with these lenders as of September 30, 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower

(Dollars in thousands)

 

# of

Lenders/

Notes

 

Note

Dates

 

Maturity

Dates

 

Type

 

Note

Amounts

 

 

 

Balance

Outstanding

at September 30,

2020

 

 

Payment

 

Average

Interest

Rate at

September 30,

2020

 

 

Interest

Rate

Index(1)

Medallion Financial

   Corp.

 

5/5

 

4/11 - 8/14

 

12/20 - 9/21

 

Term loans

and demand

notes secured

by pledged

loans(2)

 

$

20,096

 

(2)

 

$

20,096

 

 

Interest

only(3)

 

 

3.75

%

 

Various(3)

Medallion Chicago

 

2/23

 

11/11 - 12/11

 

2/21

 

Term loans

secured by

owned

Chicago

medallions(4)

 

 

18,449

 

 

 

 

10,687

 

 

$134 of

principal &

interest

paid

monthly

 

 

3.50

%

 

N/A

Medallion Funding

 

1/1

 

11/18

 

12/23

 

Term loan unsecured

 

 

1,400

 

 

 

 

980

 

 

$70

principal &

interest

paid

quarterly

 

 

4.00

%

 

N/A

 

 

 

 

 

 

 

 

 

 

$

39,945

 

 

 

$

31,763

 

 

 

 

 

 

 

 

 

 

(1)

At September 30, 2020, 30-day LIBOR was 0.15%, 360-day LIBOR was 0.36%, and the prime rate was 3.25%.

(2)

One note has an interest rate of Prime, one note has an interest rate of Prime plus 0.50%, one note has a fixed interest rate of 3.75%, one note has an interest rate of LIBOR plus 3.75%, and the other interest rates on these borrowings are LIBOR plus 2%.

(3)

Various agreements call for remittance of all principal received on pledged loans subject to minimum monthly payments ranging up to or from $12 to $85.

(4)

Guaranteed by the Company.

On July 6, 2019, the Company paid $10,819,000 at maturity in satisfaction of all its outstanding obligations under one of its credit facilities. In connection with this payment, the Company obtained a waiver from one of its other lenders, with a term note of $2,040,000, of certain resulting repayment and other obligations, which waiver expires on December 15, 2020.

In March 2019, the Company used some of the proceeds of the privately placed notes to pay off one of the notes payable to banks at a 50% discount, resulting in a gain on debt extinguishment of $4,145,000 in the 2019 first quarter.

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. See Note 15 for more information.

As a result of the cash flow shortages due to the slowdown in the taxi industry resulting from the COVID-19 pandemic, the Company received 180 day payment deferrals that terminated in August and modifications to provide for interest only payments from September through the end of this year for the notes payable to banks described above.

(D) RETAIL AND PRIVATELY PLACED NOTES

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, the private placement was reopened and an additional $6,000,000 principal amount of notes was issued to certain institutional investors.

Page 25 of 71


 

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.

(E) 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 (0.23% at September 30, 2020) 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 September 30, 2020, $33,000,000 was outstanding on the preferred securities.

(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 September 30, 2020, the total outstanding on these notes was $7,405,000 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, 2020.

On June 17, 2020, RPAC was approved for and received a Paycheck Protection Program, or PPP, loan under the CARES Act. As of September 30, 2020, the total outstanding balance of such loan was $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. As of September 30, 2020, RPAC had not applied for forgiveness of this loan.

(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 debt to equity and minimum net worth. The Company was in compliance with such restrictions as of September 30, 2020.

(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 nine months ended September 30, 2020 and 2019.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating lease costs

 

$

596

 

 

$

531

 

 

$

1,788

 

 

$

1,593

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

632

 

 

 

556

 

 

 

1,994

 

 

 

1,680

 

Right-of-use asset obtained in exchange for lease liability

 

 

(14

)

 

 

29

 

 

 

(42

)

 

 

(1

)

Page 26 of 71


 

 

The following table presents the breakout of the operating leases as of September 30, 2020 and December 31, 2019.

 

(Dollars in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Operating lease right-of-use assets

 

$

11,944

 

 

$

13,482

 

Other current liabilities

 

 

2,086

 

 

 

2,085

 

Operating lease liabilities

 

 

11,159

 

 

 

12,738

 

Total operating lease liabilities

 

 

13,245

 

 

 

14,823

 

Weighted average remaining lease term

 

6.6 years

 

 

7.3 years

 

Weighted average discount rate

 

 

5.55

%

 

 

5.54

%

 

At September 30, 2020, maturities of the lease liabilities were as follows:

 

(Dollars in thousands)

 

 

 

 

Remainder of 2020

 

$

644

 

2021

 

 

2,474

 

2022

 

 

2,406

 

2023

 

 

2,356

 

2024

 

 

2,373

 

Thereafter

 

 

5,911

 

Total lease payments

 

$

16,164

 

Less imputed interest

 

 

2,919

 

Total operating lease liabilities

 

$

13,245

 

 

(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 September 30, 2020 and December 31, 2019.

 

(Dollars in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Goodwill and other intangibles

 

$

(45,302

)

 

$

(45,595

)

Provision for loan losses

 

 

28,636

 

 

 

19,198

 

Net operating loss carryforwards(1)

 

 

26,469

 

 

 

22,607

 

Accrued expenses, compensation, and other assets

 

 

997

 

 

 

1,701

 

Unrealized gains on other investments

 

 

(8,690

)

 

 

(6,790

)

Total deferred tax asset (liability)

 

 

2,110

 

 

 

(8,879

)

Valuation allowance

 

 

(462

)

 

 

(462

)

Deferred tax asset (liability), net

 

 

1,648

 

 

 

(9,341

)

Taxes receivable

 

 

1,639

 

 

 

1,516

 

Net deferred and other tax assets (liabilities)

 

$

3,287

 

 

$

(7,825

)

 

(1)

As of September 30, 2020, the Company and its subsidiaries had an estimated $101,627 of net operating loss carryforwards, $1,712 of which expire at various dates between December 31, 2026 and December 31, 2035, which had a net carrying value of $26,007 as of September 30, 2020.

Page 27 of 71


 

The components of our tax (provision) benefit for the three and nine months ended September 30, 2020 and 2019 were as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

 

 

$

(230

)

 

$

 

 

$

(1,099

)

State

 

 

(83

)

 

 

(661

)

 

 

(306

)

 

 

(1,620

)

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

5,940

 

 

 

(887

)

 

 

9,239

 

 

 

1,311

 

State

 

 

2,524

 

 

 

1,613

 

 

 

3,550

 

 

 

3,334

 

Net (provision) benefit for income taxes

 

$

8,381

 

 

$

(165

)

 

$

12,483

 

 

$

1,926

 

 

The following table presents a reconciliation of statutory federal income tax (provision) benefit to consolidated actual income tax (provision) benefit for the three and nine months ended September 30, 2020 and 2019.

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Statutory Federal income tax (provision) benefit at 21%

 

$

5,967

 

 

$

(1,616

)

 

$

10,034

 

 

$

(332

)

State and local income taxes, net of federal income tax benefit

 

 

1,201

 

 

 

(547

)

 

 

1,961

 

 

 

(113

)

Revaluation of net operating losses

 

 

 

 

 

876

 

 

 

 

 

 

380

 

Change in state income tax accruals

 

 

 

 

 

 

 

 

 

 

 

600

 

Change in effective state income tax rate

 

 

(939

)

 

 

608

 

 

 

(790

)

 

 

916

 

Income attributable to non-controlling interest

 

 

522

 

 

 

451

 

 

 

356

 

 

 

451

 

Non deductible expenses

 

 

(211

)

 

 

 

 

 

(1,000

)

 

 

 

Other

 

 

1,841

 

 

 

63

 

 

 

1,922

 

 

 

24

 

Total income tax (provision) benefit

 

$

8,381

 

 

$

(165

)

 

$

12,483

 

 

$

1,926

 

 

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 September 30, 2020.

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 2016 through the present are the more significant filings that are open for examination. Currently, the Company is undergoing various examinations covering the years 2016 to 2018.

(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, 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 1,012,816 remained issuable as of September 30, 2020. 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.

Page 28 of 71


 

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. NaN 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.

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. NaN 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 September 30, 2020, 864,350 options on the Company’s common stock were outstanding under the Company’s plans, of which 197,232 options were exercisable. Additionally there were 352,615 unvested shares of the Company’s common stock outstanding and 62,780 unvested restricted share 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 $3.30 per share and $2.98 per share for the nine months ended September 30, 2020 and 2019. The following assumption categories are used to determine the value of any option grants.

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Risk free interest rate

 

 

1.46

%

 

 

2.39

%

Expected dividend yield

 

 

 

 

 

0.79

 

Expected life of option in years(1)

 

 

6.25

 

 

 

6.25

 

Expected volatility(2)

 

 

50.18

 

 

 

48.45

 

Page 29 of 71


 

 

(1)

Expected life is calculated using the simplified method.

(2)

We determine our expected volatility based on our historical volatility.

The following table presents the activity for the stock option programs for the 2020 first, second and third quarters and the 2019 full year.

 

 

 

Number of

Options

 

 

 

Exercise

Price Per

Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2018

 

 

144,666

 

 

$

2.14-13.84

 

 

$

7.23

 

Granted

 

 

449,450

 

 

 

5.21-7.25

 

 

 

6.61

 

Cancelled

 

 

(44,076

)

 

 

6.55-13.84

 

 

 

9.00

 

Exercised(1)

 

 

0

 

 

 

 

0

 

 

 

0

 

Outstanding at December 31, 2019

 

 

550,040

 

 

 

2.14-13.53

 

 

 

6.58

 

Granted

 

 

335,773

 

 

 

 

6.68

 

 

 

6.68

 

Cancelled

 

 

(14,585

)

 

 

6.55-7.25

 

 

 

6.67

 

Exercised(1)

 

 

0

 

 

 

 

0

 

 

 

0

 

Outstanding at March 31, 2020

 

 

871,228

 

 

 

2.14-13.53

 

 

 

6.62

 

Granted

 

 

0

 

 

 

 

 

 

 

 

Cancelled

 

 

(1,623

)

 

 

6.55-7.25

 

 

 

6.90

 

Exercised(1)

 

 

0

 

 

 

 

 

 

 

 

Outstanding at June 30, 2020

 

 

869,605

 

 

 

2.14-13.53

 

 

 

6.62

 

Granted

 

 

0

 

 

 

 

 

 

 

 

Cancelled

 

 

(5,255

)

 

 

6.55-7.25

 

 

 

6.92

 

Exercised(1)

 

 

0

 

 

 

 

 

 

 

 

Outstanding at September 30, 2020

 

 

864,350

 

 

$

2.14-13.53

 

 

$

6.61

 

Options exercisable at September 30, 2020(2)

 

 

197,232

 

 

 

2.14-13.53

 

 

 

6.45

 

 

(1)

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 $0 for the three and nine months ended September 30, 2020 and 2019.

(2)

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2020 and the related exercise price of the underlying options, was $6,000 for outstanding options and $5,000 for exercisable options as of September 30, 2020. The remaining contractual life was 8.60 years for outstanding options and 7.27 years for exercisable options at September 30, 2020.

Page 30 of 71


 

The following table presents the activity for the restricted stock programs for the 2020 first, second and third quarters and the 2019 full year.

 

 

 

Number of

Shares

 

 

 

Grant

Price Per

Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2018

 

 

190,915

 

 

$

2.14-5.27

 

 

$

4.06

 

Granted

 

 

216,148

 

 

 

4.80-7.25

 

 

 

6.59

 

Cancelled

 

 

(3,946

)

 

 

3.93-6.55

 

 

 

4.97

 

Vested(1)

 

 

(118,238

)

 

 

2.06-4.80

 

 

 

3.89

 

Outstanding at December 31, 2019

 

 

284,879

 

 

 

3.95-7.25

 

 

 

6.01

 

Granted

 

 

165,674

 

 

 

 

6.68

 

 

 

6.68

 

Cancelled

 

 

(5,577

)

 

 

3.95-7.25

 

 

 

6.67

 

Vested(1)

 

 

(81,337

)

 

 

3.95-6.55

 

 

 

5.41

 

Outstanding at March 31, 2020

 

 

363,639

 

 

 

4.39-7.25

 

 

 

6.44

 

Granted

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(696

)

 

 

6.55-7.25

 

 

 

6.97

 

Vested(1)

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2020

 

 

362,943

 

 

$

4.39-7.25

 

 

 

6.44

 

Granted

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(2,273

)

 

 

6.55-7.25

 

 

 

6.99

 

Vested(1)

 

 

(8,055

)

 

 

4.80-5.27

 

 

 

4.97

 

Outstanding at September 30, 2020(2)

 

 

352,615

 

 

$

4.39-7.25

 

 

$

6.47

 

 

(1)

The aggregate fair value of the restricted stock vested was $25,000 and $579,000 for the three and nine months ended September 30, 2020, and was $0 and $736,000 for the three and nine months ended September 30, 2019.

(2)

The aggregate fair value of the restricted stock was $882,000 as of September 30, 2020. The remaining vesting period was 2.05 years at September 30, 2020.

During the nine months ended September 30, 2020, the Company granted 47,156 restricted stock units that vest on June 19, 2021 with a grant price of $3.16. In addition, during the year ended December 31, 2019, the Company granted 26,040 restricted stock units that vested on June 14, 2020 with a grant price of $4.80. These units have 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 15,624 units. The remaining 10,416 units vested and were settled.

The following table presents the activity for the unvested options outstanding under the plans for the 2020 first, second and third quarters.

 

 

 

Number of

Options

 

 

 

Exercise

Price

Per Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2019

 

 

487,262

 

 

$

2.14-7.25

 

 

$

6.45

 

Granted

 

 

335,773

 

 

 

 

6.68

 

 

 

6.68

 

Cancelled

 

 

(14,148

)

 

 

6.55-7.25

 

 

 

6.68

 

Vested

 

 

(104,939

)

 

 

 

6.55

 

 

 

6.55

 

Outstanding at March 31, 2020

 

 

703,948

 

 

 

2.14-7.25

 

 

 

6.21

 

Granted

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(1,422

)

 

 

6.55-7.25

 

 

 

6.95

 

Vested

 

 

(12,000

)

 

 

2.22-5.58

 

 

 

4.46

 

Outstanding at June 30, 2020

 

 

690,526

 

 

$

2.14-7.25

 

 

 

6.61

 

Granted

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(4,631

)

 

 

6.55-7.25

 

 

 

6.97

 

Vested

 

 

(18,777

)

 

 

2.61-5.27

 

 

 

4.73

 

Outstanding at September 30, 2020

 

 

667,118

 

 

$

2.14-7.25

 

 

$

6.66

 

 

The intrinsic value of the options vested was $2,000 and $44,000 for the three and nine months ended September 30, 2020.

Page 31 of 71


 

(9) SEGMENT REPORTING

The Company has 6 business segments, which include 4 lending and 2 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 conducted by the Bank in all fifty states, with the highest concentrations in Texas, Florida, and California at 16%, 10%, and 9% of loans outstanding and with no other states over 9% as of September 30, 2020. 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 61%, 20%, and 12% of the segment portfolio as of September 30, 2020. The home improvement lending segment works with contractors and financial service providers to finance residential home improvements concentrated in swimming pools, roofs, windows, and solar panels, at 28%, 24%, 12%, and 9% of total home improvement loans outstanding, and with no other product lines over 9% as of September 30, 2020. The commercial lending segment focuses on enterprise wide industries, including manufacturing services, and various other industries, in which 54% of these loans are made in the Midwest. The medallion lending segment arose in connection with the financing of the medallions, taxis, and related assets, of which 90% were in New York City as of September 30, 2020.

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 current year race season had been suspended from March 15, 2020 through May 17, 2020. As states began to reopen, NASCAR resumed races and expects to complete all races scheduled. Commencing the second quarter 2020, the Bank began issuing loans related to the new strategic partnership business, which is currently included within the corporate and other investment segment due to its small size.

As part of the 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 71


 

The following tables present segment data as of and for the three and nine months ended September 30, 2020 and 2019.

 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Three Months Ended September 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

28,962

 

 

$

7,218

 

 

$

1,791

 

 

$

(909

)

 

$

 

 

$

378

 

 

$

37,440

 

Total interest expense

 

 

3,476

 

 

 

1,655

 

 

 

663

 

 

 

(56

)

 

 

42

 

 

 

2,604

 

 

 

8,384

 

Net interest income (loss)

 

 

25,486

 

 

 

5,563

 

 

 

1,128

 

 

 

(853

)

 

 

(42

)

 

 

(2,226

)

 

 

29,056

 

Provision for loan losses

 

 

1,812

 

 

 

745

 

 

 

 

 

 

37,196

 

 

 

 

 

 

(4

)

 

 

39,749

 

Net interest income (loss)

   after loss provision

 

 

23,674

 

 

 

4,818

 

 

 

1,128

 

 

 

(38,049

)

 

 

(42

)

 

 

(2,222

)

 

 

(10,693

)

Sponsorship and race winnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,962

 

 

 

 

 

 

8,962

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,636

)

 

 

 

 

 

(2,636

)

Other income (expense), net

 

 

(7,246

)

 

 

(2,700

)

 

 

(712

)

 

 

(9,738

)

 

 

(2,503

)

 

 

(1,148

)

 

 

(24,047

)

Net income (loss) before taxes

 

 

16,428

 

 

 

2,118

 

 

 

416

 

 

 

(47,787

)

 

 

3,781

 

 

 

(3,370

)

 

 

(28,414

)

Income tax (provision)  benefit

 

 

(4,201

)

 

 

(541

)

 

 

(104

)

 

 

11,908

 

 

 

(942

)

 

 

2,261

 

 

 

8,381

 

Net income (loss)

 

$

12,227

 

 

$

1,577

 

 

$

312

 

 

$

(35,879

)

 

$

2,839

 

 

$

(1,109

)

 

$

(20,033

)

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

774,956

 

 

$

310,691

 

 

$

68,042

 

 

$

33,521

 

 

$

 

 

$

3,334

 

 

$

1,190,544

 

Total assets

 

 

788,459

 

 

 

321,084

 

 

 

80,247

 

 

 

142,450

 

 

 

40,112

 

 

 

231,923

 

 

 

1,604,275

 

Total funds borrowed

 

 

628,528

 

 

 

255,778

 

 

 

65,906

 

 

 

113,009

 

 

 

8,652

 

 

 

199,312

 

 

 

1,271,185

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

6.22

%

 

 

2.06

%

 

 

1.49

%

 

 

(85.70

)%

 

 

31.97

%

 

 

(8.78

)%

 

 

(5.69

)%

Return on average equity

 

 

31.11

 

 

 

10.29

 

 

 

6.82

 

 

NM

 

 

NM

 

 

 

(54.58

)

 

 

(29.77

)

Interest yield

 

 

14.97

 

 

 

9.73

 

 

 

10.51

 

 

 

(5.34

)

 

N/A

 

 

N/A

 

 

 

11.23

 

Net interest margin

 

 

13.18

 

 

 

7.50

 

 

 

6.62

 

 

 

(3.89

)

 

N/A

 

 

N/A

 

 

 

8.72

 

Reserve coverage

 

 

3.48

 

 

 

1.51

 

 

 

0.00

 

 

 

63.28

 

 

N/A

 

 

N/A

 

 

 

7.07

 

Delinquency status(2)

 

 

0.52

 

 

 

0.03

 

 

 

2.67

 

 

 

8.31

 

 

N/A

 

 

N/A

 

 

 

1.07

 

Charge-off ratio

 

 

0.44

 

 

 

0.09

 

 

 

(0.02

)

 

 

89.89

 

 

N/A

 

 

N/A

 

 

 

5.36

 

 

(1)

Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.

(2)

Loans 90 days or more past due.

(3)

Ratio is based on total commercial lending balances, and relates to the total loan business.

 

 

 

Page 33 of 71


 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Nine Months Ended September 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

82,525

 

 

$

19,431

 

 

$

5,275

 

 

$

86

 

 

$

 

 

$

1,253

 

 

$

108,570

 

Total interest expense

 

 

10,268

 

 

 

4,178

 

 

 

1,937

 

 

 

2,781

 

 

 

122

 

 

 

6,933

 

 

 

26,219

 

Net interest income (loss)

 

 

72,257

 

 

 

15,253

 

 

 

3,338

 

 

 

(2,695

)

 

 

(122

)

 

 

(5,680

)

 

 

82,351

 

Provision for loan losses

 

 

20,705

 

 

 

3,041

 

 

 

 

 

 

49,489

 

 

 

 

 

 

(4

)

 

 

73,231

 

Net interest income (loss)

   after loss provision

 

 

51,552

 

 

 

12,212

 

 

 

3,338

 

 

 

(52,184

)

 

 

(122

)

 

 

(5,676

)

 

 

9,120

 

Sponsorship and race winnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,161

 

 

 

 

 

 

15,161

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,584

)

 

 

 

 

 

(6,584

)

Other income (expense), net

 

 

(21,115

)

 

 

(7,002

)

 

 

(2,191

)

 

 

(20,603

)

 

 

(5,726

)

 

 

(8,842

)

 

 

(65,479

)

Net income (loss) before taxes

 

 

30,437

 

 

 

5,210

 

 

 

1,147

 

 

 

(72,787

)

 

 

2,729

 

 

 

(14,518

)

 

 

(47,782

)

Income tax (provision) benefit

 

 

(7,783

)

 

 

(1,332

)

 

 

(286

)

 

 

18,138

 

 

 

(680

)

 

 

4,426

 

 

 

12,483

 

Net income (loss)

 

$

22,654

 

 

$

3,878

 

 

$

861

 

 

$

(54,649

)

 

$

2,049

 

 

$

(10,092

)

 

$

(35,299

)

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

774,956

 

 

$

310,691

 

 

$

68,042

 

 

$

33,521

 

 

$

 

 

$

3,334

 

 

$

1,190,544

 

Total assets

 

 

788,459

 

 

 

321,084

 

 

 

80,247

 

 

 

142,450

 

 

 

40,112

 

 

 

231,923

 

 

 

1,604,275

 

Total funds borrowed

 

 

628,528

 

 

 

255,778

 

 

 

65,906

 

 

 

113,009

 

 

 

8,652

 

 

 

199,312

 

 

 

1,271,185

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

4.04

%

 

 

1.84

%

 

 

1.37

%

 

 

(38.80

)%

 

 

8.27

%

 

 

(5.45

)%

 

 

(3.43

)%

Return on average equity

 

 

20.20

 

 

 

9.19

 

 

 

6.56

 

 

 

(192.88

)

 

NM

 

 

 

(22.64

)

 

 

(17.02

)

Interest yield

 

 

14.99

 

 

 

9.62

 

 

 

10.58

 

 

 

0.13

 

 

N/A

 

 

N/A

 

 

 

11.31

 

Net interest margin

 

 

13.13

 

 

 

7.53

 

 

 

6.69

 

 

 

(4.12

)

 

N/A

 

 

N/A

 

 

 

8.58

 

Reserve coverage

 

 

3.48

 

 

 

1.51

 

 

 

0.00

 

 

 

63.28

 

 

N/A

 

 

N/A

 

 

 

7.07

 

Delinquency status(2)

 

 

0.52

 

 

 

0.03

 

 

 

2.67

 

 

 

8.31

 

 

N/A

 

 

N/A

 

 

 

1.07

 

Charge-off ratio

 

 

1.96

 

 

 

0.44

 

 

 

(0.01

)

 

 

26.21

 

 

N/A

 

 

N/A

 

 

 

3.30

 

 

(1)

Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.

(2)

Loans 90 days or more past due.

(3)

Ratio is based on total commercial lending balances, and relates to the total loan business.

 

Page 34 of 71


 

 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Three Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

26,147

 

 

$

5,184

 

 

$

1,842

 

 

$

975

 

 

$

 

 

$

492

 

 

$

34,640

 

Total interest expense

 

 

3,578

 

 

 

1,309

 

 

 

741

 

 

 

1,935

 

 

 

47

 

 

 

1,615

 

 

 

9,225

 

Net interest income (loss)

 

 

22,569

 

 

 

3,875

 

 

 

1,101

 

 

 

(960

)

 

 

(47

)

 

 

(1,123

)

 

 

25,415

 

Provision for loan losses

 

 

6,744

 

 

 

(629

)

 

 

364

 

 

 

1,858

 

 

 

 

 

 

 

 

 

8,337

 

Net interest income (loss) after loss

   provision

 

 

15,825

 

 

 

4,504

 

 

 

737

 

 

 

(2,818

)

 

 

(47

)

 

 

(1,123

)

 

 

17,078

 

Sponsorship and race winning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,940

 

 

 

 

 

 

7,940

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,663

)

 

 

 

 

 

(2,663

)

Other income (expense), net

 

 

(6,181

)

 

 

(2,000

)

 

 

563

 

 

 

(2,762

)

 

 

(1,784

)

 

 

(2,591

)

 

 

(14,755

)

Net income (loss) before taxes

 

 

9,644

 

 

 

2,504

 

 

 

1,300

 

 

 

(5,580

)

 

 

3,446

 

 

 

(3,714

)

 

 

7,600

 

Income tax (provision) benefit

 

 

(2,497

)

 

 

(648

)

 

 

(314

)

 

 

1,345

 

 

 

(831

)

 

 

2,780

 

 

 

(165

)

Net income (loss)

 

$

7,147

 

 

$

1,856

 

 

$

986

 

 

$

(4,235

)

 

$

2,615

 

 

$

(934

)

 

$

7,435

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

690,466

 

 

$

228,491

 

 

$

64,646

 

 

$

112,003

 

 

$

 

 

$

3,563

 

 

$

1,099,169

 

Total assets

 

 

702,541

 

 

 

239,991

 

 

 

87,486

 

 

 

226,868

 

 

 

33,134

 

 

 

229,734

 

 

 

1,519,754

 

Total funds borrowed

 

 

559,995

 

 

 

190,871

 

 

 

69,658

 

 

 

180,040

 

 

 

7,758

 

 

 

178,793

 

 

 

1,187,115

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

4.14

%

 

 

3.22

%

 

 

4.49

%

 

 

(7.26

)%

 

 

31.13

%

 

 

(1.54

)%

 

 

1.31

%

Return on average equity

 

 

20.69

 

 

 

16.09

 

 

 

22.45

 

 

 

(36.30

)

 

NM

 

 

 

(7.81

)

 

 

6.81

 

Interest yield

 

 

15.35

 

 

 

9.46

 

 

 

11.09

 

 

 

3.30

 

 

N/A

 

 

N/A

 

 

 

11.87

 

Net interest margin

 

 

13.25

 

 

 

7.07

 

 

 

6.63

 

 

 

(3.25

)

 

N/A

 

 

N/A

 

 

 

8.71

 

Reserve coverage

 

 

2.25

 

 

 

0.97

 

 

 

0.00

 

(1)

 

18.22

 

 

N/A

 

 

N/A

 

 

 

3.77

 

Delinquency status(2)

 

 

0.69

 

 

 

0.11

 

 

 

0.40

 

(1)

 

2.41

 

 

N/A

 

 

N/A

 

 

 

0.73

 

Charge-off ratio

 

 

2.05

 

 

 

0.09

 

 

 

4.93

 

(3)

 

5.20

 

 

N/A

 

 

N/A

 

 

 

2.17

 

 

(1)

Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.

(2)

Loans 90 days or more past due.

(3)

Ratio is based on total commercial lending balances, and relates to the total loan business.

 

Page 35 of 71


 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Nine Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

72,996

 

 

$

14,187

 

 

$

5,359

 

 

$

2,482

 

 

$

 

 

$

1,674

 

 

$

96,698

 

Total interest expense

 

 

9,541

 

 

 

3,252

 

 

 

2,108

 

 

 

5,435

 

 

 

119

 

 

 

5,313

 

 

 

25,768

 

Net interest income (loss)

 

 

63,455

 

 

 

10,935

 

 

 

3,251

 

 

 

(2,953

)

 

 

(119

)

 

 

(3,639

)

 

 

70,930

 

Provision for loan losses

 

 

19,925

 

 

 

733

 

 

 

364

 

 

 

15,374

 

 

 

 

 

 

455

 

 

 

36,851

 

Net interest income (loss) after loss

   provision

 

 

43,530

 

 

 

10,202

 

 

 

2,887

 

 

 

(18,327

)

 

 

(119

)

 

 

(4,094

)

 

 

34,079

 

Sponsorship and race winning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,008

 

 

 

 

 

 

16,008

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,211

)

 

 

 

 

 

(7,211

)

Other income (expense), net

 

 

(17,501

)

 

 

(5,356

)

 

 

(532

)

 

 

(8,106

)

 

 

(5,298

)

 

 

(5,822

)

 

 

(42,615

)

Net income (loss) before taxes

 

 

26,029

 

 

 

4,846

 

 

 

2,355

 

 

 

(26,433

)

 

 

3,380

 

 

 

(9,916

)

 

 

261

 

Income tax (provision) benefit

 

 

(6,741

)

 

 

(1,255

)

 

 

(568

)

 

 

6,375

 

 

 

(815

)

 

 

4,930

 

 

 

1,926

 

Net income (loss)

 

$

19,288

 

 

$

3,591

 

 

$

1,787

 

 

$

(20,058

)

 

$

2,565

 

 

$

(4,986

)

 

$

2,187

 

Balance Sheet Data as of

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

690,466

 

 

$

228,491

 

 

$

64,646

 

 

$

112,003

 

 

$

 

 

$

3,563

 

 

$

1,099,169

 

Total assets

 

 

702,541

 

 

 

239,991

 

 

 

87,486

 

 

 

226,868

 

 

 

33,134

 

 

 

229,734

 

 

 

1,519,754

 

Total funds borrowed

 

 

559,995

 

 

 

190,871

 

 

 

69,658

 

 

 

180,040

 

 

 

7,758

 

 

 

178,793

 

 

 

1,187,115

 

Balance Sheet Data as of

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

695,257

 

 

$

244,716

 

 

$

66,405

 

 

$

105,022

 

 

$

 

 

$

3,362

 

 

$

1,114,762

 

Total assets

 

 

707,377

 

 

 

252,704

 

 

 

84,924

 

 

 

217,483

 

 

 

31,538

 

 

 

247,641

 

 

 

1,541,667

 

Total funds borrowed

 

 

563,805

 

 

 

201,605

 

 

 

68,666

 

 

 

176,825

 

 

 

7,794

 

 

 

150,898

 

 

 

1,169,593

 

Selected Financial Ratios as of

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

4.01

%

 

 

2.50

%

 

 

2.69

%

 

 

(10.82

)%

 

 

10.76

%

 

 

(2.90

)%

 

 

(0.12

)%

Return on average equity

 

 

17.42

 

 

 

11.34

 

 

 

13.43

 

 

 

(54.12

)

 

NM

 

 

 

(11.52

)

 

 

(0.60

)

Interest yield

 

 

15.45

 

 

 

9.44

 

 

 

11.59

 

 

 

2.50

 

 

N/A

 

 

N/A

 

 

 

11.68

 

Net interest margin

 

 

13.43

 

 

 

7.27

 

 

 

7.03

 

 

 

(2.97

)

 

N/A

 

 

N/A

 

 

 

8.57

 

Reserve coverage

 

 

2.25

 

 

 

0.97

 

 

 

0.00

 

(1)

 

18.22

 

 

N/A

 

 

N/A

 

 

 

3.77

 

Delinquency status(2)

 

 

0.69

 

 

 

0.11

 

 

 

0.40

 

(1)

 

2.41

 

 

N/A

 

 

N/A

 

 

 

0.73

 

Charge-off ratio

 

 

2.30

 

 

 

0.20

 

 

 

1.77

 

(3)

 

18.29

 

 

N/A

 

 

N/A

 

 

 

3.92

 

 

(1)

Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.

(2)

Loans 90 days or more past due.

(3)

Ratio is based on total commercial lending balances, and relates to the total loan business.

  

 

 

 

 

 

 

   

Page 36 of 71


 

(10) COMMITMENTS AND CONTINGENCIES

(A) EMPLOYMENT AGREEMENTS

The Company has employment agreements with certain key officers for either a two- or five-year term. Annually, the contracts with a five-year term will 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 two-year term will renew for new 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-year term; however, there is currently one agreement that renews after two years for additional one-year terms and one agreement with a two-year term that does not have a renewal period. 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 $12,466,000.

(B) OTHER COMMITMENTS

The Company had no commitments to extend credit or make investments outstanding at September 30, 2020. 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) 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 to 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.

(D) 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.

Jeffrey Rudnick, the son of one of the Company’s directors, is an officer of LAX Group, LLC (LAX), one of the Company’s equity investments. Mr. Rudnick receives 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 provides consulting services to the Company directly for a monthly retainer of $4,200.

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 $7,405,000 that earns interest at an annual rate of 2% through March 2022, and none of such interest 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

Page 37 of 71


 

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 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 September 30, 2020 and December 31, 2019, 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.

 

 

 

September 30, 2020

 

 

December 31, 2019

 

(Dollars in thousands)

 

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and federal funds sold(1)

 

$

49,731

 

 

$

49,731

 

 

$

67,821

 

 

$

67,821

 

Equity investments

 

 

10,284

 

 

 

10,284

 

 

 

10,079

 

 

 

10,079

 

Investment securities

 

 

45,991

 

 

 

45,991

 

 

 

48,998

 

 

 

48,998

 

Loans receivable

 

 

1,190,544

 

 

 

1,190,544

 

 

 

1,114,762

 

 

 

1,114,762

 

Accrued interest receivable(2)

 

 

10,590

 

 

 

10,590

 

 

 

8,662

 

 

 

8,662

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds borrowed(3)

 

 

1,271,185

 

 

 

1,271,104

 

 

 

1,169,593

 

 

 

1,171,274

 

Accrued interest payable(2)

 

 

3,784

 

 

 

3,784

 

 

 

4,398

 

 

 

4,398

 

 

(1)

Categorized as level 1 within the fair value hierarchy. See Note 13.

(2)

Categorized as level 3 within the fair value hierarchy. See Note 13.

(3)

As of September 30, 2020 and December 31, 2019, publicly traded retail notes traded at a discount to par of $81 and a premium to par of $1,681, respectively.

(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).

Page 38 of 71


 

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.

Equity investments were recorded at cost less impairment plus or minus observable price changes. Commencing with the quarter ended March 31, 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 table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019.

 

September 30, 2020

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

 

 

$

2,579

 

 

$

 

 

$

2,579

 

Available for sale investment securities

 

 

 

 

 

45,991

 

 

 

 

 

 

45,991

 

Total(1)

 

$

 

 

$

48,570

 

 

$

 

 

$

48,570

 

 

(1)

Total unrealized gain of $1,075, net of tax, was included in accumulated other comprehensive income (loss) for the nine months ended September 30, 2020 related to these assets.

 

December 31, 2019

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale investment securities(1)

 

$

 

 

$

48,998

 

 

$

 

 

$

48,998

 

Total

 

$

 

 

$

48,998

 

 

$

 

 

$

48,998

 

 

(1)

Total unrealized gains of $1,081, net of tax, was included in accumulated other comprehensive income (loss) for the year ended December 31, 2019 related to these assets.

 

 

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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 September 30, 2020 and December 31, 2019.

 

September 30, 2020

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

$

 

 

$

 

 

$

10,284

 

 

$

10,284

 

Impaired loans

 

 

 

 

 

 

 

 

114,741

 

 

 

114,741

 

Loan collateral in process of foreclosure

 

 

 

 

 

 

 

 

48,742

 

 

 

48,742

 

Total

 

$

 

 

$

 

 

$

173,767

 

 

$

173,767

 

 

December 31, 2019

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

$

 

 

$

 

 

$

10,079

 

 

$

10,079

 

Impaired loans

 

 

 

 

 

 

 

 

34,915

 

 

 

34,915

 

Loan collateral in process of foreclosure

 

 

 

 

 

 

 

 

52,711

 

 

 

52,711

 

Total

 

$

 

 

$

 

 

$

97,705

 

 

$

97,705

 

 

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 recurring and non-recurring level 3 fair value measurements of assets and liabilities as of September 30, 2020 and December 31, 2019.

 

(Dollars in thousands)

 

Fair Value at 9/30/20

 

 

Valuation Techniques

 

Unobservable Inputs

 

Range

(Weighted Average)

Equity investments

 

$

8,829

 

 

Investee financial analysis

 

Financial condition and operating performance of the borrower (1)

 

N/A

 

 

 

 

 

 

 

 

Collateral support

 

N/A

 

 

 

1,455

 

 

Precedent market transaction

 

Offering price

 

$8.73 / share

Impaired loans

 

 

114,741

 

 

Market approach

 

Historical and actual loss experience

 

1.50% - 6.00%

 

 

 

 

 

 

 

 

 

 

60% of balance

 

 

 

 

 

 

 

 

Median transfer price (2)

 

$0.6 - 108.7

 

 

 

 

 

 

 

 

Collateral value

 

N/A

Loan collateral in process of foreclosure

 

 

48,742

 

 

Market approach

 

Median transfer price (2)

 

$0.6 - 108.7

 

 

 

 

 

 

 

 

Collateral value (3)

 

N/A

 

 

(1)

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.

 

(2)

Represents amount net of liquidation costs.

 

(3)

Relates to the recreation portfolio.

Page 40 of 71


 

(Dollars in thousands)

 

Fair Value at 12/31/19

 

 

Valuation Techniques

 

Unobservable Inputs

 

Range

(Weighted Average)

 

Equity investments

 

$

7,435

 

 

Investee financial analysis

 

Financial condition and operating performance of the borrower

 

N/A

 

 

 

 

 

 

 

 

 

Collateral support

 

N/A

 

 

 

 

1,189

 

 

Investee book value adjusted for market appreciation

 

Financial condition and operating performance of the borrower

 

N/A

 

 

 

 

 

 

 

 

Public company comparables

 

Business enterprise value

 

$4,855 - 6,120

 

 

 

 

 

 

 

 

 

Business enterprise value/revenue multiples

 

1.59 - 5.98x

 

 

 

 

 

 

 

 

 

Discount for lack of marketability

 

 

25

%

 

 

 

1,455

 

 

Precedent market transaction

 

Offering price

 

$8.73 / share

 

 

(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.

On February 27, 2009 and December 22, 2009, the Bank issued, and the US Treasury purchased under the Troubled Assets Relief Program, or TARP, Capital Purchase Program, or the CPP, the Bank’s fixed rate non-cumulative Perpetual Preferred Stock, Series A, B, C, and D for an aggregate purchase price of $21,498,000 in cash. 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 at favorable rates. In connection with the issuance of the Series E, the Bank exited the CPP by redeeming the Series A, B, C, and D; and received approximately $4,000,000, net of dividends due on the repaid securities. 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 September 30, 2020 and December 31, 2019. 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 $86,825,000, currently terminates on November 15, 2020. Borrowings under the DZ loan are collateralized by Trust III’s assets.

 

Page 41 of 71


 

(16) SUBSEQUENT EVENTS

 

 We have evaluated subsequent events that have occurred through the date of financial statement issuance. As of such date, there were no subsequent events that required disclosure.

 

Page 42 of 71


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, and trailers, and to finance home improvements. 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 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% (19% if there had been no loan sales during 2016, 2017, and 2018). 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 September 30, 2020, our consumer loans represented 91% of our net loan portfolio, with commercial loans representing 6% and medallion loans representing 3%. Total assets under management, which includes assets serviced for third-party investors, were $1,717,000,000 as of September 30, 2020, and were $1,660,000,000 and $1,649,000,000 as of December 31, 2019 and September 30, 2019, 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 issued to customers, 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.

Beginning in 2019, Medallion Bank began the process to build-out a strategic partnership program with financial technology, or fintech, companies. Medallion Bank entered into an initial partnership in 2020 and began issuing its first loans, while continuing to explore opportunities with additional fintech companies.

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 current and ongoing coronavirus, or COVID-19, pandemic, its broad impact and preventive measures taken to contain or mitigate the outbreak have had, and are likely 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 ma