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MFIN Medallion Financial

Filed: 9 Aug 21, 4:11pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission file number 001-37747

 

MEDALLION FINANCIAL CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

04-3291176

(State of Incorporation)

(IRS Employer

Identification No.)

437 MADISON AVENUE, 38th Floor

NEW YORK, New York 10022

(Address of Principal Executive Offices) (Zip Code)

(212) 328-2100

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbols

 

Name of each exchange

on which registered

Common Stock, par value $0.01 per share

 

 

MFIN

 

 

NASDAQ Global Select Market

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      NO  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

 

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of August 6, 2021 was 25,061,764.

 

 

 


 

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The following discussion should be read in conjunction with our financial statements and the notes to those statements and other financial information appearing elsewhere in this report.

This report contains forward-looking statements relating to future events and future performance applicable to us within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words expects, anticipates, intends, believes, or similar language. In connection with certain forward-looking statements contained in this Form 10-Q and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward-looking statements contained in this Form 10-Q were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict, and many of which are beyond control of the Company. In particular, any forward-looking statements are subject to the risks and great uncertainties associated with the ongoing COVID-19 pandemic and the related impact on the US and global economies, as well as risks related to the SEC investigation described in this report.

All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statements. The statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form 10-Q should consider these facts in evaluating the information contained herein. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-Q. The inclusion of the forward-looking statements contained in this Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-Q will be achieved.

In light of the foregoing, readers of this Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein. You should consider these risks and those described under Risk Factors in the Company’s Annual Report on Form 10-K, in this Quarterly Report on Form 10-Q, and others that are detailed in the other reports that the Company files from time to time with the Securities and Exchange Commission.

Page 2 of 70


 

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 home improvements, along with providing loan origination and other services to fintech partners. We historically have had a leading position in originating, acquiring, and servicing loans that finance taxi medallions and various types of commercial businesses.

Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17%. In January 2017, we announced our plans to transform our overall strategy. We have transitioned away from medallion lending and have placed our strategic focus on our growing consumer finance portfolio. Total assets under management, which includes assets serviced for third-party investors, were $1.8 billion as of June 30, 2021 and December 31, 2020, and have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996.

We conduct our business through various wholly-owned subsidiaries including:

 

Medallion Bank, or the Bank, an FDIC-insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activities, and has a separate board of directors with a majority of independent directors;

 

Medallion Funding LLC, or Medallion Funding, a Small Business Investment Company, or SBIC, our primary taxi medallion lending company;

 

Medallion Capital, Inc., or Medallion Capital, an SBIC which conducts a mezzanine financing business;

 

Freshstart Venture Capital Corp., or Freshstart, an SBIC which originates and services taxi medallion and commercial loans; and

 

Medallion Servicing Corp., or MSC, which provides loan services to the Bank.

Our other consolidated subsidiaries are comprised of Medallion Fine Art, Inc., CDI-LP Holdings, Inc., Medallion Motorsports, LLC, and RPAC Racing LLC, or RPAC. In addition, we make both marketable and nonmarketable equity investments, primarily as a function of our mezzanine lending business.

Our consolidated balance sheet as of June 30, 2021, and the related consolidated statements of operations, consolidated statements of other comprehensive income/(loss), consolidated statements of stockholders’ equity and cash flows for the three months then ended included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the US have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the three and six months ended June 30, 2021 may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

Page 3 of 70


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

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

 

June 30, 2021

 

 

December 31, 2020

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents(1)

 

$

31,389

 

 

$

54,743

 

Federal funds sold

 

 

60,164

 

 

 

57,297

 

Investment securities

 

 

48,307

 

 

 

46,792

 

Equity investments

 

 

10,090

 

 

 

9,746

 

Loans

 

 

1,340,567

 

 

 

1,229,838

 

Allowance for loan losses

 

 

(46,946

)

 

 

(57,548

)

Net loans receivable

 

 

1,293,621

 

 

 

1,172,290

 

Accrued interest receivable

 

 

9,525

 

 

 

10,338

 

Income tax receivable

 

 

1,072

 

 

 

1,757

 

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

 

 

11,439

 

 

 

12,404

 

Loan collateral in process of foreclosure(2)

 

 

49,039

 

 

 

54,560

 

Goodwill

 

 

150,803

 

 

 

150,803

 

Intangible assets, net

 

 

50,368

 

 

 

51,090

 

Other assets

 

 

23,930

 

 

 

20,591

 

Total assets

 

$

1,739,747

 

 

$

1,642,411

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses(3)

 

$

19,515

 

 

$

14,902

 

Accrued interest payable

 

 

3,883

 

 

 

4,673

 

Deposits(4)

 

 

1,152,068

 

 

 

1,065,398

 

Short-term borrowings

 

 

8,016

 

 

 

87,334

 

Deferred tax liabilities, net

 

 

8,591

 

 

 

807

 

Operating lease liabilities

 

 

9,889

 

 

 

11,018

 

Long-term debt(5)

 

 

214,971

 

 

 

153,718

 

Total liabilities

 

 

1,416,933

 

 

 

1,337,850

 

Commitments and contingencies(6)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock (50,000,000 shares of $0.01 par value stock authorized- 28,013,007 shares at June 30, 2021 and 27,828,871 shares at December 31, 2020 issued)

 

 

280

 

 

 

278

 

Additional paid in capital

 

 

278,727

 

 

 

277,539

 

Treasury stock (2,951,243 shares at June 30, 2021 and December 31, 2020)

 

 

(24,919

)

 

 

(24,919

)

Accumulated other comprehensive income

 

 

1,434

 

 

 

2,012

 

Retained earnings (accumulated deficit)

 

 

(4,804

)

 

 

(23,502

)

Total stockholders’ equity

 

 

250,718

 

 

 

231,408

 

Non-controlling interest in consolidated subsidiaries

 

 

72,096

 

 

 

73,153

 

Total equity

 

 

322,814

 

 

 

304,561

 

Total liabilities and equity

 

$

1,739,747

 

 

$

1,642,411

 

Number of shares outstanding

 

 

25,061,764

 

 

 

24,877,628

 

Book value per share

 

$

10.00

 

 

$

9.30

 

 

(1)

Includes restricted cash of $2,970 as of June 30, 2021 and December 31, 2020.

(2)

Includes financed sales of this collateral to third parties that are reported separately from the loan portfolio, and that are conducted by the Bank of $3,919 as of June 30, 2021 and $3,535 as of December 31, 2020.

(3)

Includes the short-term portion of lease liabilities of $2,106 and $2,004 as of June 30, 2021 and December 31, 2020. Refer to Note 6 for more details.

(4)

Includes $2,796 and $2,674 of deferred financing costs as of June 30, 2021 and December 31, 2020. Refer to Note 5 for more details.

(5)

Includes $4,258 and $3,131 of deferred financing costs as of June 30, 2021 and December 31, 2020. Refer to Note 5 for more details.

(6)

Refer to Note 10 for details.

 

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

Page 4 of 70


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

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

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest and fees on loans

 

$

37,132

 

 

$

35,324

 

 

$

73,987

 

 

$

70,343

 

Interest and dividends on investment securities

 

 

243

 

 

 

264

 

 

 

468

 

 

 

734

 

Medallion lease income

 

 

 

 

 

 

 

 

 

 

 

53

 

Total interest income(1)

 

 

37,375

 

 

 

35,588

 

 

 

74,455

 

 

 

71,130

 

Interest on deposits

 

 

4,465

 

 

 

5,920

 

 

 

9,176

 

 

 

11,861

 

Interest on short-term borrowings

 

 

246

 

 

 

481

 

 

 

649

 

 

 

1,045

 

Interest on long-term debt

 

 

3,173

 

 

 

2,434

 

 

 

6,467

 

 

 

4,929

 

Total interest expense(2)

 

 

7,884

 

 

 

8,835

 

 

 

16,292

 

 

 

17,835

 

Net interest income

 

 

29,491

 

 

 

26,753

 

 

 

58,163

 

 

 

53,295

 

Provision (benefit) for loan losses

 

 

(682

)

 

 

16,941

 

 

 

2,336

 

 

 

33,482

 

Net interest income after provision (benefit) for loan losses

 

 

30,173

 

 

 

9,812

 

 

 

55,827

 

 

 

19,813

 

Other income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sponsorship and race winnings, net

 

 

4,345

 

 

 

3,626

 

 

 

6,818

 

 

 

6,199

 

Gain (loss) on equity investments

 

 

3,205

 

 

 

(1

)

 

 

3,205

 

 

 

(3,560

)

Gain on extinguishment of debt

 

 

2,859

 

 

 

 

 

 

4,626

 

 

 

 

Write-down of loan collateral in process of foreclosure

 

 

(2,162

)

 

 

(983

)

 

 

(4,947

)

 

 

(7,269

)

Other income (loss)

 

 

(480

)

 

 

614

 

 

 

1

 

 

 

906

 

Total other income (loss), net

 

 

7,767

 

 

 

3,256

 

 

 

9,703

 

 

 

(3,724

)

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,901

 

 

 

6,702

 

 

 

13,586

 

 

 

13,635

 

Race team related expenses

 

 

2,674

 

 

 

1,818

 

 

 

4,796

 

 

 

3,948

 

Loan servicing fees

 

 

1,731

 

 

 

1,729

 

 

 

3,378

 

 

 

3,341

 

Collection costs

 

 

1,641

 

 

 

1,461

 

 

 

2,874

 

 

 

2,690

 

Professional fees

 

 

2,224

 

 

 

1,319

 

 

 

2,730

 

 

 

4,908

 

Rent expense

 

 

624

 

 

 

631

 

 

 

1,299

 

 

 

1,328

 

Regulatory fees

 

 

456

 

 

 

236

 

 

 

895

 

 

 

601

 

Travel, meals, and entertainment

 

 

68

 

 

 

32

 

 

 

228

 

 

 

240

 

Amortization of intangible assets

 

 

361

 

 

 

361

 

 

 

722

 

 

 

722

 

Other expenses

 

 

2,140

 

 

 

1,897

 

 

 

3,954

 

 

 

4,044

 

Total other expenses

 

 

19,820

 

 

 

16,186

 

 

 

34,462

 

 

 

35,457

 

Income (loss) before income taxes

 

 

18,120

 

 

 

(3,118

)

 

 

31,068

 

 

 

(19,368

)

Income tax (provision) benefit

 

 

(6,528

)

 

 

853

 

 

 

(10,406

)

 

 

4,102

 

Net income (loss) after taxes

 

 

11,592

 

 

 

(2,265

)

 

 

20,662

 

 

 

(15,266

)

Less: income attributable to the non-controlling interest

 

 

1,325

 

 

 

1,712

 

 

 

1,964

 

 

 

2,354

 

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

 

$

10,267

 

 

$

(3,977

)

 

 

18,698

 

 

$

(17,620

)

Basic net income (loss) per share

 

$

0.42

 

 

$

(0.16

)

 

$

0.76

 

 

$

(0.72

)

Diluted net income (loss) per share

 

$

0.41

 

 

$

(0.16

)

 

$

0.75

 

 

$

(0.72

)

Distributions declared per share

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,595,822

 

 

 

24,444,677

 

 

 

24,557,511

 

 

 

24,423,225

 

Diluted

 

 

24,950,512

 

 

 

24,444,677

 

 

 

24,923,023

 

 

 

24,423,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Included in interest and investment income is $170 and $495 of paid-in-kind interest for the three and six months ended June 30, 2021 and $341 and $634 for the three and six months ended June 30, 2020.

(2)

Average borrowings outstanding were $1,342,570 and $1,320,361, and the related average borrowing costs were 2.36% and 2.49% for the three and six months ended June 30, 2021, and were $1,290,318 and $1,227,413, and 2.75% and 2.92%, for the three and six months ended June 30, 2020.  

 

  

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

 

Page 5 of 70


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS)

(UNAUDITED)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss) after taxes

 

$

11,592

 

 

$

(2,265

)

 

$

20,662

 

 

$

(15,266

)

Other comprehensive income (loss), net of tax

 

 

27

 

 

 

981

 

 

 

(578

)

 

 

1,128

 

Total comprehensive income (loss)

 

 

11,619

 

 

 

(1,284

)

 

 

20,084

 

 

 

(14,138

)

Less comprehensive income attributable to the non-controlling interest

 

 

1,325

 

 

 

1,712

 

 

 

1,964

 

 

 

2,354

 

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

 

$

10,294

 

 

$

(2,996

)

 

$

18,120

 

 

$

(16,492

)

 

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

 

Page 6 of 70


 

 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

(Dollars in thousands)

 

Common

Stock Shares

 

 

Common

Stock

 

 

Capital in

Excess of

Par

 

 

Treasury

Stock Shares

 

 

Treasury

Stock

 

 

Retained

Earnings (Accumulated Deficit)

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders’

Equity

 

 

Non-

controlling

Interest

 

 

Total

Equity

 

Balance at December 31, 2020

 

 

27,828,871

 

 

$

278

 

 

$

277,539

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

(23,502

)

 

$

2,012

 

 

$

231,408

 

 

$

73,153

 

 

$

304,561

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,431

 

 

 

 

 

 

8,431

 

 

 

640

 

 

 

9,071

 

Distributions to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,511

)

 

 

(1,511

)

Stock-based compensation expense

 

 

 

 

 

2

 

 

 

496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

498

 

 

 

 

 

 

498

 

Issuance of restricted stock, net

 

 

163,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

 

 

(7,602

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains

   on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(605

)

 

 

(605

)

 

 

 

 

 

(605

)

Balance at March 31, 2021

 

 

27,985,598

 

 

 

280

 

 

 

278,035

 

 

 

(2,951,243

)

 

 

(24,919

)

 

 

(15,071

)

 

 

1,407

 

 

 

239,732

 

 

 

72,282

 

 

 

312,014

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,267

 

 

 

 

 

 

10,267

 

 

 

1,325

 

 

 

11,592

 

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,511

)

 

 

(1,511

)

Stock-based compensation

 

 

 

 

 

 

 

 

576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

576

 

 

 

 

 

 

576

 

Issuance of restricted stock, net

 

 

15,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

 

 

(10,332

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

22,227

 

 

 

 

 

 

116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

116

 

 

 

 

 

 

116

 

Net change in unrealized gains

   on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

 

 

27

 

 

 

 

 

 

27

 

Balance at June 30, 2021

 

 

28,013,007

 

 

$

280

 

 

$

278,727

 

 

$

(2,951,243

)

 

$

(24,919

)

 

$

(4,804

)

 

$

1,434

 

 

$

250,718

 

 

$

72,096

 

 

$

322,814

 

 

 

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

Page 7 of 70


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

(Dollars in thousands)

 

Common

Stock Shares

 

 

Common

Stock

 

 

Capital in

Excess of

Par

 

 

Treasury

Stock Shares

 

 

Treasury

Stock

 

 

Retained

Earnings (Accumulated 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 expense

 

 

 

 

 

2

 

 

 

464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

466

 

 

 

 

 

 

466

 

Issuance of restricted stock, net

 

 

165,674

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Forfeiture of restricted stock, net

 

 

(5,577

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

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 losses 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Page 8 of 70


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

For the Six Months Ended June 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

20,662

 

 

$

(15,266

)

Adjustments to reconcile net income (loss) from operations to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

2,336

 

 

 

33,482

 

Paid-in-kind interest

 

 

(495

)

 

 

(634

)

Depreciation and amortization

 

 

4,082

 

 

 

2,933

 

Increase (decrease) in deferred and other tax liabilities

 

 

8,469

 

 

 

(3,240

)

Amortization of origination fees, net

 

 

3,723

 

 

 

2,891

 

Net change in value of loan collateral in process of foreclosure

 

 

7,243

 

 

 

11,282

 

Net realized (gains) losses on investments

 

 

(3,205

)

 

 

3,555

 

Stock-based compensation expense

 

 

1,072

 

 

 

987

 

Gain on extinguishment of debt

 

 

(4,626

)

 

 

 

Decrease in accrued interest receivable

 

 

813

 

 

 

2,106

 

(Increase) decrease in other assets

 

 

(574

)

 

 

(5,518

)

Increase in accounts payable and accrued expenses

 

 

1,109

 

 

 

653

 

Increase (decrease) in accrued interest payable

 

 

(790

)

 

 

172

 

Net cash provided by operating activities

 

 

39,819

 

 

 

33,403

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Loans originated

 

 

(365,416

)

 

 

(264,514

)

Proceeds from principal receipts, sales, and maturities of loans

 

 

225,976

 

 

 

137,286

 

Purchases of investments

 

 

(15,318

)

 

 

(7,796

)

Proceeds from principal receipts, sales, and maturities of investments

 

 

14,007

 

 

 

8,397

 

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

 

 

8,941

 

 

 

6,179

 

Net cash used for investing activities

 

 

(131,810

)

 

 

(120,448

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from time deposits and funds borrowed

 

 

409,810

 

 

 

344,982

 

Repayments of time deposits and funds borrowed

 

 

(335,403

)

 

 

(218,855

)

Distributions to non-controlling interests

 

 

(3,019

)

 

 

(3,019

)

Proceeds from the exercise of stock options

 

 

116

 

 

 

 

Net cash provided by financing activities

 

 

71,504

 

 

 

123,108

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND

  RESTRICTED CASH

 

 

(20,487

)

 

 

36,063

 

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

 

 

112,040

 

 

 

67,821

 

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

 

$

91,553

 

 

$

103,884

 

SUPPLEMENTAL INFORMATION

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

15,769

 

 

$

16,355

 

Cash paid during the period for income taxes

 

 

1,688

 

 

 

81

 

NON-CASH INVESTING

 

 

 

 

 

 

 

 

Loans transferred to loan collateral in process of foreclosure, net

 

$

10,663

 

 

$

12,125

 

  

(1)

Includes federal funds sold.

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

Page 9 of 70


 

MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES

Medallion Financial Corp., or the Company, is a finance company organized as a Delaware corporation that reports as a bank holding company, but is not a bank holding company for regulatory purposes. The Company conducts its business through various wholly-owned subsidiaries including its primary operating company, Medallion Bank, or the Bank, a Federal Deposit Insurance Corporation, or FDIC, insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activities. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and undergoes examinations by those agencies. The Bank was initially formed for the primary purpose of originating commercial loans in three categories: 1) loans to finance the purchase of taxi medallions, 2) asset-based commercial loans, and 3) SBA 7(a) loans. Subsequent to its formation, the Bank began originating consumer loans to finance the purchases of recreational vehicles, or RVs, boats, home improvements, and to provide loan origination and other services to fintech partners. The Company also conducts business through Medallion Funding LLC, or MFC, a Small Business Investment Company, or SBIC, which originates and services medallion and commercial loans.

The Company also conducts business through its subsidiaries Medallion Capital, Inc., or MCI, an SBIC which conducts a mezzanine financing business, and Freshstart Venture Capital Corp., or FSVC, an SBIC that originated and services medallion and commercial loans. MFC, MCI, and FSVC, as SBICs, are regulated by the Small Business Administration, or SBA. MCI and FSVC are financed in part by the SBA.

The Company has a controlling ownership stake in Medallion Motorsports, LLC, the primary owner of RPAC Racing, LLC, or RPAC, a professional car racing team that competes in the Monster Energy NASCAR Cup Series, which is also consolidated with the Company.

The Company formed a wholly-owned subsidiary, Medallion Servicing Corporation, or MSC, to provide loan services to the Bank. The Company has assigned all of its loan servicing rights for the Bank, which consists of servicing medallion loans originated by the Bank, to MSC, which bills and collects the related service fee income from the Bank, and is allocated and charged by the Company for MSC’s share of these servicing costs.

In 2019, the Bank began the process to build out a strategic partnership program with financial technology, or fintech, companies. The Bank entered into an initial partnership in 2020 and a second partnership in 2021, and continues to explore opportunities with additional fintech companies.

Taxi Medallion Loan Trust III, or Trust III, was established for the purpose of owning medallion loans originated by MFC or others. Trust III is a variable interest entity, or VIE, and MFC was the primary beneficiary until the 2018 fourth quarter. As a result, the Company consolidated Trust III in its financial results until consummation of a restructuring in the 2018 fourth quarter. For a discussion of the restructuring, see Note 15. Trust III is a separate legal and corporate entity with its own creditors which, in any liquidation of Trust III, will be entitled to be satisfied out of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders. The assets of Trust III are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC.

The Company established a wholly-owned subsidiary, Medallion Financing Trust I, or Fin Trust, for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,083,000 at June 30, 2021, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.

MFC, through several wholly-owned subsidiaries, together, Medallion Chicago, purchased $8,689,000 of City of Chicago taxi medallions out of foreclosure, some of which are leased to fleet operators. The 159 taxi medallions are carried at a net realizable value of $1,284,000 in other assets on the Company’s consolidated balance sheet at June 30, 2021, compared to a net realizable value of $2,932,000 and $3,091,000 at December 31, 2020 and June 30, 2020.

Page 10 of 70


 

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the US, or GAAP, requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and assumptions are those that management considers to be the most critical to an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. All of these estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions change, it is reasonably possible that the judgments and estimates could change, which may result in future impairments of loans and loan collateral in process of foreclosure, goodwill and intangible assets, and investments, among other effects.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its wholly-owned and controlled subsidiaries. All significant intercompany transactions, balances, and profits (losses) have been eliminated in consolidation.

The consolidated financial statements have been prepared in accordance with GAAP. The Company consolidates all entities it controls through a majority voting interest, a controlling interest through other contractual rights, or as being identified as the primary beneficiary of VIEs. The primary beneficiary is the party who has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (2) an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third-party’s holding is recorded as non-controlling interest.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that exceed the federally insured limits. Cash includes $2,970,000 of an interest reserve associated with the private placements of debt in March and August 2019, which cannot be used for any other purpose until March 2022. Cash also includes $1,250,000 of interest-bearing funds deposited in other banks, that are mainly callable, with terms of 4 to 7 years.

Fair Value of Assets and Liabilities

The Company follows the Financial Accounting Standards Board, or FASB, FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, or FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e. a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entity’s own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 12 and 13 to the consolidated financial statements.

Equity Investments

The Company follows FASB ASC Topic 321, Investments – Equity Securities, or ASC 321, which requires all applicable investments in equity securities with a readily determinable fair value to be valued as such, and those without a readily determinable fair value, are measured at cost, less any impairment plus or minus any observable price changes. Equity investments of $10,090,000 and $9,746,000 at June 30, 2021 and December 31, 2020, comprised mainly of nonmarketable stock and stock warrants, are recorded at cost less any impairment plus or minus observable price changes. As of June 30, 2021 and December 31, 2020, the Company determined that there was no impairment or observable price change.   

 

In the 2021 second quarter, the Company sold 1,166,667 shares of its investment in Upgrade, Inc. for proceeds of $3,816,000 and recognized a gain on the sale of $3,179,000. The Company continued to hold 1,500,000 shares of Upgrade, Inc. at a cost of $819,000 as of June 30, 2021.

Page 11 of 70


 

In the 2021 first quarter, the Company purchased $2,000,000 of equity securities with a readily determinable fair value. As a result, all unrealized gains and losses are included in earnings, and the fair value of these securities of $1,969,000 as of June 30, 2021 are included in other assets on the consolidated balance sheet.

The table below presents the unrealized portion related to the equity securities held as of June 30, 2021.

 

(Dollars in thousands)

 

Three Months Ended

June 30, 2021

 

Six Months Ended

June 30, 2021

 

Net losses recognized during the period on equity securities

 

$

(3

)

$

(31

)

Less: Net gains (losses) recognized during the period on equity securities sold during the period

 

 

 

 

 

Unrealized losses recognized during the reporting period on equity securities still held at the reporting date

 

$

(3

)

$

(31

)

 

Investment Securities

The Company follows FASB ASC Topic 320, Investments – Debt Securities, or ASC 320, which requires that all applicable investments in debt securities be classified as trading securities, available-for-sale securities, or held-to-maturity securities. Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. The net premium on investment securities totaled $337,000 at June 30, 2021 and $278,000 at December 31, 2020, and $38,000 and $81,000 was amortized to interest income for the three and six months ended June 30, 2021 and $79,000 and $134,000 was amortized to interest income for the three and six months ended June 30, 2020. Refer to Note 3 for more details. ASC 320 further requires that held-to-maturity securities be reported at amortized cost and available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the consolidated financial statements, and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity, net of the effect of income taxes, until they are sold. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in stockholders’ equity, which were recorded net of the income tax effect, will be reversed.

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 June 30, 2021 and December 31, 2020, net loan origination costs were $24,074,000 and $20,684,000. Net amortization to income for the three months ended June 30, 2021 and 2020 was $2,067,000 and $1,587,000 and was $3,723,000 and $2,891,000 for the six months ended June 30, 2021 and 2020.

Page 12 of 70


 

Interest income is recorded on the accrual basis. Medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. The consumer loan portfolio has different characteristics, typified by a larger number of lower dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is likely the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Management considers loans that are in bankruptcy status, but have not been charged-off, to be impaired. These loans are placed on nonaccrual when they become 90 days past due, or earlier if they enter bankruptcy, and are charged-off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. For the recreation loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged-off. If the collateral is repossessed, a loss is recorded by writing the collateral down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off. Proceeds collected on charged-off accounts are recorded as recoveries. Total loans 90 days or more past due were $2,912,000 at June 30, 2021, or 0.22% of the total loan portfolio, compared to $6,878,000, or 0.57% at December 31, 2020.

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants concessions to the borrower for other than an insignificant period of time that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring, or TDR. The Company strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before they reach nonaccrual status. These modified terms may include rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize the economic loss to the Company and to avoid foreclosure or repossession of the collateral. For modifications where the Company forgives principal, the entire amount of such principal forgiveness is immediately charged off. Loans classified as TDRs are considered impaired loans. Beginning in the third quarter 2019, all consumer loans which are party to a Chapter 13 bankruptcy are immediately classified as TDRs. The Company’s policy with regard to bankrupt recreation loans is to take an immediate 40% write down of the loan balance. As a result of the Consolidated Appropriations Act, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, relief period was extended to the later of January 1, 2022 or 60 days after the date which the coronavirus, or COVID-19, national emergency terminates. During the relief period, companies may elect to (a) suspend the requirements of GAAP for loan modifications related to COVID-19 that would otherwise be categorized as TDRs and (b) suspend any determination of a loan modified as a result of the effects of COVID-19 as a TDR, including impairment for accounting purposes. Any such suspension is applicable for the term of the loan modification, but solely with respect to any modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019, and shall not apply to any adverse impact on the credit of a borrower that is not related to COVID-19. As of June 30, 2021, there were no consumer or medallion loan modifications related to COVID-19 that would have otherwise been classified as a TDR, and therefore there was no need for the Company to elect this relief under the CARES Act during 2020 and 2021. However, the Company may have loan modifications related to COVID-19 that would apply under this provision of the CARES Act in the future.

Loan collateral in process of foreclosure primarily includes medallion loans that have reached 120 days past due and have been charged-down to their net realizable value, in addition to consumer repossessed collateral in the process of being sold. The medallion loan component reflects that the collection activities on the loans have transitioned from working with the borrower, to the liquidation of the collateral securing the loans.

The Company had $0 and $15,367,000 of net loans pledged as collateral under borrowing arrangements at June 30, 2021 and December 31, 2020.

The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing, or FASB ASC 860, which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, the Company had elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $107,624,000 at June 30, 2021 and $107,131,000 at December 31, 2020. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860, which relates to servicing assets held by MFC (related primarily to the remaining assets in Trust III) and the Bank, and determined that no material servicing asset or liability existed as of June 30, 2021 and December 31, 2020.

Allowance for Loan Losses

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. In analyzing the adequacy of the allowance for loan losses, the Company uses historical delinquency and actual loss rates with a one-year lookback period for consumer loans. For commercial loans deemed nonperforming, the historical loss

Page 13 of 70


 

experience and other projections are looked at. For medallion loans, delinquent nonperforming loans are valued at collateral value for the most recent quarter. Collateral value for the medallion loans is generally determined utilizing factors deemed relevant under the circumstances of the market including but not limited to: actual transfers, pending transfers, median and average sales prices, discounted cash flows, market direction and sentiment, and general economic trends for the industry and economy. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. As a result of COVID-19, there was an increase in the reserve percentages of 50 basis points on the recreation subprime loan business during 2020. In addition, the Company determined that anticipated payment activity on the medallion portfolio was impossible to quantify upon exit of the six-month deferral period with borrowers, and therefore deemed all such loans as impaired in the third quarter of 2020. As a result, all medallion loans were placed on nonaccrual and written down to collateral value, net of liquidation costs, of $79,500 for New York City medallions. The Company continues to monitor the impact of COVID-19 on the consumer, commercial, and medallion loans. Had there been no payment deferrals offered to borrowers under the CARES Act, potential loans 90 days or more past due would have resulted in increased reserves and/or charge-offs. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.

Goodwill and Intangible Assets

The Company’s goodwill and intangible assets arose as a result of the excess of fair value over book value for several of the Company’s previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under the Company’s new reporting, and was subject to a purchase price accounting allocation process conducted by an independent third-party expert to arrive at the current categories and amounts. Goodwill is not amortized, but is subject to quarterly review by management to determine whether additional impairment testing is needed, and such testing is performed at least on an annual basis. Intangible assets are amortized over their useful life of approximately 20 years. As of June 30, 2021, December 31, 2020, and June 30, 2020, the Company had goodwill of $150,803,000, which all related to the Bank, and intangible assets of $50,368,000, $51,090,000, and $51,814,000, and the Company recognized $361,000 and $361,000 of amortization expense on the intangible assets for the three months ended June 30, 2021 and 2020, and $722,000 and $722,000 of amortization expense on the intangible assets for the six months ended June 30, 2021 and 2020. Additionally, loan portfolio premiums of $12,387,000 were determined as of April 2, 2018, of which $835,000, $2,717,000, and $5,251,000 were outstanding at June 30, 2021, December 31, 2020, and June 30, 2020, and of which $1,695,000 and $179,000 was amortized to interest income for the three months ended June 30, 2021 and 2020, and of which $1,882,000 and $508,000 was amortized to interest income for the six months ended June 30, 2021 and 2020. The Company engaged an expert to assess the goodwill and intangibles for impairment at December 31, 2020, who concluded there was 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 June 30, 2021.

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

 

(Dollars in thousands)

 

June 30, 2021

 

 

December 31, 2020

 

Brand-related intellectual property

 

$

18,425

 

 

$

18,974

 

Home improvement contractor relationships

 

 

5,778

 

 

 

5,951

 

Race organization

 

 

26,165

 

 

 

26,165

 

Total intangible assets, net

 

$

50,368

 

 

$

51,090

 

 

Fixed Assets

Fixed assets are carried at cost less accumulated depreciation and amortization, and are depreciated on a straight-line basis over their estimated useful lives of 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated economic useful life of the improvement. Depreciation and amortization expense was $75,000 and $139,000 for the three months ended June 30, 2021 and 2020, and was $159,000 and $261,000 for the six months ended June 30, 2021 and 2020.

Deferred Costs

Deferred financing costs represent costs associated with obtaining the Company’s borrowing facilities, and are amortized on a straight line basis over the lives of the related financing agreements and life of the respective pool. Amortization expense was $592,000 and $586,000 for the three months ended June 30, 2021 and 2020, and was $1,237,000 and $1,308,000 for the six months ended June 30, 2021 and 2020. In addition, the Company capitalizes certain costs for transactions in the process of completion (other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon completion or termination of the transaction, any accumulated amounts will be amortized against income over an appropriate period,

Page 14 of 70


 

or written off. The amount on the Company’s balance sheet for all of these purposes were $7,054,000, $5,805,000, and $4,709,000 as of June 30, 2021, December 31, 2020, and June 30, 2020.

Income Taxes

Income taxes are accounted for using the asset and liability approach in accordance with FASB ASC Topic 740, Income Taxes, or ASC 740. Deferred tax assets and liabilities reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are also recorded for net operating losses, capital losses and any tax credit carryforwards. A valuation allowance is provided against a deferred tax asset when it is more likely than not that some or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether a valuation allowance for deferred tax assets is needed. Items considered in determining the Company’s valuation allowance include expectations of future earnings of the appropriate tax character, recent historical financial results, tax planning strategies, the length of statutory carryforward periods and the expected timing of the reversal of temporary differences. The Company recognizes tax benefits of uncertain tax positions only when the position is more likely than not to be sustained assuming examination by tax authorities. The Company records income tax related interest and penalties, if applicable, within current income tax expense.

Sponsorship and Race Winnings

The Company accounts for sponsorship and race winnings revenue under FASB ASC Topic 606, Revenue from Contracts with Customers. Sponsorship revenue is recognized when the Company’s performance obligations are completed in accordance with the contract terms of the sponsorship contract. Race winnings revenue is recognized after each race during the season based upon terms provided by NASCAR and the placement of the driver.

Earnings (Loss) Per Share (EPS)

Basic earnings (loss) per share are computed by dividing net income (loss) resulting from operations available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if option contracts to issue common stock were exercised, or if restricted stock vests, and has been computed after giving consideration to the weighted average dilutive effect of the Company’s stock options and restricted stock. The Company uses the treasury stock method to calculate diluted EPS, which is a method of recognizing the use of proceeds that could be obtained upon exercise of options and warrants, including unvested compensation expense related to the shares, in computing diluted EPS. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. The table below shows the calculation of basic and diluted EPS.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

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

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss) resulting from operations

   available to common stockholders

 

$

10,267

 

 

$

(3,977

)

 

$

18,698

 

 

$

(17,620

)

Weighted average common shares outstanding applicable to

   basic EPS

 

 

24,595,822

 

 

 

24,444,677

 

 

 

24,557,511

 

 

 

24,423,225

 

Effect of dilutive stock options

 

 

127,493

 

 

 

 

 

 

74,331

 

 

 

 

Effect of restricted stock grants

 

 

227,197

 

 

 

 

 

 

291,181

 

 

 

 

Adjusted weighted average common shares outstanding

   applicable to diluted EPS

 

 

24,950,512

 

 

 

24,444,677

 

 

 

24,923,023

 

 

 

24,423,225

 

Basic income (loss) per share

 

$

0.42

 

 

$

(0.16

)

 

$

0.76

 

 

$

(0.72

)

Diluted income (loss) per share

 

 

0.41

 

 

 

(0.16

)

 

 

0.75

 

 

 

(0.72

)

 

Potentially dilutive common shares excluded from the above calculations aggregated 396,373 and 851,272 shares as of June 30, 2021 and 2020.

Page 15 of 70


 

Stock Compensation

The Company follows FASB ASC Topic 718, or ASC 718, Compensation – Stock Compensation, for its equity incentive, stock option, and restricted stock plans, and accordingly, the Company recognizes the expense of these grants as required. Stock-based employee compensation costs pertaining to stock options are reflected in net income resulting from operations for any new grants using the fair values established by usage of the Black-Scholes option pricing model, expensed over the vesting period of the underlying option. Stock-based employee compensation costs pertaining to restricted stock are reflected in net income resulting from operations for any new grants using the grant date fair value of the shares granted, expensed over the vesting period of the underlying stock.

During the six months ended June 30, 2021 and 2020, the Company issued 163,561 and 165,674 restricted shares of stock-based compensation awards, issued 317,398 and 335,773 shares of other stock-based compensation awards, and issued 16,803 restricted stock units; and recognized $576,000 and $1,074,000, or $0.02 and $0.04 per share, for the three and six months ended June 30, 2021, and $520,000 and $987,000, or $0.02 and $0.04 per share for the three and six months ended June 30, 2020, of non-cash stock-based compensation expense related to the grants. As of June 30, 2021, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $3,481,000, which is expected to be recognized over the next 15 quarters. See Note 8 for additional details.

Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the bank regulators about components, risk weightings, and other factors.

FDIC-insured banks, including the Bank, are subject to certain federal laws, which impose various legal limitations on the extent to which banks may finance or otherwise supply funds to certain of their affiliates. In particular, the Bank is subject to certain restrictions on any extensions of credit to, or other covered transactions with, such as certain purchases of assets, the Company or its affiliates.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for federal deposit insurance, the FDIC ordered that the Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%, a level which could preclude its ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As of June 30, 2021, the Bank’s Tier 1 leverage ratio was 18.09%. The Bank’s actual capital amounts and ratios, and the regulatory minimum ratios are presented in the following table.

 

 

 

Regulatory

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Minimum

 

 

Well-

Capitalized

 

 

June 30, 2021

 

 

December 31, 2020

 

Common equity Tier 1 capital

 

 

0

 

 

 

0

 

 

$

172,775

 

 

$

148,507

 

Tier 1 capital

 

 

0

 

 

 

0

 

 

 

241,563

 

 

 

217,295

 

Total capital

 

 

0

 

 

 

0

 

 

 

258,880

 

 

 

233,460

 

Average assets

 

 

0

 

 

 

0

 

 

 

1,335,205

 

 

 

1,283,664

 

Risk-weighted assets

 

 

0

 

 

 

0

 

 

 

1,349,840

 

 

 

1,243,783

 

Leverage ratio(1)

 

 

4.0

%

 

 

5.0

%

 

 

18.1

%

 

 

16.9

%

Common equity Tier 1 capital ratio(2)

 

 

7.0

 

 

 

6.5

 

 

 

12.8

 

 

 

11.9

 

Tier 1 capital ratio(3)

 

 

8.5

 

 

 

8.0

 

 

 

17.9

 

 

 

17.5

 

Total capital ratio(3)

 

 

10.5

 

 

 

10.0

 

 

 

19.2

 

 

 

18.8

 

 

(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.

Page 16 of 70


 

In the table above, the minimum risk-based ratios as of June 30, 2021 and December 31, 2020 reflect the capital conservation buffer of 2.5%. The minimum regulatory requirements, inclusive of the capital conservation buffer, were the binding requirements for the risk-based requirements, and the “well-capitalized” requirements were the binding requirements for Tier 1 leverage capital as of both June 30, 2021 and December 31, 2020.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, or Topic 326: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. Under the FASB’s new standard, the concepts used by entities to account for credit losses on financial instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is removed. Loss estimates are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 2019 for public entities, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022. The Company is assessing the impact the update will have on its financial statements, and expects the update to have a material impact on the Company’s accounting for estimated credit losses on its loans.

Reclassifications

Certain reclassifications have been made to prior year balances to conform with the current year presentation. These reclassifications have no effect on the previously reported results of operations.

(3) INVESTMENT SECURITIES

Fixed maturity securities available for sale at June 30, 2021 and December 31, 2020 consisted of the following:

 

June 30, 2021

(Dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of US

   federal agencies

 

$

39,553

 

 

$

1,009

 

 

$

(239

)

 

$

40,323

 

State and municipalities

 

 

7,919

 

 

 

106

 

 

 

(41

)

 

 

7,984

 

Total

 

$

47,472

 

 

$

1,115

 

 

$

(280

)

 

$

48,307

 

 

December 31, 2020

(Dollars in thousands)

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of

   US federal agencies

 

$

34,929

 

 

$

1,495

 

 

$

(45

)

 

$

36,379

 

State and municipalities

 

 

10,226

 

 

 

189

 

 

 

(2

)

 

 

10,413

 

Total

 

$

45,155

 

 

$

1,684

 

 

$

(47

)

 

$

46,792

 

 

Page 17 of 70


 

The amortized cost and estimated market value of investment securities at June 30, 2021 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

 

$

20

 

 

$

20

 

Due after one year through five years

 

 

8,502

 

 

 

8,775

 

Due after five years through ten years

 

 

13,451

 

 

 

13,906

 

Due after ten years

 

 

25,499

 

 

 

25,606

 

Total

 

$

47,472

 

 

$

48,307

 

 

The following tables show information pertaining to securities with gross unrealized losses at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position.

 

 

 

Less than Twelve Months

 

 

Twelve Months and Over

 

June 30, 2021

(Dollars in thousands)

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of

   US federal agencies

 

$

(183

)

 

$

11,444

 

 

$

(55

)

 

$

1,910

 

State and municipalities

 

 

(40

)

 

 

1,960

 

 

 

(2

)

 

 

128

 

Total

 

$

(223

)

 

$

13,404

 

 

$

(57

)

 

$

2,038

 

 

 

 

Less than Twelve Months

 

 

Twelve Months and Over

 

December 31, 2020

(Dollars in thousands)

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of

   US federal agencies

 

$

(45

)

 

$

4,028

 

 

$

 

 

$

 

State and municipalities

 

 

 

 

 

 

 

 

(2

)

 

 

196

 

Total

 

$

(45

)

 

$

4,028

 

 

$

(2

)

 

$

196

 

 

Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, and the Company has the intent and ability to hold the securities for the foreseeable future. The fair value is expected to recover as the bonds approach the maturity date.

(4) LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table shows the major classification of loans, inclusive of capitalized loan origination costs, at June 30, 2021 and December 31, 2020.

 

 

 

June 30, 2021

 

 

December 31, 2020

 

(Dollars in thousands)

 

Amount

 

 

As a Percent of

Gross Loans

 

 

Amount

 

 

As a Percent of

Gross Loans

 

Recreation

 

$

886,206

 

 

 

66

%

 

$

792,686

 

 

 

65

%

Home improvement

 

 

368,257

 

 

 

28

 

 

 

334,033

 

 

 

27

 

Commercial

 

 

69,520

 

 

 

5

 

 

 

65,327

 

 

 

5

 

Medallion

 

 

16,514

 

 

 

1

 

 

 

37,768

 

 

 

3

 

Strategic partnership

 

 

70

 

 

 

 

 

 

24

 

 

 

 

Total gross loans

 

 

1,340,567

 

 

 

100

%

 

 

1,229,838

 

 

 

100

%

Allowance for loan losses

 

 

(46,946

)

 

 

 

 

 

 

(57,548

)

 

 

 

 

Total net loans

 

$

1,293,621

 

 

 

 

 

 

$

1,172,290

 

 

 

 

 

 

 


Page 18 of 70


 

The following tables show the activity of the gross loans for the three and six months ended June 30, 2021 and 2020.

 

Three Months Ended June 30, 2021

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallion

 

 

Strategic Partnership

 

 

Total

 

Gross loans – March 31, 2021

 

$

822,932

 

 

$

342,121

 

 

$

58,854

 

 

$

35,250

 

 

$

58

 

 

$

1,259,215

 

Loan originations

 

 

134,467

 

 

 

62,992

 

 

 

11,059

 

 

 

 

 

 

2,426

 

 

 

210,944

 

Principal payments, sales, and maturities

 

 

(70,672

)

 

 

(36,729

)

 

 

(564

)

 

 

(2,389

)

 

 

(2,414

)

 

 

(112,768

)

Charge-offs, net

 

 

916

 

 

 

(228

)

 

 

 

 

 

(10,869

)

 

 

 

 

 

(10,181

)

Transfer to loan collateral in process

   of foreclosure, net

 

 

(2,980

)

 

 

 

 

 

 

 

 

(3,933

)

 

 

 

 

 

(6,913

)

Amortization of origination costs

 

 

(2,477

)

 

 

410

 

 

 

 

 

 

 

 

 

 

 

 

(2,067

)

Amortization of loan premium

 

 

(60

)

 

 

(90

)

 

 

 

 

 

(1,545

)

 

 

 

 

 

(1,695

)

FASB origination costs

 

 

4,080

 

 

 

(219

)

 

 

1

 

 

 

 

 

 

 

 

 

3,862

 

Paid-in-kind interest

 

 

 

 

 

 

 

 

170

 

 

 

 

 

 

 

 

 

170

 

Gross loans – June 30, 2021

 

$

886,206

 

 

$

368,257

 

 

$

69,520

 

 

$

16,514

 

 

$

70

 

 

$

1,340,567

 

 

 

Six Months Ended June 30, 2021

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallion

 

 

Strategic Partnership

 

 

Total

 

Gross loans – December 31, 2020

 

$

792,686

 

 

$

334,033

 

 

$

65,327

 

 

$

37,768

 

 

$

24

 

 

$

1,229,838

 

Loan originations

 

 

228,317

 

 

 

111,051

 

 

 

15,216

 

 

 

 

 

 

4,370

 

 

 

358,954

 

Principal payments, sales and maturities

 

 

(129,100

)

 

 

(76,797

)

 

 

(11,541

)

 

 

(4,214

)

 

 

(4,324

)

 

 

(225,976

)

Charge-offs, net

 

 

(1,668

)

 

 

(477

)

 

 

 

 

 

(10,793

)

 

 

 

 

 

(12,938

)

Transfer to loan collateral in process of foreclosure, net

 

 

(6,033

)

 

 

 

 

 

 

 

 

(4,630

)

 

 

 

 

 

(10,663

)

Amortization of origination costs

 

 

(4,639

)

 

 

907

 

 

 

11

 

 

 

(2

)

 

 

 

 

 

(3,723

)

Amortization of loan premium

 

 

(101

)

 

 

(166

)

 

 

 

 

 

(1,615

)

 

 

 

 

 

(1,882

)

FASB origination costs

 

 

6,744

 

 

 

(294

)

 

 

12

 

 

 

 

 

 

 

 

 

6,462

 

Paid-in-kind interest

 

 

 

 

 

 

 

 

495

 

 

 

 

 

 

 

 

 

495

 

Gross loans – June 30, 2021

 

$

886,206

 

 

$

368,257

 

 

$

69,520

 

 

$

16,514

 

 

$

70

 

 

$

1,340,567

 

 

 

Three Months Ended June 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallion

 

 

Strategic Partnership

 

 

Total

 

Gross loans – March 31, 2020

 

$

735,175

 

 

$

255,899

 

 

$

68,257

 

 

$

124,448

 

 

$

 

 

$

1,183,779

 

Loan originations

 

 

106,206

 

 

 

44,713

 

 

 

3,000

 

 

 

 

 

 

153

 

 

 

154,072

 

Principal payments, sales and maturities

 

 

(49,457

)

 

 

(18,496

)

 

 

(132

)

 

 

(1,687

)

 

 

(145

)

 

 

(69,917

)

Charge-offs, net

 

 

(3,565

)

 

 

(196

)

 

 

 

 

 

(260

)

 

 

 

 

 

(4,021

)

Transfer to loan collateral in process

   of foreclosure, net

 

 

(3,003

)

 

 

 

 

 

 

 

 

(2,185

)

 

 

 

 

 

(5,188

)

Amortization of origination costs

 

 

(2,031

)

 

 

455

 

 

 

2

 

 

 

(13

)

 

 

 

 

 

(1,587

)

Amortization of loan premium

 

 

(51

)

 

 

(82

)

 

 

 

 

 

(46

)

 

 

 

 

 

(179

)

FASB origination costs

 

 

3,511

 

 

 

(221

)

 

 

8

 

 

 

(4

)

 

 

 

 

 

3,294

 

Paid-in-kind interest

 

 

 

 

 

 

 

 

341

 

 

 

 

 

 

 

 

 

341

 

Gross loans – June 30, 2020

 

$

786,785

 

 

$

282,072

 

 

$

71,476

 

 

$

120,253

 

 

$

8

 

 

$

1,260,594

 

 

Page 19 of 70


 

Six Months Ended June 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

 

 

175,850

 

 

 

78,178

 

 

 

5,175

 

 

 

 

 

 

153

 

 

 

259,356

 

Principal payments, sales and maturities

 

 

(86,529

)

 

 

(42,720

)

 

 

(4,112

)

 

 

(3,780

)

 

 

(145

)

 

 

(137,286

)

Charge-offs, net

 

 

(9,946

)

 

 

(832

)

 

 

 

 

 

(1,820

)

 

 

 

 

 

(12,598

)

Transfer to loan collateral in process

   of foreclosure, net

 

 

(7,781

)

 

 

 

 

 

 

 

 

(4,344

)

 

 

 

 

 

(12,125

)

Amortization of origination costs

 

 

(3,760

)

 

 

896

 

 

 

4

 

 

 

(31

)

 

 

 

 

 

(2,891

)

Amortization of loan premium

 

 

(103

)

 

 

(168

)

 

 

 

 

 

(237

)

 

 

 

 

 

(508

)

FASB origination costs

 

 

5,722

 

 

 

(606

)

 

 

8

 

 

 

33

 

 

 

 

 

 

5,157

 

Paid-in-kind interest

 

 

 

 

 

 

 

 

634

 

 

 

 

 

 

 

 

 

634

 

Gross loans – June 30, 2020

 

$

786,785

 

 

$

282,072

 

 

$

71,476

 

 

$

120,253

 

 

$

8

 

 

$

1,260,594

 

 

The following table sets forth the activity in the allowance for loan losses for the three and six months ended June 30, 2021 and 2020.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Allowance for loan losses – beginning balance

 

$

57,809

 

 

$

54,057

 

 

$

57,548

 

 

$

46,093

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

 

(2,672

)

 

 

(5,708

)

 

 

(7,725

)

 

 

(13,951

)

Home improvement

 

 

(786

)

 

 

(548

)

 

 

(1,467

)

 

 

(1,558

)

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Medallion

 

 

(12,791

)

 

 

(1,771

)

 

 

(13,905

)

 

 

(3,696

)

Total charge-offs

 

 

(16,249

)

 

 

(8,027

)

 

 

(23,097

)

 

 

(19,205

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

 

3,588

 

 

 

2,143

 

 

 

6,057

 

 

 

4,005

 

Home improvement

 

 

558

 

 

 

352

 

 

 

990

 

 

 

726

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Medallion

 

 

1,922

 

 

 

1,511

 

 

 

3,112

 

 

 

1,876

 

Total recoveries

 

 

6,068

 

 

 

4,006

 

 

 

10,159

 

 

 

6,607

 

Net charge-offs(1)

 

 

(10,181

)

 

 

(4,021

)

 

 

(12,938

)

 

 

(12,598

)

Provision for loan losses

 

 

(682

)

 

 

16,941

 

 

 

2,336

 

 

 

33,482

 

Allowance for loan losses – ending balance(2)

 

$

46,946

 

 

$

66,977

 

 

$

46,946

 

 

$

66,977

 

 

(1)

As of June 30, 2021, cumulative net charge-offs of loans and loan collateral in process of foreclosure in the medallion loan portfolio were $299,205, some of which may represent collection opportunities for the Company.

(2)    As of June 30, 2021, there was 0 allowance for loan losses and net charge-offs related to the strategic partnership loans.

 


Page 20 of 70


 

The following tables set forth the allowance for loan losses by type as of June 30, 2021 and December 31, 2020.

 

June 30, 2021

(Dollars in thousands)

 

Amount

 

 

Percentage of

Allowance

 

 

Allowance as

a Percent of

Loan Category

 

 

Allowance as

a Percent of Nonaccrual

 

Recreation

 

$

30,306

 

 

 

64

%

 

 

3.42

%

 

 

633.25

%

Home improvement

 

 

5,890

 

 

 

13

 

 

 

1.60

 

 

NM

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Medallion

 

 

10,750

 

 

 

23

 

 

 

65.11

 

 

 

65.11

 

Total

 

$

46,946

 

 

 

100

%

 

 

3.50

%

 

 

116.26

%

 

December 31, 2020

(Dollars in thousands)

 

Amount

 

 

Percentage of

Allowance

 

 

Allowance as

a Percent of

Loan Category

 

 

Allowance as

a Percent of Nonaccrual

 

Recreation

 

$

27,348

 

 

 

48

%

 

 

3.45

%

 

 

378.20

%

Home improvement

 

 

5,157

 

 

 

9

 

 

 

1.54

 

 

NM

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Medallion

 

 

25,043

 

 

 

43

 

 

 

66.31

 

 

 

68.01

 

Total

 

$

57,548

 

 

 

100

%

 

 

4.68

%

 

 

93.17

%

The following table presents total nonaccrual loans and foregone interest, substantially all of which is in the medallion portfolio. The fluctuation in nonaccrual interest foregone is due to past due loans and market conditions.

 

(Dollars in thousands)

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

Total nonaccrual loans

 

$

40,381

 

 

$

61,767

 

 

$

81,539

 

Interest foregone quarter to date

 

 

521

 

 

 

2,306

 

 

 

1,202

 

Amount of foregone interest applied

   to principal in the quarter

 

 

121

 

 

 

595

 

 

 

8

 

Interest foregone year to date

 

 

889

 

 

 

3,311

 

 

 

1,734

 

Amount of foregone interest applied

   to principal year to date

 

 

253

 

 

 

602

 

 

 

57

 

Interest foregone life to date

 

 

4,127

 

 

 

5,252

 

 

 

4,171

 

Amount of foregone interest applied

   to principal life to date

 

 

789

 

 

 

792

 

 

 

973

 

Percentage of nonaccrual loans to gross loan

   portfolio

 

 

3

%

 

 

5

%

 

 

6

%

Percentage of allowance for loan losses to

   nonaccrual loans

 

 

116

%

 

 

93

%

 

 

82

%

 

 


Page 21 of 70


 

The following tables present the performance status of loans as of June 30, 2021 and December 31, 2020.

 

June 30, 2021

(Dollars in thousands)

 

Performing

 

 

Nonperforming

 

 

Total

 

 

Percentage of

Nonperforming

to Total

 

Recreation

 

$

881,029

 

 

$

5,177

 

 

$

886,206

 

 

 

0.58

%

Home improvement

 

 

368,188

 

 

 

69

 

 

 

368,257

 

 

 

0.02

 

Commercial

 

 

50,510

 

 

 

19,010

 

 

 

69,520

 

 

 

27.34

 

Medallion

 

 

 

 

 

16,514

 

 

 

16,514

 

 

 

100.00

 

Strategic partnership

 

 

70

 

 

 

 

 

 

70

 

 

 

 

Total

 

$

1,299,797

 

 

$

40,770

 

 

$

1,340,567

 

 

 

3.04

%

 

December 31, 2020

(Dollars in thousands)

 

Performing

 

 

Nonperforming

 

 

Total

 

 

Percentage of

Nonperforming

to Total

 

Recreation

 

$

785,047

 

 

$

7,639

 

 

$

792,686

 

 

 

0.96

%

Home improvement

 

 

333,862

 

 

 

171

 

 

 

334,033

 

 

 

0.05

 

Commercial

 

 

48,731

 

 

 

16,596

 

 

 

65,327

 

 

 

25.40

 

Medallion

 

 

 

 

 

37,768

 

(1)

 

37,768

 

 

 

100.00

 

Strategic partnership

 

 

24

 

 

 

 

 

 

24

 

 

 

 

Total

 

$

1,167,664

 

 

$

62,174

 

 

$

1,229,838

 

 

 

5.06

%

 

 

(1)

Includes medallion loan premiums of $1,615 at December 31, 2020.

 

For those loans aged under 90 days past due, there is a possibility that their delinquency status will continue to deteriorate and they will subsequently be placed on nonaccrual status and be reserved for, and as such, deemed nonperforming.

The following tables provide additional information on attributes of the nonperforming loan portfolio as of June 30, 2021 and 2020, and December 31, 2020, all of which had an allowance recorded against the principal balance.

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

(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

 

$

5,177

 

 

$

5,177

 

 

$

179

 

 

$

7,639

 

 

$

7,639

 

 

$

264

 

 

$

5,312

 

 

$

5,312

 

 

$

243

 

Home improvement

 

 

69

 

 

 

69

 

 

 

1

 

 

 

171

 

 

 

171

 

 

 

3

 

 

 

137

 

 

 

137

 

 

 

2

 

Commercial

 

 

19,010

 

 

 

19,019

 

 

 

 

 

 

16,596

 

 

 

16,600

 

 

 

 

 

 

15,246

 

 

 

15,251

 

 

 

 

Medallion

 

 

16,516

 

 

 

17,296

 

 

 

10,753

 

 

 

37,768

 

 

 

38,368

 

 

 

25,043

 

 

 

61,230

 

 

 

61,555

 

 

 

35,838

 

Total nonperforming loans

  with an allowance

 

$

40,772

 

 

$

41,561

 

 

$

10,933

 

 

$

62,174

 

 

$

62,778

 

 

$

25,310

 

 

$

81,925

 

 

$

82,255

 

 

$

36,083

 

 

 

 

For the Three Months Ended June 30, 2021

 

 

For the Six Months Ended June 30, 2021

 

 

For the Three Months Ended June 30, 2020

 

 

For the Six Months Ended

June 30, 2020

 

(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

 

$

4,799

 

 

$

180

 

 

$

4,912

 

 

$

323

 

 

$

5,544

 

 

$

158

 

 

$

5,653

 

 

$

299

 

Home improvement

 

 

74

 

 

 

 

 

 

75

 

 

 

 

 

 

137

 

 

 

1

 

 

 

137

 

 

 

1

 

Commercial

 

 

19,210

 

 

 

 

 

 

19,788

 

 

 

 

 

 

15,360

 

 

 

 

 

 

15,359

 

 

 

1

 

Medallion

 

 

18,517

 

 

 

 

 

 

18,568

 

 

 

 

 

 

54,418

 

 

 

203

 

 

 

63,731

 

 

 

605

 

Total nonperforming loans

   with an allowance

 

$

42,600

 

 

$

180

 

 

$

43,343

 

 

$

323

 

 

$

75,459

 

 

$

362

 

 

$

84,880

 

 

$

906

 

 

The following tables show the aging of all loans as of June 30, 2021 and December 31, 2020.

Page 22 of 70


 

 

 

 

Days Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

(Dollars in thousands)

 

30-59

 

 

60-89

 

 

90 +

 

 

Total

 

 

Current

 

 

Total (1)

 

 

Recorded

Investment

90 Days and

Accruing

 

Recreation

 

$

12,185

 

 

$

3,473

 

 

$

2,769

 

 

$

18,427

 

 

$

840,464

 

 

$

858,891

 

 

$

0

 

Home improvement

 

 

663

 

 

 

161

 

 

 

69

 

 

 

893

 

 

 

369,770

 

 

 

370,663

 

 

 

0

 

Commercial

 

 

 

 

 

1,816

 

 

 

74

 

 

 

1,890

 

 

 

67,700

 

 

 

69,590

 

 

 

0

 

Medallion

 

 

375

 

 

 

9,167

 

 

 

 

 

 

9,542

 

 

 

6,974

 

 

 

16,516

 

 

 

0

 

Strategic partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70

 

 

 

70

 

 

 

0

 

Total

 

$

13,223

 

 

$

14,617

 

 

$

2,912

 

 

$

30,752

 

 

$

1,284,978

 

 

$

1,315,730

 

 

$

0

 

 

(1)

Excludes loan premiums of $835 resulting from purchase price accounting and $24,074 of capitalized loan origination costs.

 

 

 

Days Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

(Dollars in thousands)

 

30-59

 

 

60-89

 

 

90 +

 

 

Total

 

 

Current

 

 

Total (1)

 

 

Recorded

Investment

90 Days and

Accruing

 

Recreation

 

$

22,058

 

 

$

7,582

 

 

$

5,343

 

 

$

34,983

 

 

$

732,391

 

 

$

767,374

 

 

$

0

 

Home improvement

 

 

813

 

 

 

218

 

 

 

170

 

 

 

1,201

 

 

 

335,684

 

 

 

336,885

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

75

 

 

 

75

 

 

 

65,265

 

 

 

65,340

 

 

 

0

 

Medallion

 

 

2,019

 

 

 

973

 

 

 

1,290

 

 

 

4,282

 

 

 

31,871

 

 

 

36,153

 

 

 

0

 

Strategic partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

24

 

 

 

0

 

Total

 

$

24,890

 

 

$

8,773

 

 

$

6,878

 

 

$

40,541

 

 

$

1,165,235

 

 

$

1,205,776

 

 

$

0

 

 

(1)

Excludes loan premiums of $2,717 resulting from purchase price accounting and $21,345 of capitalized loan origination costs.

The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 321%, 327%, and 254% as of June 30, 2021, December 31, 2020, and June 30, 2020.

The following table shows the TDRs which the Company entered into during the three months and six months ended June 30, 2021.

 

(Dollars in thousands)

 

Number of

Loans

 

 

Pre-

Modification

Investment

 

 

Post-

Modification

Investment

 

Three months ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

     Recreation

 

 

21

 

 

$

302

 

 

$

302

 

     Medallion

 

 

2

 

 

 

256

 

 

 

256

 

Six months ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

     Recreation

 

 

39

 

 

$

474

 

 

$

468

 

     Medallion

 

 

10

 

 

 

2,994

 

 

 

2,994

 

 

During the twelve months ended June 30, 2021, 43 medallion loans modified as TDRs were in default and had an investment value of $30,140,000 as of June 30, 2021, net of a $22,176,000 allowance for loan losses, 37 recreation loans modified as TDRs were in default and had an investment value of $371,000 as of June 30, 2021, net of a $13,000 allowance for loan losses, and 0 commercial loans modified as TDRs were in default.

 


Page 23 of 70


 

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

 

(Dollars in thousands)

 

Number of

Loans

 

 

Pre-

Modification

Investment

 

 

Post-

Modification

Investment

 

Three months ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

     Recreation

 

 

21

 

 

$

231

 

 

$

185

 

     Medallion

 

 

17

 

 

 

12,519

 

 

 

12,519

 

Six months ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

     Recreation

 

 

51

 

 

$

633

 

 

$

426

 

     Medallion

 

 

30

 

 

 

13,641

 

 

 

13,641

 

 

During the twelve months ended June 30, 2020, 20 medallion loans modified as TDRs were in default and had an investment value of $11,419,000 as of June 30, 2020, net of a $6,680,000 allowance for loan losses, and 88 recreation loans modified as TDRs were in default and had an investment value of $802,000 as of June 30, 2020, net of a $37,000 allowance for loan losses.

The following tables show the activity of loan collateral in process of foreclosure, which relate only to the recreation and medallion loans, for the three and six months ended June 30, 2021 and 2020.

 

Three Months Ended June 30, 2021

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loan collateral in process of foreclosure – March 31, 2021

 

$

970

 

 

$

49,763

 

 

$

50,733

 

Transfer from loans, net

 

 

2,980

 

 

 

3,933

 

 

 

6,913

 

Sales

 

 

(1,989

)

 

 

(231

)

 

 

(2,220

)

Cash payments received

 

 

 

 

 

(3,146

)

 

 

(3,146

)

Collateral valuation adjustments

 

 

(1,079

)

 

 

(2,162

)

 

 

(3,241

)

Loan collateral in process of foreclosure – June 30, 2021

 

$

882

 

 

$

48,157

 

 

$

49,039

 

 

Six Months Ended June 30, 2021

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loan collateral in process of foreclosure – December 31, 2020

 

$

1,432

 

 

$

53,128

 

 

$

54,560

 

Transfer from loans, net

 

 

6,033

 

 

 

4,630

 

 

 

10,663

 

Sales

 

 

(4,288

)

 

 

(231

)

 

 

(4,519

)

Cash payments received

 

 

 

 

 

(4,423

)

 

 

(4,423

)

Collateral valuation adjustments

 

 

(2,295

)

 

 

(4,947

)

 

 

(7,242

)

Loan collateral in process of foreclosure – June 30, 2021

 

$

882

 

 

$

48,157

 

 

$

49,039

 

 

Three Months Ended June 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loan collateral in process of foreclosure – March 31, 2020

 

$

1,717

 

 

$

45,100

 

 

$

46,817

 

Transfer from loans, net

 

 

3,003

 

 

 

2,185

 

 

 

5,188

 

Sales

 

 

(1,988

)

 

 

 

 

 

(1,988

)

Cash payments received

 

 

 

 

 

(185

)

 

 

(185

)

Collateral valuation adjustments

 

 

(1,474

)

 

 

(983

)

 

 

(2,457

)

Loan collateral in process of foreclosure – June 30, 2020

 

$

1,258

 

 

$

46,117

 

 

$

47,375

 

 

Six Months Ended June 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

 

 

7,781

 

 

 

4,344

 

 

 

12,125

 

Sales

 

 

(3,986

)

 

 

(300

)

 

 

(4,286

)

Cash payments received

 

 

 

 

 

(1,893

)

 

 

(1,893

)

Collateral valuation adjustments

 

 

(4,013

)

 

 

(7,269

)

 

 

(11,282

)

Loan collateral in process of foreclosure – June 30, 2020

 

$

1,258

 

 

$

46,117

 

 

$

47,375

 

 

Page 24 of 70


 

(5) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows:

 

 

 

Payments Due for the Twelve Months Ending June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

2026

 

 

Thereafter

 

 

June 30, 2021(1)

 

 

December 31, 2020(1)

 

 

Interest

Rate (2)

 

Deposits(3)

 

$

469,737

 

 

$

182,911

 

 

$

226,592

 

 

$

143,797

 

 

$

131,077

 

 

$

 

 

$

1,154,114

 

 

$

1,067,822

 

 

 

1.38

%

Retail and privately placed

   notes

 

 

 

 

 

 

 

 

36,000

 

 

 

 

 

 

31,250

 

 

 

53,750

 

 

 

121,000

 

 

 

68,008

 

 

 

7.66

%

SBA debentures and

   borrowings

 

 

 

 

5,000

 

 

 

13,029

 

 

 

12,500

 

 

 

15,500

 

 

 

18,500

 

 

 

64,529

 

 

 

103,225

 

 

 

2.74

%

Preferred securities

 

 

 

 

 

 

 

 

 

 

 

 

33,000

 

 

 

33,000

 

 

 

33,000

 

 

 

2.26

%

Notes payable to banks

 

 

280

 

 

 

280

 

 

 

140

 

 

 

 

 

 

 

 

 

700

 

 

 

31,261

 

 

 

4.00

%

Other borrowings

 

 

8,016

 

 

 

 

 

 

 

 

 

 

 

 

 

8,016

 

 

 

8,689

 

 

 

2.00

%

Total

 

$

478,033

 

 

$

188,191

 

 

$

275,761

 

 

$

156,297

 

 

$

177,827

 

 

$

105,250

 

 

$

1,381,359

 

 

$

1,312,005

 

 

 

2.04

%

 

(1)

Excludes deferred financing costs of $7,054 and $5,805 as of June 30, 2021 and December 31, 2020.

(2)

Weighted average contractual rate as of June 30, 2021.

(3)

Balance excludes $750 and $250 of strategic partner reserve deposits as of June 30, 2021 and December 31, 2020.

(A) DEPOSITS

Deposits are raised through the use of investment brokerage firms that package time deposits in denominations of less than $250,000 qualifying for FDIC insurance into larger pools that are sold to the Bank. The rates paid on the deposits are competitive with market rates paid by other financial institutions. Additionally, a brokerage fee is paid, depending on the maturity of the deposits, which averages less than 0.15%. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity. The Bank did 0t have any individual time deposits greater than $100,000 as of June 30, 2021. In October 2020, the Bank began to originate time deposits through an internet listing service. These listing service deposits are from other financial institutions, and as of June 30, 2021, totaled $4,036,000. The following table presents the maturity of the broker pools, excluding strategic partner reserve deposits, as of June 30, 2021.

 

(Dollars in thousands)

 

June 30, 2021

 

Three months or less

 

$

133,194

 

Over three months through six months

 

 

122,023

 

Over six months through one year

 

 

214,520

 

Over one year

 

 

684,377

 

Total deposits

 

$

1,154,114

 

 

Page 25 of 70


 

 (B) RETAIL AND PRIVATELY PLACED NOTES

In February 2021, the Company completed a private placement to certain institutional investors of $25,000,000 aggregate principal amount of 7.25% unsecured senior notes due February 2026, with interest payable semiannually. In March 2021, an additional $3,250,000 principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $3,000,000 principal amount of such notes was issued to certain institutional investors. The Company has used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.

In December 2020, the Company completed a private placement to certain institutional investors of $33,600,000 aggregate principal amount of 7.50% unsecured senior notes due December 2027, with interest payable semiannually. In February and March 2021, an additional $8,500,000 principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $11,650,000 principal amount of such notes was issued to certain institutional investors. The Company has used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.

In March 2019, the Company completed a private placement to certain institutional investors of $30,000,000 aggregate principal amount of 8.25% unsecured senior notes due 2024, with interest payable semiannually. The Company used the net proceeds from the offering for general corporate purposes, including repaying certain borrowings under its notes payable to banks at a discount which led to a gain of $4,145,000 in the 2019 first quarter. In August 2019, an additional $6,000,000 principal amount of such notes was issued to certain institutional investors.

In April 2016, the Company issued a total of $33,625,000 aggregate principal amount of 9.00% unsecured notes due 2021, with interest payable quarterly in arrears. The Company used the net proceeds from the offering of approximately $31,786,000 to make loans and other investments in portfolio companies and for general corporate purposes, including repaying borrowings under its DZ loan in the ordinary course of business. These notes were repaid at maturity on April 15, 2021.

(C) SBA DEBENTURES AND BORROWINGS

Over the years, the SBA has approved commitments for MCI and FSVC, typically for a four and half year term and a 1% fee, which was paid. During 2017, the SBA restructured FSVC’s debentures with SBA totaling $33,485,000 in principal into a new loan by the SBA to FSVC in the principal amount of $34,024,756, or the SBA Loan. In connection with the SBA Loan, FSVC executed a Note, or the SBA Note, with an effective date of March 1, 2017, in favor of SBA, in the principal amount of $34,024,756. The SBA Loan bears interest at a rate of 3.25% and all remaining unpaid principal and interest are due on April 30, 2024, the maturity date. As of June 30, 2021, $183,985,000 of commitments had been fully utilized, there were $16,500,000 commitments available, and $64,529,000 was outstanding, including $10,529,000 under the SBA Note.

On July 31, 2020, MCI accepted a commitment from the SBA for $25,000,000 in debenture financing. As part of the acceptance, MCI paid the SBA a $250,000 commitment fee. The commitment expires September 24, 2024. $8,500,000 of the commitments has been drawn as of June 30, 2021 to replace debentures which matured in 2021. The remaining balance of $16,500,000 is drawable upon the infusion of $8,250,000 of capital from either the capitalization of retained earnings or capital infusion from the Company, after the contribution of $3,500,000 of capital by the Company during the 2021 second quarter.

(D) PREFERRED SECURITIES

In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bear a variable rate of interest of 90 day LIBOR (0.15% at June 30, 2021) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third-party investor. At June 30, 2021, $33,000,000 was outstanding on the preferred securities.

(E) NOTES PAYABLE TO BANKS

The Company and its subsidiaries have entered into note agreements with a variety of local and regional banking institutions over the years. The notes are typically secured by various assets of the underlying borrower.

In the 2021 second quarter, the Company used some of the proceeds of the privately placed notes to pay off twenty five of its notes payable to banks aggregating $17,762,000 principal amount, resulting in a gain on debt extinguishment of $2,859,430.

Page 26 of 70


 

In March 2021, the Company used some of the proceeds of the privately placed notes to pay off two of its notes payable to banks aggregating $5,207,000 principal amount, one with a maturity of April 15, 2021 and one with a maturity of September 1, 2021, resulting in a gain on debt extinguishment of $1,767,000.

In November 2018, MFC entered into a note to the benefit of DZ Bank for $1,400,000 at a 4.00% interest rate due December 2023, as part of the restructuring of the DZ loan. The note requires a regular quarterly payment of $70,000 of principal and accrued interest and matures in December 2023, and has an outstanding balance of $700,000 as of June 30, 2021. See Note 15 for more information.

(F) OTHER BORROWINGS

In November and December 2017, RPAC amended the terms of various promissory notes with affiliate Richard Petty. (Refer to Note 11 for more details.) At June 30, 2021, the total outstanding on these notes was $7,516,000 at a 2.00% annual interest rate compounded monthly and due March 31, 2022. Additionally, RPAC has a short term promissory note to an unrelated party for $500,000 due on December 31, 2021.

On June 17, 2020, RPAC was approved for and received a Paycheck Protection Program, or PPP, loan under the CARES Act, in the amount of $747,000 at a 1.00% annual interest rate due in five years. Under the terms of the note, RPAC could be granted forgiveness for all or a portion of the balance if the loan proceeds are used in accordance with the requirements set forth in the PPP. During the quarter, RPAC applied for forgiveness of this loan, which was granted by the SBA.

(G) COVENANT COMPLIANCE

Certain of the Company’s debt agreements contain restrictions that require the Company and its subsidiaries to maintain certain financial ratios, including minimum net worth. The Company was in compliance with such restrictions as of June 30, 2021.

(6) LEASES

The Company has leased premises that expire at various dates through November 30, 2027 subject to various operating leases. The Company has implemented ASC Topic 842 under a modified retrospective approach in which no adjustments have been made to the prior year balances.

The following table presents the operating lease costs and additional information for the three and six months ended June 30, 2021 and 2020.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating lease costs

 

$

572

 

 

$

596

 

 

$

1,144

 

 

$

1,192

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

590

 

 

 

632

 

 

 

1,265

 

 

 

1,324

 

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

 

 

(18

)

 

 

(14

)

 

 

(36

)

 

 

(28

)

 

The following table presents the breakout of the operating leases as of June 30, 2021 and December 31, 2020.

 

(Dollars in thousands)

 

June 30, 2021

 

 

December 31, 2020

 

Operating lease right-of-use assets

 

$

10,750

 

 

$

11,737

 

Other current liabilities

 

 

2,111

 

 

 

2,004

 

Operating lease liabilities

 

 

9,889

 

 

 

11,018

 

Total operating lease liabilities

 

 

12,000

 

 

 

13,022

 

Weighted average remaining lease term

 

5.9 years

 

 

6.4 years

 

Weighted average discount rate

 

 

5.54

%

 

 

5.54

%

Page 27 of 70


 

 

At June 30, 2021, maturities of the lease liabilities were as follows:

 

(Dollars in thousands)

 

 

 

 

Remainder of 2021

 

$

1,247

 

2022

 

 

2,411

 

2023

 

 

2,356

 

2024

 

 

2,373

 

2025

 

 

2,390

 

Thereafter

 

 

3,521

 

Total lease payments

 

$

14,298

 

Less imputed interest

 

 

2,298

 

Total operating lease liabilities

 

$

12,000

 

 

(7) INCOME TAXES

The Company is subject to federal and applicable state corporate income taxes on its taxable ordinary income and capital gains. As a corporation taxed under Subchapter C of the Internal Revenue Code, the Company is able, and intends, to file a consolidated federal income tax return with corporate subsidiaries, in which it holds 80% or more of the outstanding equity interest measured by both vote and fair value.

The following table sets forth the significant components of our deferred and other tax assets and liabilities as of June 30, 2021 and December 31, 2020.

 

(Dollars in thousands)

 

June 30, 2021

 

 

December 31, 2020

 

Goodwill and other intangibles

 

$

(44,145

)

 

$

(44,799

)

Provision for loan losses

 

 

14,308

 

 

 

19,556

 

Net operating loss carryforwards(1)

 

 

25,393

 

 

 

30,493

 

Accrued expenses, compensation, and other assets

 

 

1,676

 

 

 

1,174

 

Unrealized gains on other investments

 

 

(3,528

)

 

 

(6,769

)

Total deferred tax liability

 

 

(6,296

)

 

 

(345

)

Valuation allowance

 

 

(2,295

)

 

 

(462

)

Deferred tax liability, net

 

 

(8,591

)

 

 

(807

)

Taxes receivable

 

 

1,072

 

 

 

1,757

 

Net deferred and other tax assets (liabilities)

 

$

(7,519

)

 

$

950

 

 

(1)

As of June 30, 2021, the Company and its subsidiaries had an estimated $103,838 of net operating loss carryforwards, $1,712 of which expires at various dates between December 31, 2026 and December 31, 2035, which had a net carrying value of $23,098 as of June 30, 2021.

The components of our tax (provision) benefit for the three and six months ended June 30, 2021 and 2020 were as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

(795

)

 

$

 

 

$

(795

)

 

$

 

State

 

 

(100

)

 

 

(137

)

 

 

(270

)

 

 

(223

)

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(3,001

)

 

 

774

 

 

 

(6,054

)

 

 

3,299

 

State

 

 

(2,632

)

 

 

216

 

 

 

(3,287

)

 

 

1,026

 

Net (provision) benefit for income taxes

 

$

(6,528

)

 

$

853

 

 

$

(10,406

)

 

$

4,102

 

 

Page 28 of 70


 

The following table presents a reconciliation of statutory federal income tax (provision) benefit to consolidated actual income tax (provision) benefit for the three and six months ended June 30, 2021 and 2020.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Statutory Federal income tax (provision) benefit at 21%

 

$

(3,805

)

 

$

655

 

 

$

(6,524

)

 

$

4,067

 

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

 

 

(743

)

 

 

122

 

 

 

(1,275

)

 

 

760

 

Valuation allowance against net operating losses

 

 

(1,833

)

 

 

 

 

 

(1,833

)

 

 

 

Change in effective state income tax rates and accrual

 

 

(1,399

)

 

 

196

 

 

 

(1,369

)

 

 

149

 

Income attributable to non-controlling interest

 

 

47

 

 

 

50

 

 

 

266

 

 

 

(166

)

Non deductible expenses

 

 

385

 

 

 

(198

)

 

 

213

 

 

 

(789

)

Other

 

 

820

 

 

 

28

 

 

 

116

 

 

 

81

 

Total income tax (provision) benefit

 

$

(6,528

)

 

$

853

 

 

$

(10,406

)

 

$

4,102

 

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible pursuant to ASC 740. The Company considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company’s evaluation of the realizability of deferred tax assets must consider both positive and negative evidence. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. Based upon these considerations, the Company determined the necessary valuation allowance as of June 30, 2021.

The Company has filed tax returns in many states. Federal, New York State, New York City, and Utah state tax filings of the Company for the tax years 2018 through the present are the more significant filings that are open for examination.

(8) STOCK OPTIONS AND RESTRICTED STOCK

The Company’s Board of Directors approved the 2018 Equity Incentive Plan, or the 2018 Plan, which was approved by the Company’s stockholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to the Company’s employees and non-employee directors, including options, restricted stock, restricted stock units, and stock appreciation rights, etc. On April 22, 2020, the Company’s Board of Directors approved an amendment to the 2018 Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder, which was approved by the Company’s stockholders on June 19, 2020. A total of 2,210,968 shares of the Company’s common stock are issuable under the 2018 Plan, and 435,474 remained issuable as of June 30, 2021. Awards under the 2018 Plan are subject to certain limitations as set forth in the 2018 Plan, which will terminate when all shares of common stock authorized for delivery have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2018 Plan, whichever occurs first.

The Company’s Board of Directors approved the 2015 Employee Restricted Stock Plan, or the 2015 Restricted Stock Plan, on February 13, 2015, which was approved by the Company’s shareholders on June 5, 2015. The 2015 Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC on March 1, 2016. The terms of 2015 Restricted Stock Plan provided for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock which, at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 700,000 shares of the Company’s common stock were issuable under the 2015 Restricted Stock Plan, and 241,919 remained issuable as of June 15, 2018. Effective June 15, 2018, the 2018 Plan was approved, and these remaining shares were rolled into the 2018 Plan. Awards under the 2015 Restricted Stock Plan are subject to certain limitations as set forth in the 2015 Restricted Stock Plan. The 2015 Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the 2015 Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2015 Restricted Stock Plan, whichever occurs first.

The Company had a stock option plan, or the 2006 Stock Option Plan, available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provided for the issuance of a maximum of 800,000 shares of common stock of the Company. 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.

Page 29 of 70


 

The Company’s Board of Directors approved the 2015 Non-Employee Director Stock Option Plan, or the 2015 Director Plan, on March 12, 2015, which was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on February 29, 2016. A total of 300,000 shares of the Company’s common stock were issuable under the 2015 Director Plan, and 258,334 remained issuable as of June 15, 2018. Effective June 15, 2018, the 2018 Plan was approved, and these remaining shares were rolled into the 2018 Plan. Under the 2015 Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the 2015 Director Plan, the Company granted options to purchase 12,000 shares of the Company’s common stock to a non-employee director upon election to the Board of Directors, with an adjustment for directors who were elected to serve less than a full term. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. Options granted under the 2015 Director Plan are exercisable annually, as defined in the 2015 Director Plan. The term of the options could not exceed ten years.

The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan, or the Amended Director Plan, on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock were issuable under the Amended Director Plan. 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 June 30, 2021, 1,209,642 options on the Company’s common stock were outstanding under the Company’s plans, of which 347,824 options were exercisable. Additionally, there were 442,190 unvested shares under the Company’s restricted common stock plan, and 16,803 unvested restricted stock units, and 47,472 vested restricted stock units under the Company’s restricted stock plans.

The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of options granted was $3.24 per share and $3.30 per share for the six months ended June 30, 2021 and 2020. The following assumption categories are used to determine the value of any option grants.

 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

Risk free interest rate

 

 

0.97

%

 

 

1.46

%

Expected dividend yield

 

 

 

 

 

 

Expected life of option in years(1)

 

 

6.25

 

 

 

6.25

 

Expected volatility(2)

 

 

53.98

 

 

 

50.18

 

 

(1)

Expected life is calculated using the simplified method.

(2)

We determine our expected volatility based on our historical volatility.

Page 30 of 70


 

The following table presents the activity for the stock option programs for the 2021 first and second quarters and the 2020 full year.

 

 

 

Number of

Options

 

 

 

Exercise

Price Per

Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2019

 

 

550,040

 

 

$

2.14-13.53

 

 

$

6.58

 

Granted

 

 

444,557

 

 

 

4.89-6.68

 

 

 

6.24

 

Cancelled

 

 

(42,928

)

 

 

2.22-13.53

 

 

 

6.91

 

Exercised(1)

 

 

0

 

 

 

 

0

 

 

 

0

 

Outstanding at December 31, 2020

 

 

951,669

 

 

 

2.14-12.55

 

 

 

6.41

 

Granted

 

 

317,398

 

 

 

 

6.79

 

 

 

6.79

 

Cancelled

 

 

(3,984

)

 

 

6.55-7.25

 

 

 

6.89

 

Exercised(1)

 

 

(768

)

 

 

6.55-7.25

 

 

 

6.79

 

Outstanding at March 31, 2021

 

 

1,264,315

 

 

 

2.14-12.55

 

 

 

6.50

 

Granted

 

 

0

 

 

 

 

 

 

 

 

Cancelled

 

 

(32,446

)

 

 

4.89-7.25

 

 

 

5.98

 

Exercised(1)

 

 

(22,227

)

 

 

5.27-7.25

 

 

 

5.76

 

Outstanding at June 30, 2021

 

 

1,209,642

 

 

 

2.14-12.55

 

 

 

6.53

 

Options exercisable at June 30, 2021(2)

 

 

347,824

 

 

 

2.14-12.55

 

 

 

6.53

 

 

(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 $77,000 and $0 for the three and six months ended June 30, 2021 and 2020.

(2)

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at June 30, 2021 and the related exercise price of the underlying options, was $2,854,000 for outstanding options and $844,000 for exercisable options as of June 30, 2021. The remaining contractual life was 8.50 years for outstanding options and 7.47 years for exercisable options at June 30, 2021.

The following table presents the activity for the restricted stock programs for the 2021 first and second quarters and the 2020 full year.

 

 

 

Number of

Shares

 

 

 

Grant

Price Per

Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2019

 

 

284,879

 

 

$

3.95-7.25

 

 

$

6.01

 

Granted

 

 

229,408

 

 

 

4.89-6.68

 

 

 

6.21

 

Cancelled

 

 

(8,755

)

 

 

3.95-7.25

 

 

 

6.93

 

Vested(1)

 

 

(89,392

)

 

 

3.95-6.55

 

 

 

5.37

 

Outstanding at December 31, 2020

 

 

416,140

 

 

 

4.39-7.25

 

 

 

6.24

 

Granted

 

 

163,561

 

 

 

 

6.79

 

 

 

6.79

 

Cancelled

 

 

(7,602

)

 

 

4.89-7.25

 

 

 

5.96

 

Vested(1)

 

 

(119,577

)

 

 

4.39-7.25

 

 

 

6.09

 

Outstanding at March 31, 2021

 

 

452,522

 

 

 

4.80-7.25

 

 

 

6.48

 

Granted

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(10,332

)

 

 

4.89-7.25

 

 

 

6.13

 

Vested(1)

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2021

 

 

442,190

 

 

$

4.80-7.25

 

 

 

6.49

 

 

(1)

The aggregate fair value of the restricted stock vested was $0 and $813,000 for the three and six months ended June 30, 2021 and was $0 and $553,000 for the three and six months ended June 30, 2020.

(2)

The aggregate fair value of the restricted stock was $3,918,000 as of June 30, 2021. The remaining vesting period was 3.68 years at June 30, 2021.

Page 31 of 70


 

During the six months ended June 30, 2021, the Company granted 16,803 restricted stock units, or RSUs, that vest on June 17, 2022 with a grant price of $8.87, and during the year ended December 31, 2020, granted 47,156 RSUs that vested on June 19, 2021 with a grant price of $3.16. For the RSUs granted in 2020 and 2019, unitholders had the option of deferring settlement until a future date if the recipient makes a formal election under the guidelines of IRC Section 409A, which was done for 47,272 units.  

The following table presents the activity for the unvested options outstanding under the plans for the 2021 first and second quarters.

 

 

 

Number of

Options

 

 

 

Exercise

Price

Per Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2020

 

 

773,362

 

 

$

4.89-7.25

 

 

$

6.42

 

Granted

 

 

317,398

 

 

 

 

6.79

 

 

 

6.79

 

Cancelled

 

 

(2,530

)

 

 

6.55-7.25

 

 

 

6.96

 

Vested

 

 

(185,278

)

 

 

6.55-7.25

 

 

 

6.67

 

Outstanding at March 31, 2021

 

 

902,952

 

 

 

4.89-7.25

 

 

 

6.50

 

Granted

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(33,134

)

 

 

4.89-7.25

 

 

 

5.99

 

Vested

 

 

(8,000

)

 

 

 

5.58

 

 

 

5.58

 

Outstanding at June 30, 2021

 

 

861,818

 

 

$

4.89-7.25

 

 

 

6.53

 

 

The intrinsic value of the options vested was $29,000 and $77,000 for the three and six months ended June 30, 2021.

(9) SEGMENT REPORTING

The Company has 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 operated by the Bank and include loans in all fifty states, with the highest concentrations in Texas, Florida, and California at 14%, 9%, and 9% of loans outstanding and with no other states over 9% as of June 30, 2021. The recreation lending segment is a consumer finance business that works with third-party dealers and financial service providers for the purpose of financing RVs, boats, and other consumer recreational equipment, of which RVs, boats, and trailers make up 60%, 20%, and 10% of the segment portfolio as of June 30, 2021. The home improvement lending segment works with contractors and financial service providers to finance residential home improvements concentrated in roofs, swimming pools, and windows at 29%, 27%, and 12% of total home improvement loans outstanding, and with no other product lines over 10% as of June 30, 2021. The commercial lending segment focuses on enterprise wide industries, including manufacturing services, and various other industries, in which 66% of these loans are made in the Midwest. The medallion lending segment arose in connection with the financing of taxi medallions, taxis, and related assets, of which 85% were in New York City as of June 30, 2021.

In addition, our non-operating segments include RPAC, which is a race car team, and our corporate and other investments segment which includes items not allocated to our operating segments such as investment securities, equity investments, intercompany eliminations, and other corporate elements. As a result of COVID-19, the prior year race season had been suspended from March 15, 2020 through May 17, 2020. As states reopened, NASCAR resumed races and completed all races scheduled in 2020. Commencing in the 2020 second quarter, the Bank began issuing loans related to its strategic partnership business, which is currently included within the corporate and other investment segment due to its small size.

As part of segment reporting, capital ratios for all operating segments have been normalized at 20%, which approximates the percentage of consolidated total equity divided by total assets, with the net adjustment applied to corporate and other investments. In addition, the commercial segment exclusively represents the mezzanine lending business, and the legacy commercial loan business (immaterial to total) has been allocated to corporate and other investments.

Page 32 of 70


 

The following tables present segment data as of and for the three and six months ended June 30, 2021 and 2020.

 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Three Months Ended June 30, 2021

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

28,886

 

 

$

8,228

 

 

$

1,383

 

 

$

(1,475

)

 

$

 

 

$

353

 

 

$

37,375

 

Total interest expense

 

 

2,863

 

 

 

1,143

 

 

 

716

 

 

 

2,524

 

 

 

34

 

 

 

604

 

 

 

7,884

 

Net interest income (loss)

 

 

26,023

 

 

 

7,085

 

 

 

667

 

 

 

(3,999

)

 

 

(34

)

 

 

(251

)

 

 

29,491

 

Provision for loan losses (benefit)

 

 

1,017

 

 

 

756

 

 

 

 

 

 

(2,943

)

 

 

 

 

 

488

 

 

 

(682

)

Net interest income (loss)

   after loss provision

 

 

25,006

 

 

 

6,329

 

 

 

667

 

 

 

(1,056

)

 

 

(34

)

 

 

(739

)

 

 

30,173

 

Sponsorship and race winnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,345

 

 

 

 

 

 

4,345

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,674

)

 

 

 

 

 

(2,674

)

Other income (expense), net

 

 

(7,455

)

 

 

(2,638

)

 

 

(69

)

 

 

(1,157

)

 

 

(1,862

)

 

 

(543

)

 

 

(13,724

)

Net income (loss) before taxes

 

 

17,551

 

 

 

3,691

 

 

 

598

 

 

 

(2,213

)

 

 

(225

)

 

 

(1,282

)

 

 

18,120

 

Income tax (provision) benefit

 

 

(4,519

)

 

 

(951

)

 

 

(150

)

 

 

556

 

 

 

57

 

 

 

(1,521

)

 

 

(6,528

)

Net income (loss)

 

$

13,032

 

 

$

2,740

 

 

$

448

 

 

$

(1,657

)

 

$

(168

)

 

$

(2,803

)

 

$

11,592

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

855,900

 

 

$

362,370

 

 

$

66,236

 

 

$

5,764

 

 

$

 

 

$

3,351

 

 

$

1,293,621

 

Total assets

 

 

868,709

 

 

 

375,189

 

 

 

90,563

 

 

 

101,205

 

 

 

31,877

 

 

 

272,204

 

 

 

1,739,747

 

Total funds borrowed

 

 

712,777

 

 

 

295,887

 

 

 

72,450

 

 

 

80,959

 

 

 

8,016

 

 

 

212,020

 

 

 

1,382,109

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

6.24

%

 

 

3.04

%

 

 

2.36

%

 

 

(6.10

)%

 

 

(1.05

)%

 

 

(3.85

)%

 

 

2.43

%

Return on average equity

 

 

31.19

 

 

 

15.19

 

 

 

11.78

 

 

 

(30.51

)

 

 

(39.70

)

 

 

(1.95

)

 

 

12.90

 

Interest yield

 

 

14.03

 

 

 

9.48

 

 

 

9.16

 

 

 

(70.71

)

 

N/A

 

 

N/A

 

 

 

11.17

 

Net interest margin

 

 

12.64

 

 

 

8.16

 

 

 

4.42

 

 

 

(189.15

)

 

N/A

 

 

N/A

 

 

 

8.84

 

Reserve coverage

 

 

3.42

 

 

 

1.60

 

 

 

0.00

 

(1)

 

65.11

 

 

N/A

 

 

N/A

 

 

 

3.50

 

Delinquency status(2)

 

 

0.32

 

 

 

0.02

 

 

 

0.11

 

(1)

 

-

 

 

N/A

 

 

N/A

 

 

 

0.22

 

Charge-off ratio

 

 

(0.44

)

 

 

0.26

 

 

 

0.00

 

(3)

 

513.86

 

 

N/A

 

 

N/A

 

 

 

3.28

 

 

(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 70


 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Six Months Ended June 30, 2021

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

56,328

 

 

$

16,146

 

 

$

2,865

 

 

$

(1,544

)

 

$

 

 

$

660

 

 

$

74,455

 

Total interest expense

 

 

5,657

 

 

 

2,351

 

 

 

1,288

 

 

 

3,894

 

 

 

75

 

 

 

3,027

 

 

 

16,292

 

Net interest income (loss)

 

 

50,671

 

 

 

13,795

 

 

 

1,577

 

 

 

(5,438

)

 

 

(75

)

 

 

(2,367

)

 

 

58,163

 

Provision for loan losses

 

 

4,630

 

 

 

1,206

 

 

 

 

 

 

(3,987

)

 

 

 

 

 

487

 

 

 

2,336

 

Net interest income (loss)

   after loss provision

 

 

46,041

 

 

 

12,589

 

 

 

1,577

 

 

 

(1,451

)

 

 

(75

)

 

 

(2,854

)

 

 

55,827

 

Sponsorship and race winnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,818

 

 

 

 

 

 

6,818

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,796

)

 

 

 

 

 

(4,796

)

Other income (expense), net

 

 

(12,918

)

 

 

(4,552

)

 

 

(529

)

 

 

(3,301

)

 

 

(3,623

)

 

 

(1,858

)

 

 

(26,781

)

Net income (loss) before taxes

 

 

33,123

 

 

 

8,037

 

 

 

1,048

 

 

 

(4,752

)

 

 

(1,676

)

 

 

(4,712

)

 

 

31,068

 

Income tax (provision) benefit

 

 

(8,529

)

 

 

(2,070

)

 

 

(263

)

 

 

1,193

 

 

 

421

 

 

 

(1,158

)

 

 

(10,406

)

Net income (loss)

 

$

24,594

 

 

$

5,967

 

 

$

785

 

 

$

(3,559

)

 

$

(1,255

)

 

$

(5,870

)

 

$

20,662

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

855,900

 

 

$

362,370

 

 

$

66,236

 

 

$

5,764

 

 

$

 

 

$

3,351

 

 

$

1,293,621

 

Total assets

 

 

868,709

 

 

 

375,189

 

 

 

90,563

 

 

 

101,205

 

 

 

31,877

 

 

 

272,204

 

 

 

1,739,747

 

Total funds borrowed

 

 

712,777

 

 

 

295,887

 

 

 

72,450

 

 

 

80,959

 

 

 

8,016

 

 

 

212,020

 

 

 

1,382,109

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

6.06

%

 

 

3.39

%

 

 

1.95

%

 

 

(6.29

)%

 

 

(7.72

)%

 

 

(4.08

)%

 

 

2.08

%

Return on average equity

 

 

30.32

 

 

 

16.96

 

 

 

9.77

 

 

 

(31.44

)

 

 

(244.87

)

 

 

(30.46

)

 

 

11.09

 

Interest yield

 

 

14.18

 

 

 

9.56

 

 

 

9.66

 

 

 

(30.90

)

 

N/A

 

 

N/A

 

 

 

11.50

 

Net interest margin

 

 

12.76

 

 

 

8.17

 

 

 

5.32

 

 

 

(108.84

)

 

N/A

 

 

N/A

 

 

 

9.01

 

Reserve coverage

 

 

3.42

 

 

 

1.60

 

 

 

0.00

 

(1)

 

65.11

 

 

N/A

 

 

N/A

 

 

 

3.50

 

Delinquency status(2)

 

 

0.32

 

 

 

0.02

 

 

 

0.11

 

(1)

 

 

 

N/A

 

 

N/A

 

 

 

0.22

 

Charge-off ratio

 

 

0.12

 

 

 

0.99

 

 

 

0.00

 

(3)

 

216.01

 

 

N/A

 

 

N/A

 

 

 

2.15

 

 

(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 70


 

 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Three Months Ended June 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

27,229

 

 

$

6,326

 

 

$

1,726

 

 

$

(7

)

 

$       —

 

 

$

314

 

 

$

35,588

 

Total interest expense

 

 

3,226

 

 

 

1,236

 

 

 

617

 

 

 

988

 

 

 

40

 

 

 

2,728

 

 

 

8,835

 

Net interest income (loss)

 

 

24,003

 

 

 

5,090

 

 

 

1,109

 

 

 

(995

)

 

 

(40

)

 

��

(2,414

)

 

 

26,753

 

Provision for loan losses

 

 

8,292

 

 

 

760

 

 

-

 

 

 

7,889

 

 

 

 

 

 

 

16,941

 

Net interest income (loss) after loss

   provision

 

 

15,711

 

 

 

4,330

 

 

 

1,109

 

 

 

(8,884

)

 

 

(40

)

 

 

(2,414

)

 

 

9,812

 

Sponsorship and race winning

 

 

 

 

 

 

 

 

 

 

3,626

 

 

 

 

 

3,626

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

(1,818

)

 

 

 

 

(1,818

)

Other income (expense), net

 

 

(6,497

)

 

 

(1,962

)

 

 

(584

)

 

 

(2,292

)

 

 

(1,378

)

 

 

(2,025

)

 

 

(14,738

)

Net income (loss) before taxes

 

 

9,214

 

 

 

2,368

 

 

 

525

 

 

 

(11,176

)

 

 

390

 

 

 

(4,439

)

 

 

(3,118

)

Income tax (provision) benefit

 

 

(2,356

)

 

 

(606

)

 

 

(131

)

 

 

2,785

 

 

 

(97

)

 

 

1,258

 

 

 

853

 

Net income (loss)

 

$

6,858

 

 

$

1,762

 

 

$

394

 

 

$

(8,391

)

 

$

293

 

 

$

(3,181

)

 

$

(2,265

)

Balance Sheet Data as of June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

759,764

 

 

$

278,000

 

 

$

68,140

 

 

$

84,369

 

 

$       —

 

 

$

3,344

 

 

$

1,193,617

 

Total assets

 

 

775,151

 

 

 

288,501

 

 

 

86,831

 

 

 

190,657

 

 

 

30,542

 

 

 

280,061

 

 

 

1,651,743

 

Total funds borrowed

 

 

617,066

 

 

 

229,237

 

 

 

70,567

 

 

 

151,614

 

 

 

8,615

 

 

 

218,695

 

 

 

1,295,794

 

Selected Financial Ratios as of June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

3.68

%

 

 

2.58

%

 

 

1.86

%

 

 

(17.19

)%

 

 

3.88

%

 

 

(8.96

)%

 

 

(0.98

)%

Return on average equity

 

 

18.38

 

 

 

12.88

 

 

 

9.28

 

 

(85.96)

 

 

(53.94)

 

 

(38.05)

 

 

(4.97)

 

Interest yield

 

 

14.91

 

 

 

9.66

 

 

 

10.67

 

 

(0.03)

 

 

N/A

 

 

N/A

 

 

 

10.95

 

Net interest margin

 

 

13.15

 

 

 

7.77

 

 

 

6.86

 

 

(4.08)

 

 

N/A

 

 

N/A

 

 

 

8.23

 

Reserve coverage

 

 

3.43

 

 

 

1.44

 

 

 

 

 

 

29.84

 

 

N/A

 

 

N/A

 

 

 

5.31

 

Delinquency status(2)

 

 

0.44

 

 

 

0.05

 

 

 

0.15

 

 

 

10.29

 

 

N/A

 

 

N/A

 

 

 

1.26

 

Charge-off ratio

 

1.95

 

 

0.30

 

 

 

 

 

1.12

 

 

N/A

 

 

N/A

 

 

1.39

 

 

(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 70


 

 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Six Months Ended June 30, 2020

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

53,563

 

 

$

12,213

 

 

$

3,484

 

 

$

995

 

 

$       —

 

 

$

875

 

 

$

71,130

 

Total interest expense

 

 

6,792

 

 

 

2,523

 

 

 

1,274

 

 

 

2,837

 

 

 

80

 

 

 

4,329

 

 

 

17,835

 

Net interest income (loss)

 

 

46,771

 

 

 

9,690

 

 

 

2,210

 

 

 

(1,842

)

 

 

(80

)

 

 

(3,454

)

 

 

53,295

 

Provision for loan losses

 

 

18,893

 

 

 

2,296

 

 

 

 

 

12,293

 

 

 

 

 

 

 

33,482

 

Net interest income (loss) after loss

   provision

 

 

27,878

 

 

 

7,394

 

 

 

2,210

 

 

 

(14,135

)

 

 

(80

)

 

 

(3,454

)

 

 

19,813

 

Sponsorship and race winning

 

 

 

 

 

 

 

 

 

 

6,199

 

 

 

 

 

6,199

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

(3,948

)

 

 

 

 

(3,948

)

Other income (expense), net

 

 

(13,869

)

 

 

(4,302

)

 

 

(1,479

)

 

 

(10,865

)

 

 

(3,223

)

 

 

(7,694

)

 

 

(41,432

)

Net income (loss) before taxes

 

 

14,009

 

 

 

3,092

 

 

 

731

 

 

 

(25,000

)

 

 

(1,052

)

 

 

(11,148

)

 

 

(19,368

)

Income tax (provision) benefit

 

 

(3,582

)

 

 

(791

)

 

 

(182

)

 

 

6,230

 

 

 

262

 

 

 

2,165

 

 

 

4,102

 

Net income (loss)

 

$

10,427

 

 

$

2,301

 

 

$

549

 

 

$

(18,770

)

 

$

(790

)

 

$

(8,983

)

 

$

(15,266

)

Balance Sheet Data as of

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

759,764

 

 

$

278,000

 

 

$

68,140

 

 

$

84,369

 

 

$       —

 

 

$

3,344

 

 

$

1,193,617

 

Total assets

 

 

775,151

 

 

 

288,501

 

 

 

86,831

 

 

 

190,657

 

 

 

30,542

 

 

 

280,061

 

 

 

1,651,743

 

Total funds borrowed

 

 

617,066

 

 

 

229,237

 

 

 

70,567

 

 

 

151,614

 

 

 

8,615

 

 

 

218,695

 

 

 

1,295,794

 

Selected Financial Ratios as of

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

2.85

%

 

 

1.72

%

 

 

1.30

%

 

 

(18.56

)%

 

 

(5.17

)%

 

 

(7.14

)%

 

 

-2.23

%

Return on average equity

 

 

14.25

 

 

 

8.62

 

 

 

6.48

 

 

 

(92.14

)

 

 

81.74

 

 

 

(26.03

)

 

 

(10.82

)

Interest yield

 

 

14.98

 

 

 

9.58

 

 

 

10.97

 

 

 

2.04

 

 

N/A

 

 

N/A

 

 

 

11.31

 

Net interest margin

 

 

13.08

 

 

 

7.58

 

 

 

6.96

 

 

 

(3.78

)

 

N/A

 

 

N/A

 

 

 

8.48

 

Reserve coverage

 

 

3.43

 

 

 

1.44

 

 

 

 

 

 

29.84

 

 

N/A

 

 

N/A

 

 

 

5.31

 

Delinquency status(2)

 

 

0.44

 

 

 

0.05

 

 

 

0.15

 

 

 

10.29

 

 

N/A

 

 

N/A

 

 

 

1.26

 

Charge-off ratio

 

 

2.78

 

 

 

0.65

 

 

 

 

 

 

3.73

 

 

N/A

 

 

N/A

 

 

 

2.21

 

 

(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 70


 

  

(10) COMMITMENTS AND CONTINGENCIES

(A) EMPLOYMENT AGREEMENTS

The Company has employment agreements with certain key officers for either a one-, two- or five-year term. Annually, the contracts with a five-year term will generally renew for new five-year terms unless prior to the end of the first year of each five-year term, either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current five-year term. Typically, the contracts with a one- or two-year term will renew for new one- or two-year terms unless prior to the term either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current one or two-year terms; however, there is currently one agreement that renews after two years for additional one- year terms. In the event of a change in control, as defined, during the employment period, the agreements provide for severance compensation to the executive in an amount equal to the balance of the salary, bonus, and value of fringe benefits which the executive would be entitled to receive for the remainder of the employment period.

Employment agreements expire at various dates through 2025, with future minimum payments under these agreements of approximately $11,050,000.

(B) OTHER COMMITMENTS

The Company had no commitments to extend credit or make investments outstanding at June 30, 2021. Generally, any commitments would be on the same terms as loans to or investments in existing borrowers or investees, and generally have fixed expiration dates. Since some commitments would be expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

(C) SEC MATTERS

The staff of the SEC has conducted an investigation of the Company relating to certain issues that occurred during the period  2015 to 2017, including (i) the Company’s retention of third parties in 2015 and 2016 concerning posting information about the Company on certain financial websites and (ii) the Company’s financial reporting and disclosures concerning certain assets, including Medallion Bank, in 2016 and 2017, a period when the Company had previously reported as a business development company (“BDC”) under the Investment Company Act of 1940. Since April 2018, the Company does not report as a BDC, and has not worked with such third parties since 2016. The Company does not expect to change previously reported financial results.

 

The Company is currently engaged in active discussions and is cooperating with the SEC staff regarding a potential settlement of all aspects of the investigation, which is expected to include a civil fine in an amount that is not currently estimable, but which may be material. There can be no assurance that a settlement will be reached, or the terms and timing of any such settlement. If a settlement is not reached, litigation may ensue. In either event, the Company could incur a loss that could be material to the Company, its results of operations or financial condition. 

(D) LITIGATION

The Company and its subsidiaries become defendants to various legal proceedings arising from the normal course of business. In the opinion of management, based on the advice of legal counsel, there is no proceeding pending, or except as described above, the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse impact on the financial condition or results of operations of the Company.

(E) REGULATORY

In the ordinary course of business, the Company and its subsidiaries are subject to inquiries from certain regulators. During 2014, FSVC was examined by the SBA. The foregoing regulatory examination was resolved in January 2017 as a result of FSVC’s transfer to liquidation status and the restructure of the FSVC loan described in Note 5.

(11) RELATED PARTY TRANSACTIONS

Certain directors, officers and stockholders of the Company are also directors and officers of its main consolidated subsidiaries, MFC, MCI, FSVC, and the Bank, as well as other subsidiaries. Officer salaries are set by the Board of Directors of the Company.

Page 37 of 70


 

Jeffrey Rudnick, the son of one of the Company’s directors, was an officer of LAX Group, LLC (LAX), one of the Company’s equity investments that sold its assets on December 16, 2020. In January 2020, Mr. Rudnick received a salary from LAX of $178,000 per year, which was reduced to $133,000 in the 2020 second quarter, and certain equity from LAX consisting of 10% ownership in LAX Class B stock, vesting at 3.34% per year; 5% of any new equity raised from outside investors at a valuation of $1,500,000 or higher; and 10% of LAX’s profits as a year-end bonus. In addition, Mr. Rudnick provided consulting services to the Company directly for a monthly retainer of $4,200. Effective March 1, 2021, Mr. Rudnick serves as the Company’s Senior Vice President at a salary of $195,000 per year and is no longer providing consulting services to the Company.

The Company’s subsidiary RPAC, has an agreement with minority shareholder Richard Petty, in which it makes an annual payment of $700,000 per year for services provided to the entity. In addition, RPAC has a note payable to a trust controlled by Mr. Petty of $7,516,000 that earns interest at an annual rate of 2% through June 30, 2021, NaN of which has been paid to date.

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 825, “Financial Instruments,” requires disclosure of fair value information about certain financial instruments, whether assets, liabilities, or off-balance-sheet commitments, if practicable. The following methods and assumptions were used to estimate the fair value of each class of financial instrument. Fair value estimates that were derived from broker quotes cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

(a) Cash—Book value equals fair value.

(b) Equity investments and securities—The Company’s equity securities are recorded at cost less any impairment plus or minus observable price changes.

(c) Investment securities—The Company’s investments are recorded at the estimated fair value of such investments.

(d) Loans receivable—The Company’s loans are recorded at book value which approximated fair value.

(e) Floating rate borrowings—Due to the short-term nature of these instruments, the carrying amount approximated fair value.

(f) Commitments to extend credit—The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At June 30, 2021 and December 31, 2020, the estimated fair value of these off-balance-sheet instruments was not material.

(g) Fixed rate borrowings—The fair value of the debentures payable to the SBA is estimated based on current market interest rates for similar debt.

 

 

 

June 30, 2021

 

 

December 31, 2020

 

(Dollars in thousands)

 

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and federal funds sold(1)

 

$

91,553

 

 

$

91,553

 

 

$

112,040

 

 

$

112,040

 

Equity investments

 

 

10,090

 

 

 

10,090

 

 

 

9,746

 

 

 

9,746

 

Investment securities

 

 

48,307

 

 

 

48,307

 

 

 

46,792

 

 

 

46,792

 

Loans receivable

 

 

1,293,621

 

 

 

1,293,621

 

 

 

1,172,290

 

 

 

1,172,290

 

Accrued interest receivable(2)

 

 

9,525

 

 

 

9,525

 

 

 

10,338

 

 

 

10,338

 

Equity securities(3)

 

 

1,969

 

 

 

1,969

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds borrowed(4)

 

 

1,382,109

 

 

 

1,382,109

 

 

 

1,312,255

 

 

 

1,312,591

 

Accrued interest payable(2)

 

 

3,883

 

 

 

3,883

 

 

 

4,673

 

 

 

4,673

 

 

(1)

Categorized as level 1 within the fair value hierarchy, excluding $1,250 and $1,500 in interest bearing deposits categorized as level 2 as of June 30, 2021 and December 31, 2020. See Note 13.

(2)

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

(3)

Included within other assets on the balance sheet.

(4)

There were 0 publicly traded retail notes as of June 30, 2021. As of December 31, 2020, publicly traded retail notes traded at a premium to par of $336.

Page 38 of 70


 

(13) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.

In accordance with FASB ASC 820, the Company has categorized its assets and liabilities measured at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). Our assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.

As required by FASB ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a level 3 fair value measurement may include inputs that are observable (levels 1 and 2) and unobservable (level 3). Therefore gains and losses for such assets and liabilities categorized within the level 3 table below may include changes in fair value that are attributable to both observable inputs (levels 1 and 2) and unobservable inputs (level 3).

Assets and liabilities measured at fair value, recorded on the consolidated balance sheets, are categorized based on the inputs to the valuation techniques as follows:

Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most US Government and agency securities, and certain other sovereign government obligations).

Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

 

A)

Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);

 

B)

Quoted price for identical or similar assets or liabilities in non-active markets (for example, corporate and municipal bonds, which trade infrequently);

 

C)

Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and

 

D)

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, and certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur.

Page 39 of 70


 

Equity investments were recorded at cost less impairment plus or minus observable price changes. Commencing in 2020, the Company elected to measure equity investments at fair value on a non-recurring basis, which have been adjusted for all periods presented.

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020.

 

June 30, 2021

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

 

 

$

1,250

 

 

$

 

 

$

1,250

 

Available for sale investment securities

 

 

 

 

 

48,307

 

 

 

 

 

 

48,307

 

Equity securities

 

 

1,969

 

 

 

 

 

 

 

 

 

1,969

 

Total(1)

 

$

1,969

 

 

$

49,557

 

 

$

 

 

$

51,526

 

 

(1)

Total unrealized gain (loss) of $27 and ($578), net of tax, was included in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2021 related to these assets.

 

December 31, 2020

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

 

 

$

1,500

 

 

$

 

 

$

1,500

 

Available for sale investment securities(1)

 

 

 

 

 

46,792

 

 

 

 

 

 

46,792

 

Total

 

$

 

 

$

48,292

 

 

$

 

 

$

48,292

 

 

(1)

Total unrealized loss of $1,013, net of tax, was included in accumulated other comprehensive income (loss) for the year ended December 31, 2020 related to these assets.

 

 

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2021 and December 31, 2020.

 

June 30, 2021

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

$

 

 

$

 

 

$

10,090

 

 

$

10,090

 

Impaired loans

 

 

 

 

 

 

 

 

40,770

 

 

 

40,770

 

Loan collateral in process of foreclosure

 

 

 

 

 

 

 

 

49,039

 

 

 

49,039

 

Total

 

$

 

 

$

 

 

$

99,899

 

 

$

99,899

 

 

December 31, 2020

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

$

 

 

$

 

 

$

9,746

 

 

$

9,746

 

Impaired loans

 

 

 

 

 

 

 

 

62,174

 

 

 

62,174

 

Loan collateral in process of foreclosure

 

 

 

 

 

 

 

 

54,560

 

 

 

54,560

 

Total

 

$

 

 

$

 

 

$

126,480

 

 

$

126,480

 

 

 


Page 40 of 70


 

Significant Unobservable Inputs

 

ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as level 3 within the fair value hierarchy. The tables below are not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.

 

The valuation techniques and significant unobservable inputs used in non-recurring level 3 fair value measurements of assets and liabilities as of June 30, 2021 and December 31, 2020.

 

(Dollars in thousands)

 

Fair Value at 6/30/21

 

 

Valuation Techniques

 

Unobservable Inputs

 

Range

(Weighted Average)

Equity investments

 

$

9,271

 

 

Investee financial

   analysis

 

Financial condition and

   operating performance

   of the borrower (1)

 

N/A

 

 

 

 

 

 

 

 

Collateral support

 

N/A

 

 

 

819

 

 

Precedent market

   transaction

 

Offering price

 

$8.73 / share

Impaired loans

 

 

40,770

 

 

Market approach

 

Historical and actual loss

   experience

 

1.50% - 6.00%

 

 

 

 

 

 

 

 

 

 

60% of balance

 

 

 

 

 

 

 

 

Transfer prices (2)

 

$0.0 - 79.5

 

 

 

 

 

 

 

 

Collateral value

 

N/A

Loan collateral in process of

   foreclosure

 

 

49,039

 

 

Market approach

 

Transfer prices (2)

 

$0.0 - 79.5

 

 

 

 

 

 

 

 

Collateral value (3)

 

$1.8 - 31.5

 

(Dollars in thousands)

 

Fair Value at 12/31/20

 

 

Valuation Techniques

 

Unobservable Inputs

 

Range

(Weighted Average)

Equity investments

 

$

8,291

 

 

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

 

 

62,174

 

 

Market approach

 

Historical and actual loss

   experience

 

1.50% - 6.00%

 

 

 

 

 

 

 

 

 

 

60% of balance

 

 

 

 

 

 

 

 

Transfer prices (2)

 

$0.6 - 108.7

 

 

 

 

 

 

 

 

Collateral value

 

N/A

Loan collateral in process of

   foreclosure

 

 

53,128

 

 

Market approach

 

Transfer prices (2)

 

$0.6 - 108.7

 

 

 

1,432

 

 

 

 

Collateral value (3)

 

$0.7 - 32.3

 

 

(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.

 

(14) MEDALLION BANK PREFERRED STOCK (Non-controlling interest)

On December 17, 2019, the Bank closed an initial public offering of 1,840,000 shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, with a $46,000,000 aggregate liquidation amount, yielding net proceeds of $42,485,000, which were recorded in the Bank’s shareholders’ equity. Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.

Page 41 of 70


 

On July 21, 2011, the Bank issued, and the US Treasury purchased 26,303 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series E, or Series E, for an aggregate purchase price of $26,303,000 under the Small Business Lending Fund Program, or SBLF, with a liquidation amount of $1,000 per share. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks. The Bank pays a dividend rate of 9% on the Series E.

(15) VARIABLE INTEREST ENTITIES

During the 2018 third quarter, the Company determined that Trust III was a VIE. Trust III had been consolidated as a subsidiary of MFC historically, although it should have been consolidated under the variable interest model, since MFC was its primary beneficiary until October 31, 2018. Trust III is a VIE since the key decision-making authority rests in the servicing agreement (where MFC is the servicer for Trust III) rather than in the voting rights of the equity interests and as a result the decision-making rights are considered a variable interest. This conclusion is supported by a qualitative assessment that Trust III does not have sufficient equity at risk. Since the inception of Trust III, MFC had also been party to a limited guaranty which was considered a variable interest because, pursuant to the guaranty, MFC absorbed variability as a result of the on-going performance of the loans in Trust III. As of October 31, 2018, the Company determined that MFC was no longer the primary beneficiary of Trust III and accordingly deconsolidated the VIE, leading to a net gain of $25,325,000 recorded as well as a new promissory note payable by MFC of $1,400,000 issued in settlement of the limited guaranty. See Note 5 for more details. The Company’s interest in Trust III is accounted for as an equity investment and has a value of $0 as of June 30, 2021 and December 31, 2020. In addition, the Company remains the servicer of the assets of Trust III for a fee.  

In December 2008, Trust III entered into the DZ loan agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC, or the DZ loan. The loan, which has an outstanding balance of $85,451,000, currently terminates on August 20, 2021. Borrowings under the DZ loan are collateralized by Trust III’s assets.

(16) SUBSEQUENT EVENTS

 

 The Company has evaluated the effects of events that have occurred subsequent to June 30, 2021, through the date of financial statement issuance. As of such date, there were no subsequent events that required disclosure.

 

 

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

OBJECTIVE

The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes thereto for the three and six months ended June 30, 2021 and the year ended December 31, 2020. This section is intended to provide management’s perspective of our financial condition and results of operations. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors in the Company’s Annual Report on Form 10-K.

GENERAL

We are a finance company whose strategic focus and growth in recent years has been through Medallion Bank (a wholly-owned subsidiary), which originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, home improvements, and provides loan origination and other services to fintech partners. Historically we have had a leading position in originating, acquiring, and servicing loans that finance taxi medallions and various types of commercial businesses.

Since Medallion Bank, or the Bank, acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17%. We have transitioned away from medallion lending and have placed our strategic focus on our growing consumer finance portfolio. As a result of our change in strategy, as of June 30, 2021, our consumer loans represented 94% of our loan portfolio, with commercial loans representing 5% and medallion loans representing 1%. Total assets under management, which includes assets serviced for third-party investors, were $1.8 billion as of June 30, 2021 and December 31, 2020 and $1.6 billion as of June 30, 2020, and have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996.

Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as bank certificates of deposit, debentures issued to and guaranteed by the SBA, privately placed notes, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities.

We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Our investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.

In 2019, the Bank started building-out a strategic partnership program to provide lending and other services to financial technology, or fintech, companies. The Bank entered into an initial partnership in 2020 and began issuing its first loans and entered into another strategic partnership in 2021, and continues to explore opportunities with additional fintech companies.

In recent years, we have focused on growing our consumer lending segments and maintaining the profitability of our commercial lending segment. Since the beginning of 2020, we have taken various steps to pursue this strategy, including:

 

carrying-out cost-cutting measures, such as reducing our employee headcount by 21% at our parent company Medallion Financial Corp. and closing satellite offices in Long Island City, Chicago, and Boston;

 

exiting non-core investments, such as selling the assets of LAX Group, LLC on December 16, 2020, and selling 1,666,667 shares of our investment in Upgrade, Inc. in the 2021 second quarter, resulting in net cash proceeds of $3,816,000, and a gain of $3,179,000, as well as exiting other non-core investments when practicable to maximize our proceeds, like our remaining art investments at Medallion Fine Art, Inc., which have been written down to a net realizable value of $0 in the 2021 second quarter; and

 

growing the Bank by partnering with two fintech companies in our strategic partnership program.

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Our wholly-owned subsidiary, Medallion Bank, or the Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions that originates consumer loans, raises deposits, and conducts other banking activities. The Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we have referred a portion of our medallion and commercial loans to the Bank, which originated these loans, and have been serviced by Medallion Servicing Corp., or MSC. However, at this time the Bank is not originating any new medallion loans and is working with MSC to service its existing portfolio. MSC earns referral and servicing fees for these activities.

COVID-19

The ongoing coronavirus, or COVID-19, pandemic, its broad impact and preventive measures taken to contain or mitigate the outbreak have had, and may to continue to have, significant negative effects on the US and global economy, employment levels, employee productivity, and financial market conditions. This has had, and may continue to have increasingly negative effects on the ability of our borrowers to repay outstanding loans, the value of collateral securing loans, the demand for loans and other financial services products and consumer discretionary spending. As a result of these or other consequences, the outbreak has adversely and materially affected our business, results of operations and financial condition. Although we continue to see signs of recovery, it remains uncertain, and the effects of the outbreak on us could be exacerbated given that our business model is largely consumer and small business directed, which are more severely affected by COVID-19 and the preventative measures taken to contain or mitigate the outbreak, including its significant negative effects on consumer discretionary spending. The full extent to which the outbreak will continue to impact our operations will depend on future developments, including the impact of the Delta variant, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the continued outbreak, the actions taken to contain or mitigate the outbreak and how long, and to what extent the economic recovery from its effects will take.

We have taken steps to operate through this crisis, including having our workforce work remotely on a part-time basis in New York, though our employees outside of New York largely continue to work remotely. Despite elevated risks associated with a remote workforce, we implemented additional mitigating controls to help reduce such risks. In addition, we implemented a number of cost-cutting measures, such as reducing employee headcount by 21% at our parent company, Medallion Financial Corp., and closing satellite offices in Long Island City, Chicago and Boston.

In March 2020, we adjusted the payment policies and procedures with our consumer and medallion businesses, and allowed borrowers to defer payments up to 180 days. As of June 30, 2021, minimal consumer loans remained on deferral and no medallion loans remained on deferral. For our consumer loan portfolios, although we believe that our deferral programs have been effective to date in mitigating the effect of COVID-19, the ultimate effects of COVID-19 on these portfolios remains to be seen. For our medallion portfolio, we determined that anticipated payment activity on our medallion portfolio was impossible to quantify upon exit of the deferral moratorium, and therefore all medallion loans were deemed impaired, placed on nonaccrual status, and written down to each market’s net collateral value at December 31, 2020, with additional write-offs taken during 2021. We will continue to monitor our medallion portfolio and related assets, which may result in additional write-downs, charge-offs or impairments, the impact of which could be material to our results of operations and financial condition.

Substantially all our medallion loans and related assets are concentrated in New York City. As a result of the COVID-19 pandemic, economic activity and taxi ridership decreased dramatically in New York City and despite the reopening of New York City, there has not been a substantial increase in ridership and gross meter fares. The extent to which the COVID-19 pandemic will continue to adversely affect taxi medallion owners and, by extension, our medallion loans and related assets, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, actions taken by governmental authorities, and the direct and indirect impact of the pandemic on taxi medallion owners and the behaviors of people who have historically taken taxis.

In regards to our commercial business, many of our mezzanine portfolio companies were able to access the Paycheck Protection Program, providing needed liquidity during a period of depressed market demands. MCI drew on its remaining unfunded commitments and received a commitment from the SBA for $25,000,000 in debenture financing with a ten-year term, upon a capital infusion from Medallion Financial Corp. For the commercial portfolio, performance is slowly recovering although lingering impacts of COVID-19 continue to weigh on performance.

RPAC received $747,000 under the Paycheck Protection Program in the 2020 second quarter, all of which has been forgiven and accordingly recorded as Other income in the 2021 second quarter.

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Average Balances and Rates

The following table shows the Company’s consolidated average balance sheet, interest income and expense, and the average interest earning/bearing assets and liabilities, and which reflects the average yield on assets and average costs on liabilities for the three and six months ended June 30, 2021 and 2020.

 

 

Three Months Ended June 30,

 

 

 

2021

 

 

2020

 

(Dollars in thousands)

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Cost

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Cost

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning cash and cash equivalents

 

$

2,993

 

 

$

14

 

 

 

1.88

%

 

$

98,627

 

 

$

11

 

 

 

0.04

%

Federal funds sold

 

 

48,557

 

 

 

4

 

 

 

0.03

 

 

 

 

 

 

 

 

 

-

 

Investment securities

 

 

44,119

 

 

 

225

 

 

 

2.05

 

 

 

47,072

 

 

 

251

 

 

 

2.14

 

Loans