M E D A L L I O N F I N A N C I A L C O R P.
2 0 2 0 A N N U A L R E P O R T T O S H A R E H O L D E R S
N A V I G A T I N G T H E F U T U R E
RECREATIONAL VEHICLE LENDINGMARINE LENDINGHOME IMPROVEMENT LENDINGMEZZANINE LENDING M E D A L L I O N F I N A N C I A L C O R P.
IS A PU B LI C LY T R A D E D FIN A N C E C O M PA N Y ( N A S DAQ: M FIN ) W IT H L E A D IN G P O SITI O N S
IN VA RI O US IN D U S T RIE S , IN C LU D IN G C O N S U M E R A N D C O M M E R C I A L L E N D IN G .
ALVIN MURSTEIN
Chairman and
Chief Executive Officer
ANDREW M. MURSTEIN
President and
Chief Operating Officer
D E A R S H A R E H O L D E R S
2020 TO BUILD A SOLID FOUNDATION FOR OUR FUTURE.
MEDALLION FINANCIAL TOOK THE APPROPRIATE STEPS IN
It was an eventful year for the Company, and for the world. When we began originating loans in 2004 at
Medallion Bank, we did so by structuring our lending platforms with resilience in mind. As a result, we were
able to navigate the COVID-19 pandemic by growing our recreation and home improvement lending segments
as well as capitalizing on opportunities to gain market share. Consumer loan delinquencies and our charge-
off ratio remained low throughout 2020 while we focused on tightening our underwriting credit criteria given
the economic uncertainty we were experiencing. Our recreation and home improvement net loan portfolios
grew 10% and 34% from December 31, 2019. In addition to the consumer growth we experienced, Medallion
Bank began originating loans with its first fintech partner in the second quarter of 2020 and announced we
had entered into a definitive agreement with the second partner in the first quarter of 2021. We look forward
to building on this momentum.
During the 2020 third quarter we deemed the medallion portfolio as impaired as a result of the impact of
COVID-19 on our borrowers resulting in all loans being placed on nonaccrual status and adjusted down to
collateral value. Our strategy for many years has been focused on transitioning away from the medallion
lending segment. With that predominately behind us, we will now prioritize our efforts on recovering and
collecting as much as we can, while closely monitoring medallion values, collections, and legislation. At the
end of 2020, total medallion exposure comprised 4% of our total assets compared to 10% at the end of 2019.
On the commercial side, both liquidity and deal flow remain strong as Medallion Capital was approved for
an additional $25 million of SBA leverage in the 2020 second quarter, which provides for a ten year term
and interest of less than 2%, based on current rates. The team at Medallion Capital continues to manage
a stable portfolio as only one loan was put on non-accrual in 2020 which has been fully reserved.
1
As we continue to focus on the profitability of our consumer and commercial lending segments, we believe
the strategic decisions made will compliment these two segments in our future reporting here at Medallion
Financial. On June 22, 2020, the Company announced the election of a new independent director resulting
in a more diversified board. We reduced the holding company’s headcount by 21% this past year while also
closing our satellite offices in Long Island City, Boston and Chicago to become more efficient. In the fourth
quarter of this year we sold the assets of a legacy non-core sports-related equity investment.
When looking ahead, Medallion Financial will continue to highlight the progression we are experiencing.
2020 net income from our consumer and commercial segments was $41.6 million compared to $31.9 million
in 2019, a 30% increase, while net medallion loans dropped 88% from $105.0 million to $12.7 million at
year end. When looking at the Bank as a standalone, they recorded $48 million in 2020 net income from
their recreation and home improvement lending segments, the highest annual net income they have recorded
since inception. They remain well capitalized to grow with over $215 million in capital at the end of the year
and a Tier 1 leverage ratio of 16.93%.
When reflecting over the last several years on the initiatives we implemented when transitioning away from
our legacy medallion businesses and the progress we have made, we remain pleased with what we have
been able to achieve given the hardships the medallion industry has endured. We believe the future is bright
for our Company, especially with our continued growth and the profitability of our consumer and commercial
lending segments and we look forward to providing updates on our progress.
Lastly, we are proud of the dedication that all our employees have shown during these unprecedented times
and their ability to adapt to the challenges we faced this past year. Achieving our results and building a
foundation for our future were made possible by the hard work all our employees have put forth this past year.
We will continue to do our best to produce long-term value for our shareholders. We want to thank all of
them, past, present, and future, for their support, as we successfully navigate our future together.
Sincerely yours,
ALVIN MURSTEIN
Chairman and
Chief Executive Officer
2
ANDREW M. MURSTEIN
President and
Chief Operating Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2020
OR
For the transition period from to
Commission file number 001-37747
MEDALLION FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE
(State of
Incorporation)
04-3291176
(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
Common Stock, par value $0.01 per share
9.000% Senior Notes due 2021
Trading symbols
MFIN
MFINL
Name of each exchange on which registered
NASDAQ Global Select Market
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒
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
Non-accelerated filer
Emerging growth company
☐
☐
☐
Accelerated filer
Smaller reporting company
☒
☒
If an emerging growth company, indicate by checkmark 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
The aggregate market value of the voting common equity held by non-affiliates of the registrant, computed by reference to the last reported price at which the stock was
sold on June 30, 2020, was $54,470,199.
The number of outstanding shares of registrant’s common stock, par value $0.01, as of March 12, 2021 was 25,039,969.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for its 2021 Annual Meeting of Shareholders, which Definitive Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after the registrant’s fiscal year-end of December 31, 2020, are incorporated by reference into Part III of this Form
10-K.
TABLE OF CONTENTS
MEDALLION FINANCIAL CORP.
2020 FORM 10-K ANNUAL REPORT
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
ITEM 16.
SIGNATURES
OUR BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
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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, or the Exchange Act, 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-K 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-K 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.
2
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-K 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-K. The inclusion of the forward-looking statements contained in this Form 10-K should not
be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-K will be achieved.
In light of the foregoing, readers of this Form 10-K 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 below in this Form 10-K and others that are detailed in the other reports that the Company files
from time to time with the Securities and Exchange Commission.
PART I
ITEM 1.
OUR BUSINESS
We, Medallion Financial Corp. or the Company, are a finance company, organized as a Delaware corporation that includes Medallion Bank, our primary
operating subsidiary. In recent years, our strategic growth has been through Medallion Bank, which originates consumer loans for the purchase of recreational
vehicles, boats, and trailers and to finance home improvements. We historically have had a leading position in originating, acquiring, and servicing loans that
finance taxi medallions and various types of commercial businesses.
Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a
compound annual growth rate of 16% (19% if there had been no loan sales during 2016, 2017, and 2018). In January 2017, we announced our plans to transform
our overall strategy. We have transitioned away from medallion lending and have placed our strategic focus on our growing consumer finance portfolio. Total
assets under management, which includes assets serviced for third party investors, were $1.8 billion as of December 31, 2020 and $1.7 billion as of December 31,
2019, and have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996.
We conduct our business through various wholly-owned subsidiaries, including:
•
•
•
•
•
Medallion Bank, or the Bank, a Federal Deposit Insurance Corporation, or 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 Holding, 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.
In recent years, we have focused on growing our consumer lending segments and maintaining the profitability of our commercial lending segment. During
the year ended December 31, 2020, we have taken various steps to pursue this strategy and improve our corporate governance, 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, New York, Chicago, Illinois, and Boston, Massachusetts;
exiting non-core investments, such as selling the assets of LAX Group, LLC on December 16, 2020, and expecting to sell, when practicable to
maximize our proceeds, other non-core investments like our remaining art investments of less than $1,000,000 in Medallion Fine Art, Inc.;
3
•
•
strengthening our initiative to grow the Bank by partnering with two fintech companies in our strategic partnership program; and
electing Cynthia A. Hallenbeck as our independent director, resulting in a more independent and diverse board of directors.
Effective April 2, 2018, following authorization by our shareholders, we withdrew our previous election to be regulated as a business development
company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. Prior to such time, we were a closed-end, non-
diversified management investment company that had elected to be treated as a BDC under the 1940 Act.
As a result of this change in status, commencing with the three months ended June 30, 2018:
•
•
we consolidated the results of the Bank and our other subsidiaries in our financial statements, which, as an investment company, we were previously
precluded from doing; and
with the consolidation of the Bank, given its significance to our overall financial results, we report as a bank holding company for accounting
purposes under Article 9 and Guide 3 of Regulation S-X, but we are not a bank holding company for regulatory purposes.
In accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC Topic 946 – Financial Services –
Investment Company, we made this change to our financial reporting prospectively, and have not restated or revised periods prior to our change in status to a non-
investment company effective April 2, 2018. Accordingly, in this report we refer to both accounting in accordance with US generally accepted accounting
principles, or GAAP, applicable to bank holding companies, or Bank Holding Company Accounting, which applies commencing April 2, 2018, and to that
applicable to investment companies under the 1940 Act, or Investment Company Accounting, which applies to prior periods.
Our Market
We provide loans to individuals and small to mid-size businesses, through our subsidiaries, in four segments:
•
•
•
•
loans that finance consumer purchases of recreational vehicles, boats, and trailers;
loans that finance consumer home improvements;
loans that finance commercial businesses; and
loans that finance taxi medallions.
The following chart shows the details of our loans receivable as of December 31, 2020.
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Strategic partnership
Total
Consumer Loans
Loans
792,686 $
334,033
65,327
37,768
24
1,229,838 $
$
$
Allowance for
Loan Loss
Net Loans
Receivable
27,348 $
5,157
—
25,043
—
57,548 $
765,338
328,876
65,327
12,725
24
1,172,290
Consumer loans are originated by the Bank, and consist of loans for the purchase of recreational vehicles, boats, and trailers, or recreation lending; and to
finance home improvements such as replacement windows and roofs, or home improvement lending. Combined consumer loans outstanding were $1,094,214,000
at December 31, 2020 and comprised 93% of our net loans receivable, compared to $939,973,000, comprising 84% of our net loans receivable, as of December 31,
2019. We believe that the consumer loan portfolio is of acceptable credit quality given the high interest rates earned on the loans, which compensate for the higher
degree of credit risk in the loan portfolio.
Recreation Lending. Recreation lending is a high-growth business focused on originating prime and non-prime recreation loans. The segment is a
significant source of income, accounting for 76% of our interest income for the twelve months ended December 31, 2020. All of our recreation loans are serviced
by a third-party loan servicer, and we have used the same loan servicer since the business’s inception.
4
Through the Bank, we maintain non-exclusive relationships with approximately 3,300 dealers and financial service providers, or FSPs, not all of which are
active at any one time. FSPs are entities that provide finance and insurance, or F&I, services to small dealers that do not have the desire or ability to provide F&I
services themselves. The ability of FSPs to aggregate the financing and relationship management for many small dealers makes them valuable to the Bank. We
receive approximately half of our loan volume from dealers and the other half from FSPs. Approximately 47% of recreation lending’s new loan originations for the
twelve months ended December 31, 2020 were from our top ten dealer and FSP relationships. The percentage of new loan originations by the top ten dealer and
FSP relationships is a measure of concentration within the segment's loan originations, which management uses to determine whether to undertake diversification
efforts, and which provides investors with information about origination concentration.
The recreation lending portfolio consists of thousands of geographically distributed loans with an average loan size of approximately $14,700 as of
December 31, 2020. The loans are fixed rate loans with an average term at origination of approximately 11 years. The weighted average remaining term of our
loans outstanding at December 31, 2020 is 8.9 years, and the average payoff time is 3.3 years. The size, geographic dispersion, source and collateral variety of the
loans reduces risk to the Company. As of December 31, 2020, recreation loans were primarily secured by recreational vehicle, or RV, loans, which make up 60%
of the portfolio, and boat loans, which make up 19% of the portfolio. Recreation loans are made in all fifty states, with the highest concentrations in Texas,
California, and Florida, at 17%, 10%, and 9% of loans outstanding at December 31, 2020 and with no other states over 9%.
Home Improvement Lending. Through the Bank, we work directly with contractors and FSPs to offer flexible customer financing for window, siding, and
roof replacement; swimming pool and solar system installation; and other home improvement projects. Our core product is a standard installment loan, which
features affordable monthly payments and competitive interest rates for prime credit customers at no cost to the contractor. We also offer a variety of promotional
loan options to help contractors close a challenging sale. Promotional loan options include same-as-cash, no interest, and deferred payment features, which allow
borrowers to reduce the total cost of financing, or start repayments when it is most convenient.
Home improvement lending operates in a manner similar to recreation lending, with a few key differences. Through the Bank, we maintain a smaller
number of non-exclusive relationships, currently with approximately 800 contractors and FSPs. Management monitors the number of contractors and FSPs and
their relative contributions as a means of assessing market share and segment growth. Most of our home improvement-financed sales take place in the borrower’s
home instead of a store, with the contractor presenting the borrower with a bid that includes a financing option.
A large proportion of our home improvement-financed sales are facilitated by contractor salespeople with limited financing backgrounds rather than by
contractor employees who provide F&I services. The result is contractor demand for financing services that facilitate an in-home transaction (e.g., information
technology and extended operating hours), and additional support for the salesperson throughout the financing process. Approximately 50% of home improvement
lending’s new loan originations for the twelve months ended December 31, 2020 were from our top ten contractors and FSP relationships. The percentage of new
loan originations by the top ten contractor and FSP relationships is a measure of concentration within the segment's loan originations, which management uses to
determine whether to undertake diversification efforts, and which provides investors with information about origination concentration.
We offer home improvement loans with only fixed rates, with an average term at origination of approximately 14 years. The weighted average remaining
term of our loans outstanding is 11.5 years as of December 31, 2020, and the average payoff term is 2.9 years. The average size of the loans in our home
improvement portfolio is approximately $16,000, and geographic dispersion and source and collateral variety of home improvement loans reduces risk to the
Company. As of December 31, 2020, home improvement loans were concentrated in swimming pools, roofs, windows, and solar panels at 27%, 24%, 13%, and
8%. Home improvement loans are made to borrowers residing in all fifty states, with the highest concentrations in Florida, Texas, and Ohio at 11%, 11%, and 9%
of loans outstanding at December 31, 2020 and with no other states over 9%.
Commercial Loans
Mainly through our subsidiary Medallion Capital, we originate both senior and subordinated loans nationwide to businesses to finance either the purchase
of the equipment and related assets necessary to open a new business or the purchase or improvement of an existing business. From the inception of the
commercial loan business in 1987 through December 31, 2020, we have originated more than $996,725,000 of commercial loans. Commercial loans of
$65,327,000 comprised 6% of our net loans receivable as of December 31, 2020, compared to $69,767,000, or 6% of our net loans receivable, as of December 31,
2019.
5
We have worked to increase our commercial loan activity in recent years, primarily because of the attractive higher yielding nature of most of this business.
We focus our marketing efforts on the manufacturing, professional, scientific, and technical services, more than 53% of which are located in the Midwest region,
with the rest scattered across the country. These commercial loans are primarily secured by a second position on all assets of the businesses and generally range in
amount from $2,000,000 to $5,000,000 at origination. As a component of most of the transactions, a portion of the investment is an equity or partnership stake, and
occasionally, we also receive warrants to purchase an equity interest in the borrowers or some other form of success fee or profit participation. We plan to continue
expanding our commercial loan activities by developing a more diverse borrower base, with a wider geographic area of coverage, and by expanding the targeted
industries.
Commercial loans are generally secured by equipment, accounts receivable, real estate, or other assets, and have interest rates averaging 981 basis points
over the prevailing prime rate at the end of 2020, up from 855 basis points over the prime rate at the end of 2019.
Medallion Loans
Medallion loans of $12,725,000 comprised 1% of our net loans receivable as of December 31, 2020, down from $105,022,000, or 10% of our net loans
receivable, as of December 31, 2019. Including loans to unaffiliated investors and unconsolidated subsidiaries, the total amount of medallion loans under our
management was $119,856,000 as of December 31, 2020, compared to $218,603,000 as of December 31, 2019. Since 1979, we have originated approximately $3.6
billion in medallion loans in New York City, Chicago, Boston, Newark, Cambridge, and other cities within the United States. In addition, our management has a
long history of owning, managing, and financing taxi fleets, taxi medallions, and corporate car services, dating back to 1956.
Medallion loans collateralized by New York City taxi medallions and related assets comprised 89% and 88% of the medallion loan portfolio as of
December 31, 2020 and 2019.
While medallion loans become delinquent or default, our medallion loans are secured by the taxi medallion and enhanced with personal guarantees of the
owners, shareholders or equity members. When a borrower defaults on a loan, we have the ability to restructure the underlying loan or repossess the taxi medallion
collateralizing that loan and sell it in the market or through a foreclosure auction and pursue the personal guarantees, all of which we have done. We have recorded
an allowance for loan losses against the loans to mitigate potential future losses, and have placed the entire portfolio on nonaccrual. Consistent with our established
policy, once loans become 120 days past due, they are charged off down to collateral value and transferred to loan collateral in process of foreclosure, which was
$53,128,000 as of December 31, 2020 compared to $51,235,000 as of December 31, 2019.
New York City Market. A New York City taxi medallion is the only permitted license to operate a taxi and accept street hails in New York City, except as
discussed below. As reported by the TLC, taxi medallions sold for a wide variety of prices during 2020. Our analysis of transaction activity supported our
estimated value of $79,500, net of liquidation costs, as of December 31, 2020. We also assessed the cash flow analysis of owners and operators. The number of taxi
medallions is limited by law to 13,630 medallions outstanding, of which 5,142 were active as of December 31, 2020. A New York State law permits cars for hire to
pick up street hails in the boroughs outside Manhattan. Pursuant to such law, the TLC began issuing street hail livery licenses in June 2013.
A prospective taxi medallion owner must qualify under the taxi medallion ownership standards set and enforced by the TLC. These standards prohibit
individuals with criminal records from owning taxi medallions, require that the funds used to purchase taxi medallions be derived from legitimate sources, and
mandate that taxi vehicles and meters meet TLC specifications. In addition, before the TLC will approve a taxi medallion transfer, the TLC requires a letter from
the seller’s insurer stating that there are no outstanding claims for personal injuries in excess of insurance coverage. After the transfer is approved, the owner’s taxi
is subject to quarterly TLC inspections.
Most New York City taxi medallion transfers are handled through approximately 19 taxi medallion brokers licensed by the TLC. In addition to brokering
taxi medallions, these brokers also arrange for TLC documentation insurance, vehicles, meters, and financing. We have excellent relations with many of the most
active brokers, and previously had received referrals from them regularly.
Newark Market. We estimate that Newark taxi medallions sold for approximately $108,700, net of liquidation costs, as of December 31, 2020. The number
of Newark taxi medallions has been limited to 600 since 1950 by local law.
Chicago Market. We estimate that Chicago taxi medallions sold for approximately $18,500, net of liquidation costs, as of December 31, 2020. Pursuant to a
municipal ordinance, the number of outstanding taxi medallions is capped at 6,995 as of December 31, 2020.
6
Other Markets. We estimated that Boston and Cambridge taxi medallions sold for approximately $18,500 and $3,250, net of liquidation costs, as of
December 31, 2020. These other markets make up a de minimis percentage of our total medallion loans receivable.
Strategic Partnership
The Bank’s strategic partnership program began in 2019, in which it partnered with financial technology, or fintech, companies to offer loans and other
financial services to customers. During 2020, the first loans were issued and there were $24,000 strategic partnership loans as of December 31, 2020.
Our Strategy
Our core philosophy has been “In niches there are riches.” We try to identify markets that are profitable and where we can be an industry leader. The key
elements of our strategy include:
Capitalize on our relationships with brokers and dealers. We are committed to establishing, building, and maintaining our relationships with our brokers
and dealers. Our marketing efforts are focused on building relationships with dealers in the consumer markets as we work directly with dealerships, contractors and
FSPs to offer quality financing for their customers, including those with past credit challenges. We believe that our relationships with dealers and brokers provide
us with, in addition to potential investment opportunities, significant benefits, including an additional layer of due diligence and additional monitoring capabilities.
We have assembled a management team that has developed an extensive network of dealer and broker relationships in our target markets over the last 50 years. We
believe that our management team’s relationships with these dealers and brokers have provided and will continue to provide us with significant investment
opportunities. In 2020, all of our consumer loans were generated by brokers and dealers.
Focus on niche industries and our expertise in these niche fields. We specialize in providing consumer loans for the purchase of RVs, boats, and trailers,
and to finance home improvements through contractors and suppliers in the home improvement sector. We believe our focus on these niche areas provides us with
an opportunity to realize favorable returns, with less competition.
Employ disciplined underwriting policies and maintain rigorous portfolio monitoring. We have an extensive loan underwriting and monitoring process. We
conduct a thorough analysis of each potential loan and its prospects, competitive position, financial performance, and industry dynamics. We stress the importance
of credit and risk analysis in our underwriting process. We believe that our continued adherence to this disciplined process will permit us to continue to generate a
stable, diversified and increasing revenue stream of current income from our earning assets to enable us to make distributions to our stockholders.
Leverage the skills of our experienced management team. Our management team is led by our Chief Executive Officer, Mr. Alvin Murstein, and our
President, Mr. Andrew M. Murstein. Alvin Murstein has over 60 years of experience in the ownership, management, and financing of taxi medallions and other
commercial businesses, and Andrew M. Murstein is the third generation in his family to participate in the business and has over 30 years of experience in the
ownership, management, and financing of taxi medallions and other commercial businesses. The other members of our management team including the Bank have
broad investment backgrounds, with prior experience in banking and non-bank consumer lending, at specialty finance companies, middle market commercial
banks, and other financial services companies. We believe that the experience and contacts of our management team will continue to allow us to effectively
implement the key aspects of our business strategy.
Seek strategic acquisitions. In addition to increasing market share in existing lending markets and identifying new niches, we seek to acquire other
financing businesses and related portfolios, and specialty finance companies that make secured loans to small businesses and consumers which have experienced
historically low loan losses similar to our own. Since our initial public offering in May 1996, we have acquired eight specialty finance companies, five loan
portfolios, and three taxi rooftop advertising companies.
Implement a strategic partnership program. We launched an initial fintech partnership during 2020. These activities include originating loans or other
receivables marketed by our partners, and selling those loans or receivables to our partners without recourse within two to four business days as contractually
agreed. Revenues are to be derived primarily from contracted program fees paid to us by our partners, and interest income earned while the loans or receivables are
on our books, offset by transaction fees paid to our partners for processing loan applications. Our partners are non-banks offering loans and other financial services
to their customers. In the 2021 first quarter, we entered into a second strategic partnership to provide loan origination services to our partner.
Carry out cost-cutting measures where appropriate. We are seeking to reduce our expenses in certain areas to better align our structure with its profitability.
For example, in 2020 we reduced our employee headcount by 21% at the parent company Medallion Financial Corp. and closed satellite offices in Long Island
City, New York, Chicago, Illinois, and Boston, Massachusetts.
7
Exit non-core investments at a profit. We aim to exit our non-core investments when possible. In the 2020 fourth quarter, we sold the assets of LAX Group,
LLC. We plan to sell, when practicable to maximize our proceeds, other non-core investments like our remaining art investments of less than $1,000,000 in
Medallion Fine Art, Inc.
Loan/Investment Activity
The following table sets forth the components of loan/investment activity in the consolidated/managed investment portfolio for the years indicated.
(Dollars in thousands)
Net loans receivable
Loans originated (1)
Repayments of loans (1)
Consumer loans sold to third parties
Net realized losses on loans
Provision for loan losses
Net increase in unrealized appreciation (2)
Transfers to loans in process of foreclosure
Investment transfers excluded from loans in process of
foreclosure (3)
Deconsolidation of Trust III (4)
Amortization of origination costs
Paid-in-kind interest
Amortization of loan premium
Other, net
Net increase (decrease) in loans
Net loans receivable
2020
1,114,762 $
506,106
(321,831)
—
—
(69,817)
—
(47,254)
—
—
(6,022)
1,188
(3,042)
(1,800)
57,528
1,172,290 $
$
$
December 31,
2019
981,487 $
471,069
(251,653)
—
—
(47,386)
—
(31,398)
—
—
(4,952)
834
(3,289)
50
133,275
1,114,762 $
2018
1,380,054
428,510
(261,383)
(100,920)
(42,305)
(59,008)
29,864
(53,756)
(262,064)
(71,409)
(3,950)
—
—
(2,146)
(398,567)
981,487
(1)
(2)
(3)
(4)
Includes refinancings.
Excludes net unrealized depreciation of $1,915 for the three months ended March 31, 2018 related to investments other than securities and other assets.
Represents portfolio investments transferred to other asset categories and excluded from net loans receivable.
Represents the Taxi Medallion Loan Trust III, or Trust III, gross loans of $53,546 and loans in process of foreclosure that had been transferred to other
assets of $17,863 as a result of the Company no longer considered the primary beneficiary of, and thus not consolidating, Trust III.
Loan Characteristics
Consumer Loans. Consumer loans generally require equal monthly payments covering accrued interest and amortization of principal over a negotiated term,
generally around eleven to fourteen years. Interest rates offered are fixed. Borrowers may prepay consumer loans without any prepayment penalty. In general, the
Bank has established relationships with dealers, FSPs, and contractors in the industry, who are the sources for consumer loan volumes. The loans are made up of
recreation loans and home improvement loans which were 70% and 30% of total consumer loans at December 31, 2020.
Our recreation loans are secured primarily by RVs, boats and trailers with a small proportion of loans secured by other collateral such as autos, motorcycles
and boat motors. These loans, which together make up our largest and most profitable loan portfolio, have a weighted average yield of 15.62% at December 31,
2020. Our home improvement loans are secured by the personal property installed, and the security interest for a majority of these loans is perfected with a UCC
fixture filing. As of December 31, 2020, these loans had a weighted average yield of 9.14%.
Commercial Loans. We have typically originated commercial loans in principal amounts generally ranging from $2,000,000 to $5,000,000, and
occasionally have originated loans under or in excess of those amounts. These loans are generally retained and typically have maturities ranging from three to ten
years and require monthly payments ranging from full amortization over the loan term to fully deferred interest and principal at maturity, with multiple payment
options in between. Substantially all loans may be prepaid, and in the first five years, a prepayment fee may be owed to us. The term of, and interest rate charged
on, certain of our outstanding loans are subject to the regulations of the Small Business Administration, or the SBA. Under SBA regulations, the
8
maximum rate of interest permitted on loans originated by us is 19%; however, terms and interest rates are subject to market competition for all loans. Unlike
medallion loans, for which competition and market conditions preclude us from charging the maximum rate of interest permitted under SBA regulations, we are
able to charge the maximum rate on certain commercial loans.
Medallion Loans. Our medallion loan portfolio consists of mostly fixed-rate loans, collateralized by first security interests in taxi medallions and related
assets (vehicles, meters, and the like). We estimate that the weighted average loan-to-value ratio of all of the medallion loans was 327% as of December 31, 2020,
compared to 190% as of December 31, 2019. These ratios do not factor in the reserve on these loans of $25,043,000 and $25,410,000 as of December 31, 2020 and
2019 and also include loan collateral in process of foreclosure, held at the lower of amortized cost or collateral value. In addition, we have recourse against the vast
majority of the owners of the taxi medallions and related assets through personal guarantees.
Medallion loans generally require equal monthly payments covering accrued interest and amortization of principal over a five to twenty-five year schedule,
subject to a balloon payment of all outstanding principal at maturity. Historically, we have originated loans with one to five year maturities where interest rates are
adjusted and a new maturity period set.
Generally, we retained the medallion loans we originated. However, from time to time, we participated or sold shares of some loans or portfolios to
interested third-party financial institutions. In these cases, we retained the borrower relationships and serviced the sold loans.
Marketing, Origination, and Loan Approval Process
We employ 98 personnel (including 10 furloughed employees at our parent company, Medallion Financial Corp.) as of December 31, 2020, to originate,
manage, service, and collect on the consumer, commercial, and medallion loans. Each loan application is individually reviewed through analysis of a number of
factors, including loan-to-value ratios, the borrower’s credit history, public records, personal interviews, trade references, personal inspection of the premises, and
approval from the TLC, SBA, or other regulatory body, if applicable. Each medallion and commercial loan applicant is required to provide personal or corporate
tax returns, premises leases, and/or property deeds. The Company’s senior management establishes loan origination criteria. Loans that conform to such criteria
may be processed by a loan officer with the proper credit authority, and non-conforming loans (other than those by the Bank) must be approved by the Company’s
Chief Executive Officer, President, and/or the Chief Credit Officer and the Investment Oversight Committee of the Company’s board of directors. Loan criteria for
loans originated with the Bank is established by the Bank’s board of directors and senior management. The Bank’s policies identify specific approval authorities
for its recreation, home improvement, medallion, and real estate loans. Policy exceptions are reported to the Bank’s board of directors. Both medallion and
commercial loans are sourced from brokers with extensive networks of applicants, and commercial loans are also referred by contacts with banks, attorneys, and
accounting firms. Consumer loans are primarily sourced through relationships which have been established with RV and boat dealers, and home improvement
contractors throughout our market area.
Sources of Funds
We have historically funded our lending operations primarily through credit facilities with banks and, to a lesser degree, through equity or debt offerings or
private placements, and fixed-rate, senior secured notes and long-term subordinated debentures issued to the SBA. Since the inception of the Bank, substantially all
of the Bank’s funding has been provided by FDIC insured brokered certificates of deposit. The determination of funding sources is established by our management,
based upon an analysis of the respective financial and other costs and burdens associated with funding sources. Our funding strategy and interest rate risk
management strategy is to have the proper structuring of debt to minimize both rate and maturity risk, while maximizing returns with the lowest cost of funding
over an intermediate period of time.
9
The table below summarizes our sources of available funds and amounts outstanding under credit facilities, exclusive of deferred financing costs of
$5,805,000, and their respective end of period weighted average interest rates at December 31, 2020. See Note 6 to the consolidated financial statements for
additional information.
(Dollars in thousands)
Cash, cash equivalents, and federal funds sold
Brokered CDs & other funds borrowed
Average interest rate
Retail and privately placed notes
Average interest rate
Maturity
SBA debentures and borrowings
Amounts undisbursed
Amounts outstanding
Average interest rate
Maturity
Preferred securities
Average interest rate
Maturity
Bank loans
Average interest rate
Maturity
Other borrowings
Average interest rate
Maturity
Total cash
Total debt outstanding
$
Total
112,040
1,068,072
1.71%
103,225
8.25%
4/21-12/27
93,008
25,000
68,008
3.36%
3/21-9/30
33,000
2.35%
9/37
31,261
3.67%
2/21-12/23
8,689
1.91%
12/21 - 6/25
112,040
1,312,255
$
$
We fund our fixed-rate loans with variable-rate credit lines and bank debt, and with fixed-rate SBA debentures and borrowings. The mismatch between
maturities and interest-rate sensitivities of these balance sheet items results in interest rate risk. We seek to manage our exposure to increases in market rates of
interest to an acceptable level by:
•
•
Originating adjustable rate loans; and
Incurring fixed-rate debt.
Nevertheless, we accept varying degrees of interest rate risk depending on market conditions. For additional discussion of our funding sources and asset
liability management strategy, see Asset/Liability Management on page 57.
Competition
Banks, credit unions, and finance companies, some of which are SBICs, compete with us in originating consumer, commercial and medallion loans. Many
of these competitors have greater resources than we have, and certain competitors are subject to less restrictive regulations than we are. As a result, we cannot
assure you that we will be able to identify and complete the financing transactions that will permit us to compete successfully.
10
Human Capital Resources
As of December 31, 2020 we employed 187 persons, including 87 at our Medallion Bank subsidiary. We believe that relations with our employees are
good. The total number of employees includes 11 furloughed employees at our parent company, Medallion Financial Corp., and effective March 2, 2021 were
terminated as a result of expense-cutting measures due to the ongoing effects of the COVID-19 pandemic. We have a single human resources department for all of
our subsidiaries, except for RPAC, which employs its own human resources personnel.
We value diversity among all of our employees. Equal employment opportunity is a fundamental principle at the Company, where employment is based
upon personal capabilities and qualifications. We prohibit and do not tolerate any discrimination against employees, applicants, interns or any other covered
persons, and we ensure equal employment opportunity without discrimination on the basis of race, color, creed, religion, national origin, ancestry, ethnicity,
citizenship status, physical or mental disability, age, sex (including pregnancy), gender, gender identity or gender expression (including transgender status), marital
status, familial status, veteran status, genetic information or any other protected characteristic as established by applicable federal, state or local law.
We incentivize our employees through a combination of competitive salary, equity compensation and other benefits. We provide most employees with
incentive bonuses in the form of restricted stock and stock options. Employee equity ownership helps us attract, retain, motivate and reward employees, while
aligning employee compensation with our stockholders’ interests by linking realizable pay with stock performance.
Our Compensation Committee reviews management’s recommendations and advises management and the Board of Directors on broad compensation
policies such as salary ranges, annual incentive bonuses, long-term incentive plans, including equity-based compensation programs, and other benefit and
perquisite programs.
We have a 401(k) Investment Plan and other generally available benefit programs like health insurance, paid and unpaid leaves, life insurance, disability
coverage, accident insurance and critical illness insurance; we believe that the availability of these benefit programs generally enhance employee productivity and
loyalty to the Company. We believe it is important for our employees at the Bank to provide service to the communities in which they live and encourage them to
take time, including prearranged work time, to participate in activities of local civic organizations, charitable or nonprofit organizations or educational institutions.
We value employee development and training and are committed to identifying and developing the talents of our next-generation leaders. Our employee benefits
also help protect the health, well-being and financial security of our employees.
The health and safety of our employees is one of our highest priorities. As we continue to monitor the spread of COVID-19 and its ongoing effects, we have
and will continue to implement measures to help ensure the health and safety of our employees. In March 2020, as a result of the COVID-19 pandemic, our
employees were directed to work remotely on a temporary basis. To the extent necessary, employees were provided with equipment, including laptops. As the
severity of the pandemic subsided and states and cities began reopening, in late June 2020, our employees returned to work in our New York City offices on a part-
time basis in accordance with local guidelines, while our employees outside of New York City largely continue to work remotely. The Bank’s current plan is to
return most employees to office work, in alternating shifts, sometime in the second quarter of 2021, but such plans are dependent on the case counts, mortality
rates, vaccination availability, use and effectiveness and other factors in Utah and Washington State. We have implemented and continue to monitor changes in
health and safety legal and regulatory requirements to help protect the health and safety of our employees. Additionally, while there are certain risks with our
workforce working remotely, we have implemented additional mitigating controls to help reduce such risks.
11
MATERIAL US FEDERAL INCOME TAX CONSIDERATIONS
For our tax years ended December 31, 2020 and 2019, we have been taxed as a corporation and must pay corporate-level federal and state income taxes on
our taxable income. Because we were taxed as a corporation under Subchapter C of the Internal Revenue Code, or the Code, for the tax years ended December 31,
2020 and December 31, 2019, we are able to carry forward any net operating losses incurred to succeeding years. In addition, distributions will generally be
taxable to our stockholders to the extent of our current and accumulated earnings and profits for US federal tax purposes. Distributions in excess of our current and
accumulated earnings and profits would be treated first as a return of capital to the extent of a stockholder’s tax basis, and any remaining distributions would be
treated as a capital gain. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction.
REGULATION
Exemption from the 1940 Act
In order to maintain our status as a non-investment company, we operate so as to fall outside the definition of an “investment company” or within an
applicable exception. We expect to continue to fall within the exception from the definition of an “investment company” provided under Section 3(c)(6) of the
1940 Act as a company primarily engaged, directly or through majority-owned subsidiaries, in the business of, among other things, (i) banking, (ii) purchasing and
otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance
and services, and (iii) making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and
services. We monitor our continued compliance with this exception, and were compliant with as of December 31, 2020.
Regulation of Medallion Bank as an Industrial Bank
In May 2002, we formed the Bank, which received approval from the FDIC, for federal deposit insurance in October 2003. The Bank is subject to extensive
federal and state banking laws, regulations, and policies that are intended primarily for the protection of depositors, the Deposit Insurance Fund, and the banking
system as a whole; not for the protection of our other creditors and stockholders.
Under the banking charter, the Bank is authorized to make consumer and commercial loans, and may accept all FDIC-insured deposits other than demand
deposits (checking accounts). As a state-charted non-member bank with FDIC-insured deposits, the Bank is examined, supervised and regulated by the FDIC and
the Utah Department of Financial Institutions, or the Utah DFI. The statutes enforced by, and regulations and policies of, these agencies affect almost all aspects of
its business, including by prescribing permissible types of loans and investments, the amount of required capital, the permissible scope of its activities and various
other requirements. If the Bank’s regulators were to determine that we have violated banking laws and regulations, including by engaging in unsafe and unsound
practices, the Bank could be subject to enforcement and other regulatory actions, which could have an adverse effect on its business, results of operations and
financial condition.
Capital Standards
The Bank is subject to risk-based and leverage-based capital ratio requirements under the US Basel III capital rules adopted by the federal banking
regulators.
Under the risk-based capital standards, the Bank’s assets, exposures and certain off-balance sheet items are assigned to broad risk categories, each with
designated weights, and the resulting capital ratios represent capital as a percentage of total risk-weighted assets. The minimum capital ratios applicable to us are as
follows:
•
•
•
•
CET1 Risk-Based Capital Ratio, equal to the ratio of Common Equity Tier 1, or CET1, capital to risk-weighted assets. CET1 capital primarily
includes common shareholders’ equity subject to certain regulatory adjustments and deductions, including with respect to goodwill, intangible
assets, certain deferred tax assets and accumulated other comprehensive income. The minimum CET1 risk-based capital ratio requirement is 4.5%.
Tier 1 Risk-Based Capital Ratio, equal to the ratio of Tier 1 capital to risk-weighted assets. Tier 1 capital primarily consists of CET1 capital and
perpetual preferred stock. The minimum Tier 1 risk-based capital ratio requirement is 6%.
Total Risk-Based Capital Ratio, equal to the ratio of total capital, including CET1 capital, additional Tier 1 capital and Tier 2 capital, to risk-
weighted assets. The Bank’s Tier 2 capital primarily includes allowance for loan and lease losses up to 1.25% of the Bank’s risk-weighted assets.
The minimum total risk-based capital ratio requirement is 8%.
Tier 1 Leverage Ratio, equal to the ratio of Tier 1 capital to quarterly average assets (net of goodwill, certain other intangible assets and certain
other deductions). The minimum Tier 1 leverage ratio requirement is 4%.
12
The prompt corrective action framework, which generally applies to FDIC-insured depository institutions, including the Bank, also includes capital
requirements the Bank must satisfy in order to, among other things, be able to accept brokered deposits without limitations. See “Prompt Corrective Action” and
“Brokered Deposits” below.
In addition to meeting the minimum capital requirements, under the US Basel III capital rules, the Bank must also maintain the required capital
conservation buffer of 2.5% to avoid becoming subject to restrictions on capital distributions (including dividends on the Bank’s preferred stock) and certain
discretionary bonus payments to management. The capital conservation buffer is calculated as a ratio of CET1 capital to risk-weighted assets, and it effectively
increases the required minimum risk-based capital ratios.
The table below shows the capital requirements the Bank is required to maintain:
CET1 risk-based capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Minimum US Basel III Regulatory Capital Ratio Plus
Capital Conservation Buffer
7.0%
8.5%
10.5%
For purposes of calculating the denominator of the three risk-based capital ratios, the assets of covered banking organizations are given risk weights that,
under the US Basel III capital rules, range from 0% to 1,250%, depending on the nature of the asset. Most of the Bank’s loans are assigned a 100% risk weight,
with loans that are 90 days or more past due or on nonaccrual assigned a 150% risk weight. In addition, direct obligations of the US Department of the Treasury, or
the US Treasury, or obligations unconditionally guaranteed by the US government have a 0% risk weight, while general obligation claims on states or other
political subdivisions of the United States are assigned a 20% risk weight, except for municipal or state revenue bonds, which have a 50% risk weight.
The US Basel III capital rules provide for limited recognition in CET1 capital, and deduction from CET1 capital above certain thresholds, of three
categories of assets: (i) deferred tax assets arising from temporary differences that cannot be realized through net operating loss carrybacks (net of related valuation
allowances and of deferred tax liabilities), (ii) mortgage servicing assets (net of associated deferred tax liabilities) and (iii) investments in more than 10% of the
issued and outstanding common stock of unconsolidated financial institutions (net of associated deferred tax liabilities). In July 2019, the federal banking
regulators issued a final rule designed to simplify the capital treatment of those categories of assets for banking organizations, such as the Bank, that are not subject
to the advanced approaches in the US Basel III capital rules. The provisions final rule became fully effective for the Bank on April 1, 2020.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms. Among
other things, these standards revise the Basel Committee’s standardized approach for credit risk and provide a new standardized approach for operational risk
capital. The Basel Committee’s standards will generally be effective on January 1, 2023. As with all standards proposed by the Basel Committee, the December
2017 standards are not effective in any jurisdiction until rules implementing such standards have been implemented by the relevant regulators in such jurisdiction.
Following the release of these standards, the federal banking regulators stated that the standards are intended to achieve various objectives with regard to
internationally active banks and that the regulators will consider how to apply the standards in the United States.
Federal banking regulators published a final rule, effective April 1, 2019, permitting banking organizations to phase in any adverse day-one regulatory
capital effects of the adoption of ASU 2016-13 (referred to as the current expected credit loss model, or CECL), over a period of three years.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, or EGRRCPA, required federal banking regulators to adopt regulations to
implement an exemption from the US Basel III capital rules for smaller banking organizations, including the Bank, that maintain a “Community Bank Leverage
Ratio” of at least 8% to 10%. Specifically, the EGRRCPA provides that if any depository institution or depository institution holding company with less than $10
billion in total consolidated assets maintains tangible equity in excess of this leverage ratio, as implemented by the federal banking regulators, it would be deemed
to be in compliance with (i) the leverage and risk-based capital requirements promulgated by the federal banking agencies; (ii) in the case of a depository
institution, the capital ratio requirements to be considered “well-capitalized” under the federal banking agencies’ “prompt corrective action” regime; and (iii) “any
other capital or leverage requirements” to which the depository institution or holding company is subject, unless the appropriate federal banking agency determines
otherwise based on the particular institution’s risk profile.
13
The FDIC adopted a final rule, which took effect in January 2020, implementing the Community Bank Leverage Ratio. Under the rule, the Community
Bank Leverage Ratio is the same as the Tier 1 Leverage Ratio under the Basel III capital rules and a qualifying small banking organization, such as the Bank, that
has less than $10 billion in total consolidated assets and meets certain risk-based criteria can choose to apply the Community Bank Leverage Ratio framework if its
Community Bank Leverage Ratio is greater than 9%. The Coronavirus Aid, Relief, and Economic Security Act, enacted on March 27, 2020, directed by the FDIC
and other federal banking regulators to decrease temporarily the Community Bank Leverage Ratio to 8%, which the federal banking regulators implemented did by
adopting a temporary rule. The Bank has not elected and currently does not expect to elect to apply the Community Bank Leverage Ratio framework, but will
continue to assess the framework and may choose to apply it in the future.
As a condition to receipt of FDIC insurance, the Bank entered into the 2003 capital maintenance agreement with the FDIC requiring it to maintain a 15%
leverage ratio (Tier 1 capital to average assets) and an adequate allowance for loan and lease losses and restricting the amount of medallion loans that the Bank
may finance to three times the Bank’s Tier 1 capital.
Prompt Corrective Action
The Bank is subject to FDIC regulations which apply to every FDIC-insured depository institution, setting out a system of mandatory and discretionary
supervisory actions that generally become more severe as the capital levels of an individual institution decline. Pursuant to provisions of the Federal Deposit
Insurance Act, or FDIA, and related regulations with respect to prompt corrective action, the federal banking regulators must take “prompt corrective action” with
respect to FDIC-insured depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five capital categories: “well-
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An insured depository institution’s
capital category depends upon how its capital levels compare with various relevant capital measures and certain other factors that are established by regulation.
CET1 risk-based capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio
“Well-capitalized”
6.5%
8.0%
10.0%
5.0%
“Adequately capitalized”
4.5%
6.0%
8.0%
4.0%
If a bank meets the quantitative thresholds for well-capitalized status provided above and is not subject to any written agreement, order or directive from the
appropriate regulatory agency to meet and maintain a specific capital level, it will qualify as well-capitalized. Failure to be well-capitalized or to meet minimum
capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material adverse
effect on the Bank’s operations or financial condition. See “Brokered Deposits” below for additional information. Failure to be well-capitalized or to meet
minimum capital requirements could also result in restrictions on the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory
approval of applications. Pursuant to the 2003 capital maintenance agreement, the Bank has agreed that the Bank’s capital levels will at all times meet or exceed
the levels required for the Bank to be considered well-capitalized under FDIC rules.
Brokered Deposits
The Bank uses “brokered deposits” to fund a substantial portion of the Bank’s activities. Under the FDIA and related regulations, FDIC-insured institutions
such as the Bank may only accept brokered deposits without FDIC permission if they meet specified capital standards and are not subject to any written agreement,
order or directive to meet and maintain a specific capital level, and are subject to restrictions with respect to the interest they may pay on deposits unless they are
well-capitalized. In particular, the FDIA and the FDIC’s regulations prohibit an insured depository institution from accepting brokered deposits or offering interest
rates on any deposits significantly higher than the prevailing rate in the bank’s normal market area or nationally (depending upon where the deposits are solicited),
unless it is well-capitalized or is adequately capitalized and receives a waiver from the FDIC. A depository institution that is adequately capitalized and accepts
brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates.
In December 2020, the FDIC issued a final rule intended to modernize its regulations on brokered deposit and interest rate restrictions. Under the rule,
effective April 1, 2021, a bank that is “adequately capitalized” and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any
deposit in excess of (i) 75 basis points over certain national rates described in the FDIC’s regulations or (ii) 90% of the highest interest rate paid on a particular
deposit product in the bank’s local market area, if the bank provides notice to the FDIC and evidence of such local rate.
14
Pursuant to the 2003 capital maintenance agreement, the Bank has agreed that our capital levels will at all times meet or exceed the level required for the
Bank to be considered well-capitalized under FDIC rules. If the Bank was no longer able to accept or renew brokered deposits as a result of failing to meet the
requisite capital standards or as a result of being subject to a written agreement, order or directive to meet and maintain a specific capital level, there would be a
material adverse effect on the Bank’s business, financial condition, liquidity and results of operations.
Payment of Dividends
The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to
statutory and regulatory restrictions that limit the amount available for such distribution, depending upon earnings, financial condition and cash needs of the
institution, as well as general business conditions. Insured depository institutions are also prohibited from paying management fees to any controlling persons or,
with certain limited exceptions, making capital distributions, including dividends, if after such transaction the institution would be less than adequately capitalized.
Under Utah law, the Bank may only declare dividends to the Bank’s shareholders out of the Bank’s net profits, after providing for all expenses, losses,
interest and taxes accrued or due. Further, the Bank is required to transfer to a surplus fund at least 10% of the Bank’s net profits before dividends for the period
covered by the dividend until the surplus fund reaches 100% of the Bank’s capital stock. Any amount paid from the Bank’s net earnings into a fund for the
retirement of outstanding debt capital instruments or preferred stock for the period covered by the dividend will be considered an addition to the Bank’s surplus
fund if, upon the retirement of such instruments, the amount paid into the retirement fund for the period may be properly carried to the Bank’s surplus fund.
The federal banking agencies also have authority to prohibit depository institutions from engaging in business practices that are considered unsafe or
unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute.
In addition, as discussed under “Capital Standards,” if the Bank’s risk-based capital ratios do not satisfy the minimum risk-based requirements plus the
capital conservation buffer, the Bank will face graduated constraints on, among other things, capital distributions (including dividends on the Bank’s preferred
stock) based on the amount of the shortfall and the amount of the Bank’s eligible retained income.
Safety and Soundness
The FDIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards
as the agencies deem appropriate. Guidelines adopted by the federal banking regulators establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, these
guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. These
guidelines also prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are
unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. The federal banking agencies may
require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given
the specific circumstances and severity of an institution’s noncompliance with one or more standards. The FDIC may also terminate deposit insurance upon a
finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable
law, regulation, rule, order or condition imposed by the FDIC.
Among other things, in addition to the restrictions on brokered deposits discussed above, the FDIA limits the interest rates paid on deposits by
undercapitalized institutions and limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or
related interest.
Consumer Financial Protection
The Bank is subject to a number of federal and state consumer protection laws that extensively govern the Bank’s consumer lending businesses. These laws
include, but are not limited to, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Electronic Fund Transfer Act and
these laws’ respective state-law counterparts, as well as laws regarding unfair and deceptive acts and practices. These federal and state laws, among other things,
require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate
the use of credit
15
report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices and subject the Bank to substantial regulatory oversight.
Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages,
restitution and attorneys’ fees. Federal banking regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce
consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, and civil money penalties.
Failure to comply with consumer protection requirements may also result in substantial reputational harm that could adversely affect our business.
Community Reinvestment Act of 1977
The Bank is subject to certain requirements and reporting obligations under the Community Reinvestment Act, or CRA. Under the CRA, the Bank has an
obligation, consistent with safe and sound operations, to help meet the credit needs of our assessment area including low- and moderate-income individuals and
communities in that assessment area. In connection with its examination of the Bank, the FDIC is required to assess our CRA performance in the areas of lending,
investments and services. The FDIC may take compliance with the CRA into account when regulating and supervising our other activities. The CRA also requires
the agencies to take into account banks’ records of meeting community credit needs when evaluating applications for, among other things, new branches or
mergers. We have elected to be evaluated for our compliance with CRA requirements based on a strategic plan we adopted with public involvement and regulatory
approval. That strategic plan includes measurable goals for helping to meet the credit needs of our assessment area, and is available on our website. The CRA
provides that CRA examination ratings be made public. The Bank received a rating of “Outstanding” in its most recently completed CRA examination.
In December 2019, the OCC and the FDIC issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit; (ii) update
where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent,
consistent, and timely CRA-related data collection, recordkeeping, and reporting. In May 2020, the OCC issued a final rule that implemented many of the
provisions of the notice of proposed rulemaking and added certain clarifications and transitional relief. The FDIC did not join in the final rule and indicated that it
was not prepared to finalize the proposal at that time. The Bank will continue to evaluate any changes to the CRA regulations and their impact to the Bank’s
financial condition, results of operations or liquidity.
Transactions with Affiliates and Insiders
The Bank is subject to certain federal laws that restrict and control our ability to extend credit and provide to or receive services from its affiliates under
Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. An affiliate of a bank is any company or entity that controls, is
controlled by or is under common control with the bank. These restrictions include quantitative and qualitative limits on the amounts and types of transactions that
may take place, including the transfer of funds by the Bank to certain of its affiliates in the form of loans, extensions of credit, investments, or purchases of assets.
These restrictions also require that credit transactions with affiliates be collateralized and that its transactions with affiliates be on terms no less favorable to the
Bank than comparable transactions with unrelated third parties. Generally, the Bank’s covered transactions with any affiliate are limited to 10% of our capital stock
and surplus, and covered transactions with all affiliates are limited to 20% of our capital stock and surplus.
The Bank is also subject to limits under federal law on its ability to extend credit to its directors, executive officers and principal shareholders (persons that
beneficially own or control more than 10% of any class of our voting stock), as well as to entities owned or controlled by such persons. Among other things,
extensions of credit to such insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with non-insiders. Also, the terms of such extensions of credit may not involve more than the normal
risk of non-repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons individually
and in the aggregate. Certain extensions of credit also require the approval of the Bank’s board of directors.
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Financial Privacy and Cybersecurity
Federal and state law contains extensive consumer privacy protection provisions. The Gramm-Leach-Bliley Act requires financial institutions to
periodically disclose their privacy policies and practices relating to sharing such information and enables retail customers to opt out of institutions’ ability to share
information with unaffiliated third parties under certain circumstances. Other federal and state laws and regulations impact our ability to share certain information
with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. The Gramm-Leach-Bliley Act also
requires financial institutions to implement a comprehensive information security program that includes administrative, technical and physical safeguards to ensure
the security and confidentiality of customer records and information. Federal law also makes it a criminal offense, except in limited circumstances, to obtain or
attempt to obtain customer information of a financial nature by fraudulent or deceptive means.
State regulators have been increasingly active in implementing privacy and cybersecurity standards and regulations. In recent years, several states adopted
regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs,
including data encryption requirements. Many states have also implemented or modified their data breach notification and data privacy requirements. For example,
the California Consumer Privacy Act, which became effective in January 2020, applies to for-profit businesses that conduct business in California and meet certain
revenue or data collection thresholds and imposes privacy compliance obligations with regard to the personal information of California residents.
In December 2020, federal banking regulators issued a proposed rule that would implement notification requirements for banking organizations in
connection with significant computer-security incidents. Under the proposed rule, a banking organization would be required to notify its primary federal regulator
within 36 hours after the discovery of an incident that could materially disrupt or impair the banking organization’s ability to carry out banking operations,
activities or processes or deliver services to a material portion of its customer base, affect the viability of key business lines of the banking organization, or impact
the financial stability of the United States.
Anti-Money Laundering and the USA PATRIOT Act
The Bank is subject to the anti-money laundering, or AML, provisions of the Bank Secrecy Act, or the BSA, as amended by the USA PATRIOT Act, or the
PATRIOT Act, and implementing regulations issued by the FDIC and the US Treasury. The PATRIOT Act, which includes the International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001, is intended to facilitate the detection and prosecution of terrorism and international money laundering. The
PATRIOT Act establishes standards for verifying customer identification incidental to the opening of new accounts. Other provisions of the PATRIOT Act provide
for special information sharing procedures governing communications with the government and other financial institutions with respect to suspected terrorists and
money laundering activity, and enhancements to suspicious activity reporting, including electronic filing of suspicious activity reports over a secure filing network.
The BSA requires all financial institutions, including banks, to, among other things, establish a risk-based system of internal controls reasonably designed to
prevent money laundering and the financing of terrorism. The BSA includes a variety of record-keeping and reporting requirements (such as cash and suspicious
activity reporting), as well as due diligence/know-your-customer documentation requirements. In January 2021, the Anti-Money Laundering Act of 2020, or
AMLA, which amends the BSA, was enacted.
The AMLA is intended to comprehensively reform and modernize US anti-money laundering laws. Many of the statutory provisions in the AMLA will
require additional rulemakings, reports and other measures, and the impact of the AMLA, including on our compliance costs and compliance risk relating to the
BSA, will depend on, among other things, rulemaking and implementation guidance. The US Treasury’s Office of the Financial Crimes Enforcement Network, or
FinCEN, issued a final rule, applicable as of May 2018, to clarify and enhance customer due diligence requirements for financial institutions. The rule (among
other things) imposes certain obligations on covered financial institutions with respect to their “legal entity customers,” including corporations, limited liability
companies and other similar entities. For each such customer that opens an account (including an existing customer opening a new account), the covered financial
institution must identify and verify the customer’s “beneficial owners,” who are specifically defined in the rule. Bank regulators routinely examine institutions for
compliance with customer due diligence obligations.
Regulation by the SBA
Medallion Funding, Medallion Capital, and Freshstart are each licensed by the SBA to operate as SBICs, under the Small Business Investment Act of 1958,
as amended, or the SBIA. The SBIA authorizes the licensing of privately-held investment vehicles as SBICs in order to provide long term financing to small
business concerns. Under the SBIA and the regulations promulgated by the SBA thereunder, a “small business concern” is a business that is independently owned
and operated, which is not dominant in its field of operation, and which (i) has a tangible net worth, together with any affiliates, of $19.5 million or less and
average annual net
17
income after US federal income taxes for the preceding two fiscal years of $6.5 million or less (average annual net income is computed without the benefit of any
carryover loss), or (ii) satisfies alternative criteria under the Federal government’s North American Industry Classification System, or the NAICS, that assigns
codes to the industry in which a small business is engaged and provides a small business size standard based either on the number of persons employed by the
business or its gross revenues. In addition, at the end of each fiscal year, at least 25% of the total amount of investments must be made in “smaller enterprises” that
have a net worth of $6.0 million or less, and average net income after federal income taxes for the preceding two years of $2.0 million or less. A business that
meets the NAICS size standards also qualifies as a “smaller enterprise” for purposes of meeting SBA’s size standard regulations.
Investments by SBICs must generally be in active, primarily domestic businesses. SBIC regulations preclude investment in the following types of
businesses: (1) business whose primary business activity is as a relender or reinvestor (that is, directly or indirectly, providing funds to others, purchasing debt
obligations, factoring, or long term leasing of equipment with no provision for maintenance or repair); (2) many kinds of real estate projects; (3) single purpose
projects that are not continuing businesses; (4) companies located outside the US intending to use the proceeds of the investment outside of the US or companies
that are located in the US that have more than 49% of their employees or tangible assets located outside of the US; (5) businesses that are passive and do not carry
on an active trade or business; (6) businesses that use 50% or more of the funds to buy goods or services from an associated supplier; and (7) certain “sin
businesses” such as gambling and the like.
Under current SBA regulations, the maximum rate of interest that Medallion Funding, Medallion Capital and Freshstart may charge may not exceed the
higher of (i) 19% or (ii) the sum of (a) the higher of (i) that company’s weighted average cost of qualified borrowings, as determined under SBA regulations, or
(ii) the current SBA debenture rate, plus (b) 11%, rounded to the next lower eighth of one percent. As of December 31, 2020, the maximum rate of interest
permitted on loans originated by Medallion Funding, Medallion Capital, and Freshstart was 19%. As of December 31, 2020, our outstanding medallion loans had a
weighted average rate of interest of 3.00%, and our outstanding commercial loans had a weighted average rate of interest of 13.06%. Current SBA regulations also
require that each loan originated by an SBIC has a term between one and 20 years.
In addition, SBICs are subject to periodic examination by the SBA, for which the SBA charges examination fees. SBICs must maintain certain records and
make them available for SBA examination. SBICs also are required to prepare valuations of their portfolio investments in accordance with prescribed valuation
guidelines, maintain certain minimum levels of capital, file annual reports containing financial, management and other information and file notices of certain
material changes in their ownership and operations. We are typically examined by the SBA for compliance with applicable SBA regulations.
SBICs are precluded from making investments in a small business if it would give rise to a conflict of interest. Generally, a conflict of interest may arise if
an associate of the SBIC has or makes an investment in the small business that the SBIC is financing or serves as one of its officers or would otherwise benefit
from the financing. A conflict of interest would also occur if an SBIC were to lend money to any of its officers, directors, and employees, or invest in any affiliates
thereof. Joint investing with an associate (such as another fund controlled by affiliates of the general partner of the fund) may be made on identical terms or on
terms that are fair to the SBIC. The SBA also prohibits, without prior SBA approval, a “change of control” or transfers which would result in any person (or group
of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC. A “change of control” is any event which would result in the transfer of
the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements, or otherwise.
Under SBA regulations, without prior SBA approval, loans and other investments by licensees with outstanding SBA leverage to any single small business
concern may not exceed 30% of an SBIC’s “regulatory capital.”
SBICs may invest idle funds that are not being used to make loans or other long-term investments in certain short-term investments permitted under SBA
regulations. These permitted investments include direct obligations of, or obligations guaranteed as to principal and interest by, the government of the US with a
term of 15 months or less and deposits maturing in one year or less issued by an institution insured by the FDIC. These permitted investments must be maintained
in (i) direct obligations of, or obligations guaranteed as to principal and interest by, the US, which mature within 15 months from the date of the investment;
(ii) repurchase agreements with federally insured institutions with a maturity of seven days or less if the securities underlying the repurchase agreements are direct
obligations of, or obligations guaranteed as to principal and interest by the US, and such securities must be maintained in a custodial account in a federally insured
institution; (iii) mutual funds, securities, or other instruments that exclusively consist of, or represent pooled assets of, investments described in (i) or (ii) above;
(iv) certificates of deposit with a maturity of one year or less, issued by a federally insured institution; (v) a deposit account in a federally insured institution,
subject to withdrawal restriction of one year or less; (vi) a checking account in a federally insured institution; or (vii) a reasonable petty cash fund.
SBICs may purchase voting securities of small business concerns in accordance with SBA regulations. Although prior regulations prohibited an SBIC from
controlling a small business concern except in limited circumstances, SBA regulations allow an
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SBIC to exercise control over a small business for a period of seven years from the date on which the SBIC initially acquires its control position. This control
period may be extended for an additional period of time with the SBA’s prior written approval.
If an SBIC defaults in its payment obligations to SBA under its outstanding debentures, fails to comply with any terms of its securities, or violates any law
or certain regulations applicable to it, the SBA has the right to accelerate the maturity of all amounts due under its debentures. Additionally, the SBA may appoint a
receiver for the SBIC and for its liquidation in the event of a default on payment of a SBIC’s debentures or for serious regulatory violations.
Other
Change in Control
Because the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and
we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any
person or company from acquiring control of us and, indirectly, the Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of Utah
Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or
company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any
class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations. Although the Bank is an “insured
depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act, your investment in the Company is
not insured or guaranteed by the FDIC, or any other agency, and is subject to loss. Under the Utah Financial Institutions Act, control is defined as the power
directly or indirectly or through or in concert with one or more persons to (1) direct or exercise a controlling influence over the management or policies of us or the
election of a majority of the directors of us, or (2) to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class
of our voting securities by a person other than an individual. If any holder of any series of the Bank’s preferred stock is or becomes entitled to vote for the election
of the Bank’s directors, such series will be deemed a class of voting stock, and any other person will be required to obtain the non-objection of the FDIC under the
Change in Bank Control Act to acquire or maintain 10% or more of that series. Investors are responsible for ensuring that they do not, directly or indirectly, acquire
shares of our common stock in excess of the amount which can be acquired without regulatory approval.
Examination and Supervision
Federal and state banking agencies require the Bank to prepare annual reports on financial condition and to conduct an annual audit of financial affairs in
compliance with minimum standards and procedures. We must undergo regular on-site examinations by the FDIC and the Utah DFI, which examine for adherence
to a range of legal and regulatory compliance responsibilities. A bank regulator conducting an examination has complete access to the books and records of the
examined institution. The results of the examination are confidential, with the exception of the CRA examination discussed above. The cost of examinations may
be assessed against the examined institution as the agency deems necessary or appropriate.
Incentive Compensation
The FDIC has issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking
organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk taking. The guidance, which covers all employees
that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking
organization’s incentive compensation arrangements should (i) provide incentives that appropriately balance risk and financial results in a manner that does not
encourage employees to expose their organizations to imprudent risk, (ii) be compatible with effective internal controls and risk management and (iii) be supported
by strong corporate governance, including active and effective oversight by the organization’s board of directors.
The Dodd-Frank Act requires the federal banking regulators and the SEC to establish joint regulations or guidelines at specified regulated entities having at
least $1 billion in total assets, such as us, prohibiting incentive-based payment arrangements that encourage inappropriate risk-taking by providing an executive
officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. The
federal banking regulators and the SEC proposed revised rules in 2016, which have not been finalized.
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Valid When Made and True Lender
In June 2020, the FDIC published a final rule clarifying that a loan made by a state-chartered bank is considered “valid when made” pursuant to the
preemptive authority in Section 27 of the FDIA, and therefore the loan’s original terms, including, among others, its interest rate, are valid and enforceable by any
subsequent assignee, transferee, or buyer, regardless of the usury laws of other states. The FDIC rule does not address when a state-chartered bank is the "true
lender" of a loan, and the ultimate effect of the FDIC rule remains uncertain in light of legal challenges to the FDIC’s rule and an analogous rule issued by the
OCC. On August 20, 2020, the state attorneys general of seven states and the District of Columbia filed suit against the FDIC, alleging that the final rule conflicts
with the FDIA, exceeds the FDIC’s statutory authority, and violates the Administrative Procedure Act. The suit is ongoing, however, we believe the impact to the
Bank, regardless of outcome, would be minimal
Future Legislation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation
from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically
propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future
legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under
which we operate and may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital
and modify our business strategy, and limit our ability to pursue business opportunities in an efficient manner.
AVAILABLE INFORMATION
Our corporate website is located at www.medallion.com. We make copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and any amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act available on
or through our website free of charge as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Our SEC filings can be
found in the Investors Relations section of our website, the address of which is www.medallion.com/investors.html, or on the SEC website at www.sec.gov. Our
Code of Ethical Conduct and Insider Trading Policy can be located in the Corporate Governance section of our website at
www.medallion.com/investors_corporate_governance.html. These documents, as well as our SEC filings, are available in print free of charge to any stockholder
who requests a copy from our Secretary.
ITEM 1A.
RISK FACTORS
Risks Related to Our Loan Portfolios and Business
The ongoing COVID-19 pandemic, and the related significant negative impact on the global economy and financial markets, have had and could
further have a material adverse impact on our business, operating results, and financial condition, particularly given our concentration in the consumer
lending business.
The spread of COVID-19 has created a global public-health crisis that has resulted in widespread volatility and deteriorations in employment levels, as
well as business, economic, and market conditions that have materially and adversely affected our business, operating results and financial condition. The full
extent of the adverse impact of the COVID-19 pandemic on our business, results of operations, financial position (including capital and liquidity) and prospects
depends on a number of evolving factors, including:
•
•
The duration, extent, and severity of the pandemic. COVID-19 does not yet appear to be contained as it continues to spread throughout the
United States and could affect significantly more households and businesses. Delays in the widespread distribution and use of effective
vaccines, or a lack of public acceptance of vaccines, could lead people to continue to self-isolate and not participate in the economy at pre-
pandemic levels for a prolonged period of time, which could, in turn, perpetuate or exacerbate the adverse effects of COVID-19 on economic
conditions. Further, even if vaccines are widely distributed and used, there can be no assurance that vaccines will ultimately be successful in
limiting or stopping the spread of COVID-19 or mitigating the impact of COVID-19 on economic conditions.
The response of governmental and non-governmental authorities. Many of the actions taken by governmental and non-governmental authorities
have been directed toward curtailing household and business activities to contain the spread of COVID-19 while simultaneously deploying
fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. These actions are not
always coordinated or consistent across
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jurisdictions. The scope, duration and ultimate effects of these responses continue to be uncertain, and we cannot predict the full impact these
responses may have on our business and operations.
•
•
The effect on our borrowers, counterparties, employees, and third-party service providers. COVID-19 and its associated consequences and
uncertainties may continue to affect individuals, households and businesses differently and unevenly. Our credit, operational, including
cybersecurity, and other risks could continue to increase as a result of the impacts of COVID-19, including, for example, as a result of the work-
from-home arrangements implemented by us and our service providers. Although, to date, the operational measures we have taken, such as
having employees work remotely on a part-time basis, have allowed us to continue to operate during the pandemic, we may continue to
experience disruptions or other adverse effects to our operations as a result of the COVID-19 pandemic’s continued impacts on our employees
and service providers.
The effect on economies and markets. The COVID-19 pandemic, perceptions regarding its broad impact and preventive measures taken to
contain or mitigate the pandemic have had, and are likely to continue to have, significant negative effects on the US and global economy,
employment levels, employee productivity and financial market conditions, which, in turn, may continue to have negative effects on the ability
of our borrowers to repay outstanding loans, the value of collateral securing loans, demand for loans and other financial services products, and
consumer discretionary spending. National, regional and local economies and markets could continue to suffer disruptions that are lasting. Even
after the pandemic recedes and measures taken by governmental authorities in response, such as stay-at-home orders and other social-distancing
measures, cease to apply, the pandemic may continue to have long-term effects on economic and commercial activity, as well as consumer
behaviors. A prolonged economic slowdown could adversely affect our originations of recreation and home improvement loans (which
comprises the significant majority of our loan portfolio) and the performance of our existing loans. In addition, governmental actions are
meaningfully influencing the interest-rate environment, which have had and could continue to have an adverse effect on our results of
operations and financial condition.
In March 2020, we adjusted our payment policies and procedures and created a program to support our borrowers during the pandemic. We have been
negotiating payment terms with our borrowers, and allowed them to defer payments up to 180 days, which as of December 31, 2020, there were minimal consumer
loans on deferral. Although we believe that our deferral programs have been effective to date in mitigating the effect of COVID-19 on our consumer loan portfolio
and consumer businesses are uncertain, and we could suffer potential losses on our consumer portfolios as a result of the effects of the pandemic on the ability of
our borrowers to repay their loans. The effects of the pandemic on us could be exacerbated given that our business model is largely consumer-directed and the
pandemic, and preventative measures taken to contain or mitigate the pandemic, have had and may increasingly have significant negative effects on consumer
discretionary spending and unemployment levels.
The impact of COVID-19 is being especially felt in the taxi industry. In March 2020, the Governor of New York State declared states of emergency for
both the State and City of New York, and, since then, economic activity generally and taxi ridership in particular have decreased dramatically in New York City.
Despite New York City’s phased reopening, the extent to which the COVID-19 pandemic will continue to adversely affect New York City taxi medallion owners
and, by extension, our medallion loans and other 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. With our medallion business, we also adjusted our payment policies and procedures and allowed
borrowers to defer payments up to 180 days in March 2020. Since March 31, 2020, payments on medallion loans have decreased significantly compared to
payments during the 2020 first quarter and prior periods. For the medallion business, no loans remained on deferral and it was determined it was impossible to
quantify anticipated payment activity. As a result, all loans were placed on nonaccrual and written down to net collateral value in the 2020 third quarter. In
addition, medallion loans in the New York City market were written down to $79,500 net as of December 31, 2020. We are actively engaged with many borrowers
about modifying their loan agreements, and as a result, we placed all medallion loans on TDR as we work with borrowers. We are also continuing to evaluate
options for our medallion loan 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.
As a result of the cash flow shortages due to the slowdown in the taxi industry resulting from the COVID-19 pandemic, we received from our lending banks
180-day payment deferrals that terminated in August and modifications to provide interest only payments from September through the end of 2020 for the notes
payable to banks. We have also worked to extend our maturity dates with lenders throughout 2021. To the extent we continue to experience cash flow shortages,
whether as a result of the pandemic or otherwise, we would need to negotiate additional relief from our lenders or seek alternative funding, neither of which can be
assured.
As a result of these foregoing factors or other risks and consequences, the pandemic could continue to materially and adversely affect our business,
results of operations and financial condition and heighten the other risk described in this Item 1A- Risk
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Factors. The full extent to which the pandemic will impact our operations will depend on future developments, which are highly uncertain and cannot be predicted
at this time, and include the duration, severity and scope of the continued outbreak and the actions taken to contain or mitigate the pandemic.
Our business is heavily concentrated in consumer lending and could be adversely affected by an economic downturn.
Our business is heavily concentrated in consumer lending. As a result, we are more susceptible to fluctuations and risks particular to consumer credit than a
more diversified company, including as a result of the COVID-19 pandemic, as described above. For example, our business is particularly sensitive to
macroeconomic conditions that affect the US economy, consumer spending and consumer credit. We are also more susceptible to the risks of increased regulations
and legal and other regulatory actions that are targeted at consumer credit or the specific consumer credit products that we offer (including promotional financing).
Our business concentration could have a material adverse effect on our results of operations.
By its nature, lending to consumers carries with it different risks and typically a higher risk of loss than commercial lending. Although the net interest
margins are intended to be higher to compensate us for this increased risk, an economic downturn could result in higher loss rates and lower returns than expected,
and could affect the profitability of our consumer loan portfolios. During periods of economic slowdown, delinquencies, defaults, repossessions, and losses
generally increase, and consumers may reduce their discretionary spending in areas such as recreation and home improvement, which constitute a significant
majority of our business. These periods have been, and may continue to be, accompanied by increasing unemployment rates and declining values of consumer
products securing outstanding accounts, which weaken collateral coverage and increase the amount of a loss in the event of default.
Additionally, higher gasoline prices, volatile real estate values and market conditions, reset of adjustable rate mortgages to higher interest rates, general
availability of consumer credit, or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer
demand for RVs, boats, trailers and other consumer products (including in connection with home improvement projects), as well as weaken collateral values on
certain types of consumer products. Any decrease in consumer demand for those products could have a material adverse effect on our ability to originate new loans
and, accordingly, on our business, financial condition, and results of operations.
Although declines in commodity prices, and more particularly gasoline prices, generally are financially beneficial to the individual consumer, these declines
may also have a negative impact on unemployment rates in geographic areas that are highly dependent upon the oil and natural gas industry, which could adversely
affect the credit quality of consumers in those areas.
Our balance sheet consists of a significant percentage of non-prime consumer loans, which are associated with higher than average delinquency rates. The
actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn. In addition,
during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in our net interest income.
Furthermore, our business is significantly affected by monetary and regulatory policies of the US Federal Government and its agencies. Changes in any of
these policies are influenced by macroeconomic conditions and other factors that are beyond our control and could have a material adverse effect on us through
interest rate changes, costs of compliance with increased regulation, and other factors.
The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how
those economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely
affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the quality of our assets.
Our financial condition, liquidity and results of operations depend on the credit performance of our loans.
As of December 31, 2020, approximately 55% of our recreation loans were non-prime receivables with obligors who do not qualify for conventional
consumer finance products as a result of, among other things, adverse credit history. While our underwriting guidelines are designed to confirm that,
notwithstanding such factors, the obligor would be a reasonable credit risk, the receivables nonetheless are expected to experience higher default rates than a
portfolio of obligations of prime obligors. The weakening of our underwriting guidelines for any reason, such as in response to the competitive environment, in an
effort to originate higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans or our inability to adequately
adapt policies and procedures to changes in economic or other conditions, may result in loan defaults and charge-offs that may necessitate increases to our
allowance for loan losses, each of which could adversely affect our net income and financial condition. In the event of a default on a recreation loan, generally the
most practical recovery method is repossession of the financed vehicle, although the collateral value of the vehicle usually does not fully cover the outstanding
account balance and costs of recovery. Repossession sales that do not yield sufficient proceeds to repay the receivables in full typically result in losses on those
receivables.
In addition, our prime portfolio has grown in proportion to our overall portfolio over the past several years. While prime portfolios typically have lower
default rates than non-prime portfolios, we have less ability to make risk adjustments to the pricing of
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prime loans compared to non-prime loans. As a result, to the extent our prime portfolio continues to grow, a larger proportion of our business will consist of loans
with respect to which we will have less flexibility to adjust pricing to absorb losses. As a result of these factors, we may sustain higher losses than anticipated in
our prime portfolio. Additionally, if our prime loan losses are higher than expected then we may also be at risk with regards to our forecasted losses, which could
impact our loss reserves and results of operations.
Changes in the taxi and for-hire vehicle industries have resulted in significantly increased competition and have had a material adverse effect on
our business, financial condition, and operations and have resulted in losses in our medallion loan portfolio.
The continued expansion of ride-sharing applications, or ride-sharing apps and the issuance of additional livery licenses and other for-hire classifications
has changed the taxi and for-hire vehicle industries resulting in significantly increased competition in all of our taxi medallion markets. Many of these for-hire
vehicle operators operate outside of the regulatory regime under which we and our borrowers operate, which poses an increased risk of competition because they
are able to pass the cost savings of not having to comply with certain regulations to its passengers.
In New York City, Chicago, Boston, and other markets where we originated medallion loans, taxi fares are generally set by government agencies, but
expenses associated with operating taxis are largely unregulated. Escalating expenses, such as rising gas prices and an increase in interest rates, coupled with
stagnant or declining taxi fares can render taxi operations less profitable and cause borrowers to default on loans from us, which would adversely affect the value
of our collateral. There were reductions in fare totals and taxi trips in the 2020 fiscal year, which were likely the result of the ongoing COVID-19 pandemic,
together with continued increases in competition, impacts from the congestion pricing surcharge, and use of public transportation.
Decreases in the value of our medallion loan collateral, including the impact on loans in process of foreclosure, and our Chicago taxi medallions
purchased out of foreclosure have had, and may continue to have, a material adverse effect on our business.
We stopped originating new medallion loans in July 2015. Our medallion loans and related assets represent 4% of our total assets at December 31, 2020.
There have also been recent decreases in the values of our medallion loan collateral. Increased competition reduced the overall market for taxi services, income
from operating medallions, and the value of taxi medallions. If these trends continue and intensify, there would be a further material increase to our loan-to-value
ratios, loan delinquencies, and loan defaults , which could have a material adverse effect on our business, financial condition, and results of operations.
According to TLC data, New York City taxi medallions appreciated in value to a high of $1,320,000 for corporate taxi medallions and $1,050,000 for
individual taxi medallions in 2014. In 2017, the New York City Council eliminated the distinction between individual and corporate taxi medallions. We estimate
that the market value of New York City taxi medallions declined to $85,000, $79,500 net of liquidation costs, as of December 31, 2020.
We own 159 Chicago taxi medallions that were purchased out of foreclosure in 2003. Additionally, a portion of our loan revenue is derived from loans
collateralized by Chicago taxi medallions. The Chicago taxi medallions had appreciated in value from $50,000 in 2003 to approximately $370,000 in 2013. Since
that time, however, there has been a decline in the value of Chicago taxi medallions to approximately $24,000, $18,500 net of liquidation costs, as of December 31,
2020.
Government entities may take other actions in the future, which could have adverse effects on the market for taxi medallions and which could affect,
potentially materially, our financial condition and results of operations. Every city in which we originated medallion loans, and most other major cities in the
United States, limits the supply of taxi medallions, which results in supply restrictions that support the value of taxi medallions. Loosening these restrictions that
result in the issuance of additional taxi medallions could decrease the value of taxi medallions in that market and in turn, adversely affect the value of the collateral
securing our then outstanding medallion loans in that market.
We estimate that the weighted average loan-to-value ratio of our medallion loans was approximately 327% as of December 31, 2020. If taxi medallion
values continue to decline, there is likely to be an increase in medallion loan delinquencies, foreclosures and borrower bankruptcies. Our ability to recover on
defaulted medallion loans by foreclosing on and selling the taxi medallion collateral would be diminished, which would result in material losses on defaulted
medallion loans which could have a material adverse effect on our business. If we are required to liquidate all or a portion of our medallion loans quickly, we
would realize less than the value at which we had previously recorded such medallions.
Uncertainty relating to the reporting of collateral values for our loans may adversely affect the value of our portfolio.
Medallion loans are primarily collateral-based lending, whereby the collateral value generally exceeds the amount of the loan at the time of origination,
providing sufficient excess collateral to protect us against losses. Collateral values for medallion loans reflect recent sales prices and are typically obtained from
the regulatory agency in a particular local market. We rely on the integrity of the
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collateral value benchmarks obtained by the applicable regulatory agencies and other third parties. Any changes or volatility in these benchmarks could cause us to
suffer losses. We have experienced a significant downward movement in medallion collateral values which has caused and may continue to cause a negative
impact on our valuation analysis and could further significantly lower the fair market value measurements of our portfolio.
We require an objective benchmark in determining the value of our portfolio. If the benchmarks that we currently use are deemed to be unreliable, we will
need to use other intrinsic factors in determining the collateral values for our loans.
Our allowance for loan losses may prove to be insufficient to cover losses on our loans.
We maintain an allowance for loan losses (a reserve established through a provision for losses that decreases our earnings and that, accordingly, affects our
financial condition) that we believe is appropriate to provide for incurred losses in our loan portfolio.
The process for establishing an allowance for loan losses is critical to our results of operations and financial condition, and requires complex models and
judgments, including forecasts of economic conditions. Changes in economic conditions affecting borrowers, growth in our loan portfolio, changes in the credit
characteristics of our loan portfolio, new information regarding our loans and other factors, both within and outside of our control, may require an increase in the
allowance for loan losses. In cases where we modify a loan, if the modified loans do not perform as anticipated, we may be required to establish additional
allowances on these loans.
We periodically review and update our methodology, models and the underlying assumptions, estimates and assessments we use to establish our allowance
for loan losses to reflect our view of current conditions. Moreover, our regulators, as part of their supervisory function, periodically review the methodology,
models and the underlying assumptions, estimates and assessments we use for calculating, and the adequacy of, our allowance for loan losses. Our regulators,
based on their judgment, may conclude that we should modify our methodology, models or the underlying assumptions, estimates and assessments, increase our
allowance for loan losses, and/or recognize further losses. We continue to review and evaluate our methodology, models and the underlying assumptions,
estimates, and assessments we use and we will implement further enhancements or changes to them, as needed. We cannot assure you that our loan loss reserves
will be sufficient to cover actual losses. Future increases in the allowance for loan losses or recognized losses (as a result of any review, update, regulatory
guidance, changes in accounting standards or otherwise) will result in a decrease in net earnings and capital and could have a material adverse effect on our
business, results of operations, and financial condition.
Our business, financial condition and results of operations could be negatively impacted if we are unsuccessful in developing and maintaining our
relationships with dealerships, contractors, and FSPs.
We originate loans by working with third-party sellers of consumer products and not working directly with consumers. As a result, our ability to originate
consumer loans depends on our relationships with a limited number of dealerships, contractors, and FSPs. Although we have relationships with various dealerships,
contractors, and FSPs, none of our relationships are exclusive and each may be terminated at any time. In particular, there is significant competition for the
contractor and FSP relationships we depend on in connection with our home improvement lending segment. The loss of any of these relationships, our failure to
develop additional relationships, and circumstances in which our existing dealer, contractor, and FSP relationships generate decreased sales and loan volume all
may have a material adverse effect on a substantial part of our business, financial condition and results of operations.
A reduction in demand for our products and failure by us to adapt to such reduction could adversely affect our business, financial condition and
results of operations.
The demand for the products we offer may be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences or
financial conditions, regulatory restrictions that decrease customer access to particular products or the availability of competing products. If we fail to adapt to
significant changes in our customers’ demand for, or access to, our products, our revenues could decrease and our operations could be adversely affected. Even if
we do make changes to our product offerings to fulfill customer demand, customers may resist such changes or may reject such products. Moreover, the effect of
any product change on the results of our business may not be fully ascertainable until the change has been in effect for some time, and, by that time, it may be too
late to make further modifications to such product without causing further adverse effects to our business, results of operations, and financial condition.
Decreases or increases in prevailing interest rates could adversely affect our business, our cost of capital and our net interest income.
Our commercial borrowers generally have the right to prepay their loans upon payment of a fee ranging from 1% to 2% for standard loans, and for higher
amounts, as negotiated, for larger more custom loan arrangements. A borrower is likely to exercise prepayment rights at a time when the interest rate payable on
the borrower’s loan is high relative to prevailing interest rates. In a lower interest rate environment, we will have difficulty re-lending prepaid funds at comparable
rates, which may reduce the net interest income that we receive. When this occurs, we will generally reinvest these proceeds in temporary investments, pending
their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we
could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company
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may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if a substantial number of our
portfolio companies elect to prepay amounts owed to us and we are not able to reinvest the proceeds for comparable yields in a timely fashion. Additionally,
prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.
Our profitability may be directly affected by interest rate levels and fluctuations in interest rates. As interest rates change, our gross interest rate spread on
originations either increases or decreases because the rates charged on the loans originated are limited by market and competitive conditions, restricting our ability
to pass on increased interest costs to the consumer. Additionally, although a significant percentage of our borrowers are non-prime and are not highly sensitive to
interest rate movement, increases in interest rates may reduce the volume of loans we originate. While we monitor the interest rate environment and seek to
mitigate the impact of increased interest rates, we cannot provide assurance that the impact of changes in interest rates can be successfully mitigated.
In addition, the majority of our loan portfolio is comprised of fixed-rate loans. An abrupt increase in market rates of interest may have an adverse impact on
our earnings until we are able to originate new loans at higher prevailing interest rates.
Additionally, because we borrow to fund our loans and investments, a portion of our income is dependent upon the difference between the interest rate at
which we borrow funds and the interest rate at which we invest these funds. A portion of our investments, such as medallion loans, will have fixed interest rates,
while a portion of our borrowings will likely have floating interest rates. As a result, a significant change in market interest rates could have a material adverse
effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income. We may
hedge against interest rate fluctuations by using standard hedging instruments, subject to applicable legal requirements. These activities may limit our ability to
participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging
transactions could have a material adverse effect on our business, financial condition, and results of operations. Also, we will have to rely on our counterparties to
perform their obligations under such hedges.
Financing and Related Risks
We are subject to certain financial covenants and other restrictions under our loan and credit arrangements, which could affect our ability to
finance future operations or capital needs or to engage in other business activities.
Our loan and credit agreements contain financial covenants and other restrictions relating to borrowing base eligibility, tangible net worth, net income,
leverage ratios, stockholders’ equity, and collateral values. Our ability to meet these financial covenants and restrictions could be affected by events beyond our
control, such as a substantial decline in collateral values or a rise in borrower delinquencies. A breach of these covenants could result in an event of default under
the applicable debt instrument. Such a default, if not cured or waived, may allow the creditors to accelerate the related debt and may result in the acceleration of
any other debt that is subject to an applicable cross-acceleration or cross-default provision. Most of our credit facility debt is subject to cross default provisions.
Certain other events can constitute an event of default. Furthermore, if we were unable to repay the amounts due and payable under our credit facilities, those
lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or holders of the related notes accelerate the
repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. We have regularly needed waivers and extensions,
and there can be no guarantee that we will be able to continue to get them if requested. Based on the foregoing factors, the operating and financial restrictions and
covenants in our current credit agreements and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to
engage in other business activities.
Failure to obtain an extension of our existing credit facilities, failure to obtain additional revolving credit facilities or raise additional capital in the
future could have a material adverse effect on our results of operations and financial position.
We utilize secured revolving credit facilities and other facilities to fund our investments. We cannot guarantee that our credit facilities will continue to be
available beyond their current maturity dates on reasonable terms or at all, or that we will be able to otherwise obtain funds by selling assets or raising equity to
make required payments on maturing indebtedness. Our revolving credit facilities have converted to term loans. Obtaining additional revolving credit facilities or
other alternative sources of financing may be difficult, and we cannot guarantee that we will be able to do so on terms favorable to us or at all. The availability of
revolving credit facilities depends, in part, on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit, the financial
strength and strategic objectives of the banks that participate in our credit facilities and the availability of bank liquidity in general. If the credit facilities are not
renewed or extended by our lenders by their maturity dates, we will not be able to make further borrowings under the facilities after they mature and the
outstanding principal balances under such facilities will be due and payable at maturity. If we are unable to refinance our indebtedness at maturity or meet our
payment obligations, our financial condition would be adversely affected and our lenders may foreclose on the property securing such indebtedness. If we are
unable to extend or replace these facilities or arrange new credit facilities or other types of interim financing, we may need to curtail or suspend loan origination
and funding activities which could have a material adverse effect on our results of operations and financial position.
In addition, we may need to raise additional capital in the future to have sufficient capital resources and liquidity to meet our commitments, including the
terms of the 2003 capital maintenance agreement, and fund our business needs and future growth,
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particularly if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other
things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. We may not be able to obtain capital on
acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of capital markets investors or other
disruptions in capital markets, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in
the future, we may have to do so when other financial institutions are seeking to raise capital and would then have to compete with those institutions for investors.
An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition, or results of
operations.
Medallion Bank’s use of brokered deposits for its deposit-gathering activities may not be available when needed. The inability to accept and renew
brokered deposits would have a material adverse effect on our business, financial condition, liquidity, and results of operations.
Medallion Bank relies on the established brokered deposit market to originate deposits to fund its operations. Additionally, Medallion Bank’s business,
strategy and prospects are dependent on its ability to accept and renew brokered deposits without limitation and, therefore, dependent on its ability to be “well-
capitalized” under the FDIC’s regulatory framework.
Medallion Bank’s brokered deposits consist of deposits raised through the brokered deposit market rather than through retail branches. While Medallion
Bank has developed contractual relationships with a diversified group of investment brokers, and the brokered deposit market is well developed and utilized by
many banking institutions, conditions could change that might affect the availability of brokered deposits. In addition, Medallion Bank’s ability to rely on brokered
deposits as a source of funding is subject to capitalization requirements set forth in the FDIC’s prompt corrective action framework. Medallion Bank may not
accept or renew brokered deposits unless they are “well-capitalized” or they are “adequately capitalized” and they receive a waiver from the FDIC. A bank that is
“adequately capitalized” and that accepts or renews brokered deposits under a waiver from the FDIC is subject to additional restrictions on the interest rates it may
offer.
If the capital levels at Medallion Bank fall below the “well-capitalized” level as defined by the FDIC, or we otherwise fail to maintain “well capitalized”
status, Medallion Bank’s ability to raise brokered deposits would be materially impaired. If Medallion Bank’s capital levels fall below the “adequately-capitalized”
level as defined by the FDIC, it would be unable to raise brokered deposits. Any impairment or inability to raise brokered deposits would have a material adverse
effect on our business, financial condition, liquidity and results of operations. Brokered deposits may also not be as stable as other types of deposits, and if
Medallion Bank experiences a period of sustained operating losses, the cost of attracting deposits from the brokered deposit market could increase significantly.
Medallion Bank’s ability to manage its growth to stay within the “well-capitalized” level is critical to our ability to retain open access to this funding source.
We depend on cash flow from our subsidiaries to make payments on our indebtedness and fund operations.
We are primarily a holding company, and we derive most of our operating income and cash flow from our subsidiaries. As a result, we rely heavily upon
distributions from our subsidiaries to generate the funds necessary to make payments on our indebtedness and fund operations. Funds are provided to us by our
subsidiaries through dividends and payments on intercompany indebtedness, but we cannot assure you that our subsidiaries will be in a position to continue to
make these dividend or debt payments. The Utah Department of Financial Institutions and FDIC have the authority to prohibit or to limit the payment of dividends
by Medallion Bank. In addition, as a condition to receipt of FDIC insurance, Medallion Bank entered into a capital maintenance agreement with the FDIC
requiring it to maintain a 15% Tier 1 leverage ratio (Tier 1 capital to average assets). As of December 31, 2020, Medallion Bank’s Tier 1 leverage ratio was 16.9%.
We received dividends from Medallion Bank of $1,500,000 in December 2019 and $6,000,000 during 2020.
Legal and Regulatory Risks
We operate in a highly regulated environment, and if we are found to be in violation of any of the federal, state, or local laws or regulations
applicable to us, our business could suffer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted in 2010. The Dodd-Frank Act significantly
changed federal financial services regulation and affects, among other things, the lending, deposit, investment, trading, and operating activities of financial
institutions and their holding companies. In addition to the statutory requirements under the Dodd-Frank Act, the legislation also delegated authority to US
banking, securities, and derivatives regulators to impose additional restrictions through required rulemaking. The Dodd-Frank Act requires a company that owns an
industrial bank to serve as a “source of strength” to the institution and is also subject to the “Volcker Rule.” Although these requirements have not materially
impacted us, we cannot assure you that they will not in the future.
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Other changes in the laws or regulations applicable to us more generally, may negatively impact the profitability of our business activities, require us to
change certain of our business practices, materially affect our business model, limit the activities in which we may engage, affect retention of key personnel,
require us to raise additional regulatory capital, increase the amount of liquid assets that we hold, or otherwise affect our funding profile or expose us to additional
costs (including increased compliance costs). Any such changes may also require us to invest significant management attention and resources to make any
necessary changes and may adversely affect our ability to conduct our business as previously conducted or our results of operations or financial condition.
We are also subject to a wide range of federal, state, and local laws and regulations, such as local licensing requirements, and retail financing, debt
collection, consumer protection, environmental, health and safety, creditor, wage-hour, anti-discrimination, whistleblower and other employment practices laws
and regulations and we expect these costs to increase going forward. The violation of these or future requirements or laws and regulations could result in
administrative, civil, or criminal sanctions against us, which may include fines, a cease and desist order against the subject operations or even revocation or
suspension of our license to operate the subject business. As a result, we have incurred and will continue to incur capital and operating expenditures and other costs
to comply with these requirements and laws and regulations.
The recent change in Presidential Administration increases the likelihood of further changes to laws, regulations and supervisory practices affecting
financial institutions, which could include more stringent requirements and greater scrutiny from regulatory authorities.
The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a
significant adverse effect on our operations.
The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection
of depositors, customers, federal deposit insurance funds, and the banking system as a whole, not for the protection of security holders. We are subject to regulation
and supervision by the FDIC and the Utah DFI. The laws and regulations applicable to us govern a variety of matters, including permissible types, amounts, and
terms of loans and investments we may make, the maximum interest rate that may be charged, the amount of reserves we must hold against deposits we take, the
types of deposits we may accept, maintenance of adequate capital and liquidity, changes in the control of Medallion Bank and us, restrictions on dividends, and
establishment of new offices. We must obtain approval from our regulators before engaging in certain activities or acquisitions, and there is the risk that such
approvals may not be obtained, either in a timely manner or at all. Our regulators also have the ability to compel us to take, or restrict us from taking, certain
actions entirely, such as actions that our regulators deem to constitute an unsafe or unsound banking practice. Our failure to comply with any applicable laws or
regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties, or
damage to our reputation, all of which could have a material adverse effect our business, financial condition or results of operations.
Federal and state banking laws and regulations, as well as interpretations and implementations of these laws and regulations, are continually undergoing
substantial review and change. Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities. These changes and
increased scrutiny have resulted and may continue to result in increased costs of doing business and may in the future result in decreased revenues and net income,
reduce our ability to effectively compete to attract and retain customers, or make it less attractive for us to continue providing certain products and services. Any
future changes in federal and state law and regulations, as well as the interpretations and implementations, or modifications or repeals, of such laws and
regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our
business, financial condition or results of operations.
Our inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse effect on our operations in that
market and on our reputation generally. No assurance can be given that applicable laws or regulations will not be amended or construed differently or that new
laws and regulations will not be adopted, either of which could materially adversely affect our business, financial condition, or results of operations.
The USA PATRIOT Act of 2001 and the Bank Secrecy Act, or the BSA, require financial institutions to design and implement programs to prevent
financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file
suspicious activity reports with FinCEN. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers
and beneficial owners of certain legal entity customers seeking to open new financial accounts. Federal and state bank regulators also have focused on compliance
with Bank Secrecy Act and anti-money laundering regulations. In January 2021, the Anti-Money Laundering Act of 2020, or the AMLA, which amends the BSA,
was enacted. The AMLA is intended to comprehensively reform and modernize US anti-money laundering laws. Many of the statutory provisions in the AMLA
will require additional rulemakings, reports and other measures, and the impact of the AMLA, including on our compliance costs and compliance risk relating to
the BSA, will depend on, among other things, rulemaking and implementation guidance. Failure to comply with these regulations could result in fines or sanctions,
including restrictions on conducting acquisitions or expanding activities. During the last several years, a number of banking institutions have received large fines
for non-compliance with these laws and regulations. Although we have policies and procedures designed to assist in compliance with the BSA and other anti-
money laundering laws and regulations, there can be no assurance that such policies or procedures will work effectively all of the time or protect us against liability
for actions taken by our employees, agents, and intermediaries with respect to our business or any businesses that we may acquire. Failure to maintain and
implement adequate programs to combat money laundering and terrorist
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financing could also have serious reputational consequences for us, which could have a material adverse effect on our business, financial condition or results of
operations.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal
information and adversely affect our business opportunities.
We are subject to various privacy, information security, and data protection laws, including requirements concerning security breach notification, and we
could be negatively affected by these laws. For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain
limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain
disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by
us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information
security program containing safeguards appropriate based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer
information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data
security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the
event of a security breach. Moreover, legislators and regulators are increasingly adopting or revising privacy, information security, and data protection laws that
potentially could have a significant impact on our current and planned privacy, data protection, and information security-related practices, our collection, use,
sharing, retention and safeguarding of consumer or employee information, and some of our current or planned business activities. This could also increase our costs
of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at
the federal level, by the Federal Trade Commission, as well as at the state level.
Compliance with current or future privacy, data protection, and information security laws (including those regarding security breach notification) could
result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect
on our business, financial conditions or results of operations. Our failure to comply with privacy, data protection, and information security laws could result in
potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions, and damage to our reputation, which could have a material
adverse effect on our business, financial condition, or results of operations.
Our use of third-party vendors and our other ongoing third-party business relationships are subject to regulatory requirements and scrutiny.
We regularly use third-party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of
third-party relationships are subject to demanding regulatory requirements and attention by our federal and state bank regulators. Regulation requires us to enhance
our due diligence, ongoing monitoring and control over our third-party vendors and other ongoing third-party business relationships. In certain cases, we may in
the future be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase our costs and potentially limit
our competitiveness. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the
performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control
over our third-party vendors or other ongoing third-party business relationships or that such third parties have not performed appropriately, we could be subject to
enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of
which could have a material adverse effect our business, financial condition or results of operations.
Our SBIC subsidiaries are licensed by the SBA, and are therefore subject to SBA regulations.
Our SBIC subsidiaries are licensed to operate as SBICs and are regulated by the SBA. The SBA also places certain limitations on the financing terms of
investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries.
Compliance with SBA requirements may cause the SBIC subsidiaries to forego attractive investment opportunities that are not permitted under SBA regulations.
Further, SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA
regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons
acting in concert) owning 10% or more of a class of capital stock of an SBIC. If the SBIC subsidiaries fail to comply with applicable SBIC regulations, the SBA
could, depending on the severity of the violation, limit or prohibit their use of debentures, declare outstanding debentures immediately due and payable, and/or
limit them from making new investments. In addition, the SBA could revoke or suspend an SBIC license or may appoint a receiver for the SBIC and for its
liquidation for willful or repeated violation of, or willful or repeated failure to observe, any provision of the SBIA or any rule or regulation promulgated
thereunder. Such actions by the SBA would, in turn, negatively affect us.
Our ability to enter into transactions with our affiliates is restricted.
The SBA restricts the ability of SBICs to lend money to any of their officers, directors, and employees, or invest in any affiliates thereof.
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Medallion Bank is subject to certain federal laws that restrict and control its ability to engage in transactions with its affiliates. Sections 23A and 23B of the
Federal Reserve Act and applicable regulations restrict the transfer of funds by Medallion Bank to certain of its affiliates, including us, in the form of loans,
extensions of credit, investments, or purchases of assets and restrict its ability to provide services to, or receive services from, its affiliates. Sections 23A and 23B
also require generally that Medallion Bank’s transactions with its affiliates be on terms no less favorable to Medallion Bank than comparable transactions with
unrelated third parties.
Federal and state law may discourage certain acquisitions of our common stock which could have a material adverse effect on our stockholders.
Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control
Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit
any person or company from acquiring control of us and, indirectly Medallion Bank, without, in most cases, prior written approval of the FDIC or the
Commissioner of the Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among
other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company
acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations. Under the Utah
Financial Institutions Act, control is defined as the power to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of
any class of our voting securities by a person other than an individual. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares
of our common stock in excess of the amount which can be acquired without regulatory approval. These provisions could delay or prevent a third party from
acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of our common stock. Although Medallion Bank is
an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act, your investment in the
Company is not insured or guaranteed by the FDIC, or any other agency, and is subject to loss.
Risk Relating to Our Growth and Operations
We operate in a highly competitive market for investment opportunities.
The consumer lending market is very competitive and is served by a variety of entities, including banks, savings and loan associations, credit unions,
independent finance companies, and financial technology companies. The recreation lending and home improvement lending markets are also highly fragmented,
with a small number of lenders capturing large shares of each market and many smaller lenders competing for the remaining market share. Our competitors often
seek to provide financing on terms more favorable to consumers or dealers, contractors, and FSPs than we offer. Many of these competitors also have long-
standing relationships with dealers, contractors, and FSPs and may offer other forms of financing that we do not offer, e.g., credit card lending. We anticipate that
we will encounter greater competition as we expand our operations, and competition may also increase in more stable or favorable economic conditions. Certain of
our competitors are not subject to the same regulatory requirements that we are and, as a result, these competitors may have advantages in conducting certain
business and providing certain services and may be more aggressive in their loan origination activities. Increasing competition could also require us to lower the
rates we charge on loans in order to maintain our desired loan origination volume, which could also have a material adverse effect on our business, financial
condition and results of operations.
We have in the past and may in the future pursue new strategies and lines of business, and we may face enhanced risks as a result of these changes
in strategy, including from transacting with a broader array of customers and exposure to new assets, activities and markets.
In July 2019, we commenced the build-out of a new Strategic Partnership Program, through which the Bank partners with third parties to offer consumer
loans and other financial services. Potential legal and regulatory risks associated with this line of business remain uncertain, and may develop in ways that could
affect us adversely, including as a result of legal proceedings brought against us on the basis that we are the “true lender” of the loans facilitated, held, and serviced
by our partners, or on the basis of a determination by the FDIC or other financial regulators that our Strategic Partnership Program represents an unsafe and
unsound practice.
We may continue to change our strategy and enter new lines of business, including through the acquisition of another company, acquisitions of new types of
loan portfolios or other asset classes, or otherwise, in the future. Any new business initiatives, including our Strategic Partnership Program, have in the past and
may in the future, expose us to new and enhanced risks, including new credit-related, compliance, fraud, market and operational risks, increased compliance and
operating costs, different and potentially greater regulatory scrutiny of such new activities and assets and expose us to new types of consumers as well as asset
classes, activities and markets.
Any new business initiatives and strategies we may pursue in the future may be less successful than anticipated and may not advance our intended business
strategy. We may not realize a satisfactory return on investments or acquisitions, we may experience
29
difficulty in managing new portfolios or integrating operations, and management’s attention from our other businesses could be diverted. Any of these results could
ultimately have an adverse effect on our business, financial condition or results of operations.
Our financial condition and results of operations will depend on our ability to manage growth effectively.
Our ability to achieve our loan and investment objective will depend on our ability to grow, which will depend, in turn, on our management team’s ability to
identify, evaluate, and monitor, and our ability to finance and invest in, companies that meet our investment criteria.
Accomplishing this result on a cost-effective basis will be largely a function of our management team’s handling of the investment process, its ability to
provide competent, attentive, and efficient services, and our access to financing on acceptable terms. In addition to monitoring the performance of our existing
investments, members of our management team and our investment professionals may also be called upon to provide managerial assistance to our portfolio
companies. These demands on their time may distract them or slow the rate of investment. In order to grow, we will need to hire, train, supervise, and manage new
employees. However, we cannot assure you that any such employees will contribute to the success of our business. Any failure to manage our future growth
effectively could have a material adverse effect on our business, financial condition, and results of operations.
Our business depends on our ability to adapt to rapid technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new, technology-driven products and
services. The effective use of technology increases efficiency and enables financial institutions to serve customers better and to reduce costs. Our future success
depends, in part, upon our ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands, as
well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements
than we do. We may not be able to effectively implement new, technology-driven products and services or be successful in marketing these products and services
to our customers. In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause
service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. Failure to successfully
keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse
effect on our business, financial condition or results of operations.
We expect that new technologies and business processes applicable to the banking industry will continue to emerge, and these new technologies and
business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may
not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to
maintain current technology and business processes could cause disruptions in our operations or cause our products and services to be less competitive, all of
which could have a material adverse effect on our business, financial condition or results of operations.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and
reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers and
personally identifiable information of our customers and employees, in third-party data centers, and on our networks. The secure processing, maintenance, and
transmission of this information is critical to our operations. Despite our security and business continuity measures, our information technology and infrastructure
may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions or vulnerable to other disruptions as a result of
systems failures, operational events, employee error, or incidents affecting our third-party service providers (or providers to those third-party service providers).
Any such breach or disruption could compromise our networks and the information stored there could be accessed, publicly disclosed, destroyed, lost, or stolen.
Any such access, disclosure, destruction or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of
personal information and regulatory penalties, disrupt our operations and damage our reputation, which could adversely affect our business. In addition, we may
also be required to incur significant costs in connection with any regulatory investigation or civil litigation resulting from a security breach or other information
technology disruption that affects us.
We are dependent upon our key investment personnel for our future success.
We depend on the diligence, skill, and network of business contacts of the investment professionals we employ for sourcing, evaluating, negotiating,
structuring, and monitoring our investments. Our future success will also depend, to a significant extent, on the continued service and coordination of our senior
management team, particularly, Alvin Murstein, our Chairman and Chief Executive Officer, Andrew M. Murstein, our President, Larry D. Hall, our Chief
Financial Officer, Donald Poulton and his management team for Medallion Bank, and Alex Travis and his management team at Medallion Capital. The departure
of Messrs. Murstein or Mr. Hall, or any other member of our senior management team, could have a material adverse effect on our business and financial results.
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Terrorist attacks, other acts of violence or war, and natural disasters may affect any market for our securities, impact the businesses in which we
invest, and harm our operations and profitability.
Terrorist attacks and natural disasters may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist
attacks against the US or US businesses or major natural disasters hitting the United States. Such attacks or natural disasters in the US or elsewhere may impact the
businesses in which we directly or indirectly invest by undermining economic conditions in the United States. In addition, a portion of our business is focused in
the New York City metropolitan area, which suffered a terrorist attack in 2001 and has faced continued threats. Another terrorist attack in New York City or
elsewhere could severely impact our results of operations. Losses resulting from terrorist attacks are generally uninsurable.
Our operations could be interrupted if certain external vendors on which we rely experience difficulty, terminate their services or fail to comply
with banking laws and regulations.
We depend to a significant extent on relationships with third parties that provide services, primarily information technology services critical to our
operations. Currently, we obtain services from third parties that include information technology infrastructure and support, plus loan origination, loan servicing,
and accounting systems and support. If any of our third-party service providers experience difficulties or terminate their services and we are unable to replace our
service providers with other service providers, our operations could be interrupted. It may be difficult for us to replace some of our third-party vendors, particularly
vendors providing our loan origination, loan servicing and accounting services, in a timely manner if they are unwilling or unable to provide us with these services
in the future for any reason. If an interruption were to continue for a significant period of time, it could have a material adverse effect on our business, financial
condition or results of operations. Even if we are able to replace these third parties, it may be at higher cost to us, which could have a material adverse effect on our
business, financial condition, or results of operations. In addition, if a third-party provider fails to provide the services we require, fails to meet contractual
requirements, such as compliance with applicable laws and regulations, or suffers a cyber-attack or other security breach, our business could suffer economic and
reputational harm that could have a material adverse effect on our business, financial condition or results of operations.
Misconduct by current or former employees could expose us to significant legal liability and reputational harm.
We are vulnerable to reputational harm because we operate in an industry in which integrity and the confidence of the dealerships, contractors, and FSPs
that sell our consumer products are of critical importance. Our current and former directors, and employees could engage or could have engaged in misconduct that
adversely affects our business. For example, if such a person were to engage, or previously engaged, in fraudulent, illegal or suspicious activities, we could be
subject to regulatory sanctions and suffer serious harm to our reputation (as a consequence of the negative perception resulting from such activities), financial
position, third-party relationships and ability to forge new relationships with third-party dealers or contractors. Our business often requires that we deal with
confidential information. If our current and former directors, and employees were to improperly use or disclose this information or previously improperly used or
disclosed this information, even if inadvertently, we could suffer serious harm to our reputation, financial position and current and future business relationships. It
is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. Misconduct by
our employees or former directors, and employees, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our business,
financial condition or results of operations.
We borrow money, which magnifies the potential for gain or loss on amounts invested, and increases the risk of investing in us.
Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested, and therefore increase the risk associated with investing in
us. We borrow from the brokered CD market, private and public note placements and issue senior debt securities to banks and other lenders, and through long-term
subordinated SBA debentures. These creditors have fixed dollar claims on our assets that are superior to the claims of our stockholders. If the value of our assets
increases, then leveraging would cause stockholders’ equity to increase more sharply than it would have had we not leveraged. Conversely, if the value of our
assets decreases, leveraging would cause stockholders’ equity to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase
in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any
decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could reduce the amount available
for distribution payments.
As of December 31, 2020, we had $1.3 billion of outstanding indebtedness with a weighted average borrowing cost of 2.37%.
Approximately $730 million of our borrowing relationships have maturity dates during 2021 through 2022, including almost $635 million of brokered CDs.
We have been in active and ongoing discussions with each of these lenders and have extended each of the facilities as they matured. Certain lenders have worked
with us to extend and change the terms of the borrowing agreements, but we cannot assure you that they will continue to do so. Additionally, with the cessation of
LIBOR by the end of 2021, there could be rate adjustments that may have material impacts to our cost of borrowings. See Note 6 of our consolidated financial
statements for a discussion of the current and new lending arrangements to date.
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Additional Risks Relating to Our Loan Portfolios and Investments
Lending to small businesses involves a high degree of risk and is highly speculative.
Lending to small businesses involves a high degree of business and financial risk, which can result in substantial losses and should be considered
speculative. Historically, our borrower base consists primarily of small business owners that may have limited resources and that are generally unable to obtain
financing from traditional sources. There is generally no publicly available information about these small business owners, and we must rely on the diligence of our
employees and agents to obtain information in connection with our credit decisions. In addition, these small businesses often do not have audited financial
statements. Some smaller businesses have narrower product lines and market shares than their competition. Therefore, they may be more vulnerable to customer
preferences, market conditions, or economic downturns, which may adversely affect the return on, or the recovery of, our investment in these businesses.
Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, industries and sectors, which will subject us to a
risk of significant loss if any of these companies default on its obligations to us or by a downturn in the particular industry or sector.
Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, industries and sectors. In addition, taxi companies that
constitute separate issuers may have related management or guarantors and constitute larger business relationships to us. We do not have fixed guidelines for
diversification, and while we are not targeting any specific industries, our investments are, and could continue to be, concentrated in relatively few industries. As a
result, the aggregate returns we realize may be adversely affected if a small number of loans perform poorly or if we need to write down the value of any one loan.
If our larger borrowers were to significantly reduce their relationships with us and seek financing elsewhere, the size of our loan portfolio and operating results
could decrease. In addition, larger business relationships may also impede our ability to immediately foreclose on a particular defaulted portfolio company as we
may not want to impair an overall business relationship with either the portfolio company management or any related funding source. Additionally, a downturn in
any particular industry or sector in which we are invested could also negatively impact the aggregate returns we realize.
The lack of liquidity in our investments may adversely affect our business.
We generally make investments in private companies. Substantially all of these securities are subject to legal and other restrictions on resale or are
otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In
addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously
recorded our investments. We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we have material
non-public information regarding such portfolio company.
In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous
for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such
liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating
income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no
assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of rising interest rates, our cost
of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use a combination of long-term and short-term
borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt,
and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations.
Such techniques may include various interest rate hedging activities.
We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no
actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item
“net income” as of December 31, 2020 by approximately $1,183,000 on an annualized basis, and the impact of such an immediate increase of 1% over a one year
period would have been approximately ($1,763,000) at December 31, 2020. Although management believes that this measure is indicative of our sensitivity to
interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business
developments that could affect net increase in net assets resulting from operations in a particular quarter or for the year taken as a whole. Accordingly, no
assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.
Sales of loans could have an adverse effect on the credit or other characteristics of the loans and portfolios we retain.
From time to time, we have sold portfolios of loans, and those transactions have generally included loans with stronger credit characteristics than the overall
composition of our loan portfolio. Accordingly, following those transactions, the overall credit characteristics of our loan portfolio declined due to the transfer of
the loans with stronger credit characteristics. In the future, the credit
32
characteristics of our loan portfolio could change as a result of loan sales, and other characteristics could change as well. For example, if we sell loans with less
favorable credit characteristics, the net interest income and net interest margin for our loan portfolio could be adversely affected because loans with less favorable
credit characteristics typically generate more net interest income and higher net interest margin.
We depend on the accuracy and completeness of information about customers.
In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan portfolio on an ongoing basis, we may rely
on information furnished by or on behalf of customers, including financial statements, credit reports and other financial information. We may also rely on
representations of those customers or of other third parties, such as independent auditors, as to the accuracy and completeness of that information. The failure to
receive financial statements, credit reports or other financial or business information related to our customers on a timely basis, or the inadvertent reliance by us on
inaccurate, incomplete, fraudulent or misleading forms of any of the foregoing information, could result in loan losses, reputational damage or other effects that
could have a material adverse effect on our business, financial condition or results of operations.
Laws and regulations implemented in response to climate change could result in increased operating costs for our portfolio companies.
Congress and other governmental authorities have either considered or implemented various laws and regulations in response to climate change and the
reduction of greenhouse gases. Existing environmental regulations could be revised or reinterpreted, new laws and regulations could be adopted, and future
changes in environmental laws and regulations could occur, which could impose additional costs on the operation of our portfolio companies. For example,
regulations to cut gasoline use and control greenhouse gas emissions from new cars could adversely affect our medallion portfolio companies. Our portfolio
companies may have to make significant capital and other expenditures to comply with these laws and regulations. Changes in, or new, environmental restrictions
may force our portfolio companies to incur significant expenses or expenses that may exceed their estimates. There can be no assurance that such companies would
be able to recover all or any increased environmental costs from their customers or that their business, financial condition or results of operations would not be
materially and adversely affected by such expenditures or any changes in environmental laws and regulations, in which case the value of these companies could be
adversely affected.
Our business may be further adversely affected if New York City experiences a sustained economic downturn.
Historically, a significant portion of our loan revenue is derived from medallion loans collateralized by New York City taxi medallions. An economic
downturn in New York City could lead to an additional increase in defaults on our medallion loans and related assets.
An economic downturn could result in additional commercial and consumer loan customers experiencing declines in business activities and/or personal
resources, which could lead to difficulties in their servicing of their loans with us, and increasing the level of delinquencies, defaults, and loan losses in our
commercial and consumer loan portfolios.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We invest in our portfolio companies primarily through senior secured loans, junior secured loans, and subordinated debt issued by small- to mid-sized
companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their
terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments
with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio
company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we
receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In
the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding
such debt in the event of an insolvency, liquidation, dissolution, reorganization, or bankruptcy of the relevant portfolio company.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender
liability claims.
Even though we may have structured most of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts
and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize
our debt investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us
with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability
claim, including as a result of actions taken in rendering significant managerial assistance.
33
We may not control many of Medallion Capital’s portfolio companies.
We may not control many of Medallion Capital’s portfolio companies, even though we may have board representation or board observation rights. As a
result, we are subject to the risk that a Medallion Capital portfolio company in which we invest may make business decisions with which we disagree, and the
management of such company may take risks or otherwise act in ways that do not serve our interests as debt investors.
We may not realize gains from our equity investments.
Certain investments that we have made in the past and may make in the future include warrants or other equity securities. In addition, we may from time to
time make non-control, equity co-investments in companies in conjunction with private equity sponsors. Our goal is ultimately to realize gains upon our disposition
of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able
to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses
we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization, or
public offering, which would allow us to sell the underlying equity interests.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We lease office space in New York City for our corporate headquarters under a lease expiring in April 2027. We also lease office space for loan origination
offices and subsidiary operations in Newark, New Jersey, which, along with our New York City office, handles our medallion loan segment, and in Minneapolis,
Minnesota, which handles our commercial lending segment. Medallion Bank leases office space in Salt Lake City, Utah under a lease expiring in November 2027,
which handles the recreation and home improvement lending segments, and in Bothell, Washington, which handles our home improvement lending segment. We
do not own any real property, other than foreclosed properties obtained as a result of lending relationships. We believe that our leased properties, taken as a whole,
are in good operating condition and are suitable for our current business operations.
ITEM 3.
LEGAL PROCEEDINGS
We are currently involved in various legal proceedings incident to the ordinary course of our business, including collection matters with respect to certain
loans. We intend to vigorously defend any outstanding claims and pursue our legal rights. In the opinion of our management and based upon the advice of legal
counsel, there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision could result in a material
adverse effect on our results of operations or financial condition.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
STOCK PERFORMANCE GRAPH
The following graph commences as of December 31, 2015 and compares the Company’s common stock with the cumulative total return for the NASDAQ
Composite Index and the Russell 2000 Index. Furthermore, the following graph assumes the investment of $100 on December 31, 2015 in each of the Company’s
common stock, the stocks comprising the NASDAQ Composite Index and the Russell 2000 Index and assumes dividends are reinvested.
Cumulative Total Return
Based on Initial Investment of $100 on December 31, 2015
with dividends reinvested
Our common stock is quoted on NASDAQ under the symbol “MFIN.” Our common stock commenced trading on May 23, 1996. As of March 12, 2021,
there were approximately 348 holders of record of our common stock. On March 12, 2021, the last reported sale price of our common stock was $7.56 per share.
We are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains. We have not paid dividends since
2016 and do not currently anticipate paying dividends. We may, however, re-evaluate paying dividends in the future depending on market conditions. There can be
no assurance that we will pay any cash distributions, as we may retain our earnings to facilitate the growth of our business, to finance our investments, to provide
liquidity, or for other corporate purposes.
We have adopted a dividend reinvestment plan pursuant to which stockholders may elect to have distributions reinvested in additional shares of common
stock. When we declare a distribution, all participants will have credited to their plan accounts the number of full and fractional shares (computed to three decimal
places) that could be obtained with the cash, net of any applicable withholding taxes that would have been paid to them if they were not participants. The number
of full and fractional shares is computed at the weighted average price of all shares of common stock purchased for plan participants within the 30 days after the
distribution is declared plus brokerage commissions. The automatic reinvestment of distributions will not release plan participants of any income tax that may be
payable on the distribution. Stockholders may terminate their participation in the dividend reinvestment plan by providing written notice to the Plan Agent at least
10 days before any given distribution payment date. Upon termination, we will issue to a stockholder both a certificate for the number of full shares of common
stock owned and a check for any fractional shares, valued at the then current market price, less any applicable brokerage commissions and any other costs of sale.
There are no additional fees or expenses for participation in the dividend reinvestment plan. Stockholders may obtain additional information about the dividend
reinvestment plan by contacting the American Stock Transfer & Trust Company, LLC at 6201 15th Avenue, Brooklyn, NY, 11219.
35
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not repurchase any of our shares during the three months ended December 31, 2020. Accordingly, under our Stock Repurchase Program previously
authorized by our Board of Directors, up to $22,874,509 of shares remain authorized for repurchase under the program.
ITEM 6.
SELECTED FINANCIAL DATA
Reserved
ITEM 7.
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 years ended December 31, 2020, 2019, and 2018. This section is intended to provide managements perspective of our results of operation. 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 section on page 20. Additionally, more information about our business activities can be found in “Business.”
GENERAL
We are a finance company whose strategic focus and growth in recent years has been through Medallion Bank (a wholly-owned subsidiary), which
originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers, and to finance home improvements. Historically we have had a
leading position in originating, acquiring, and servicing loans that finance taxi medallions and various types of commercial businesses.
Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a
compound annual growth rate of 16% (19% if there had been no loan sales during 2016, 2017, and 2018). We have transitioned away from medallion lending and
have placed our strategic focus on our growing consumer finance portfolios. As a result of our change in strategy, as of December 31, 2020, our consumer loans
represented 93% of our net loan portfolio, with commercial loans representing 6% and medallion loans representing 1%. Total assets under management, which
includes assets serviced for third party investors, were $1.8 billion as of December 31, 2020, and $1.7 billion as of December 31, 2019, and have grown at a
compound annual growth rate of 9% from $215,000,000 at the end of 1996.
Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan
portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as bank certificates of deposit
issued to customers, debentures issued to and guaranteed by the SBA, privately placed notes, and bank term debt. Net interest income fluctuates with changes in
the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-earning assets and interest-bearing liabilities
held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of
funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on
a different basis than our interest-bearing liabilities.
We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These
investments may be venture capital style investments which may not be fully collateralized. Our investments are typically in the form of secured debt instruments
with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in
equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.
Beginning in 2019, Medallion Bank began the process to build-out a strategic partnership program with financial technology, or fintech, companies.
Medallion Bank entered into an initial partnership in 2020 and began issuing its first loans, while continuing to explore opportunities with additional fintech
companies.
In recent years, we have focused on growing our consumer lending segments and maintaining the profitability of our commercial lending segment. During
the year ended December 31, 2020, we have taken various steps to pursue this strategy and improve our corporate governance, including:
36
•
•
•
•
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, New York, Chicago, Illinois, and Boston, Massachusetts;
exiting non-core investments, such as selling the assets of LAX Group, LLC on December 16, 2020, and expecting to sell, when practicable to
maximize our proceeds, other non-core investments like our remaining art investments of less than $1,000,000 in Medallion Fine Art, Inc.;
strengthening our initiative to grow the Bank by partnering with two fintech companies in our strategic partnership program; and
electing Cynthia A. Hallenbeck as our independent director, resulting in a more independent and diverse board of directors.
On March 7, 2018, a majority of the Company’s shareholders authorized our board of directors to withdraw our election to be regulated as a business
development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act, and we withdrew such election effective April 2, 2018.
At that point, we were no longer a BDC or subject to the provisions of the 1940 Act applicable to BDCs. Historically, the composition of our assets caused it to
meet the definition of an “investment company,” and we made a corresponding election to be treated as a BDC. Now that we have de-elected BDC status, it
operates so as to fall outside the definition of an “investment company” or within an applicable exception.
As a result of this change in status, commencing with the three months ended June 30, 2018:
•
•
we consolidated the results of Medallion Bank and our other subsidiaries in our financial statements, which, as an investment company, we were
previously precluded from doing; and
with the consolidation of Medallion Bank, given its significance to our overall financial results, we now report as a bank holding company for
accounting purposes under Article 9 and Guide 3 of Regulation S-X (but we are not a bank holding company for regulatory purposes).
As we made this change to our financial reporting prospectively, in this report we refer to both accounting in accordance with US generally accepted
accounting principles, or GAAP, applicable to bank holding companies, or Bank Holding Company Accounting, which applies commencing April 2, 2018, and to
that applicable to investment companies under the 1940 Act, or Investment Company Accounting, which applies to prior periods.
Our wholly-owned subsidiary, Medallion Bank, or the Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions which
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 taxi 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 are
likely to continue to have, significant negative effects on the US and global economy, employment levels, employee productivity, and financial market conditions.
This has had, and may continue to have increasingly negative effects on the ability of our borrowers to repay outstanding loans, the value of collateral securing
loans, the demand for loans and other financial services products and consumer discretionary spending. As a result of these or other consequences, the outbreak has
adversely and materially affected our business, results of operations and financial condition. 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, 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.
37
We have taken steps to operate through this crisis. For example, in late June our employees returned to work in our New York City offices on a part-time
basis in accordance with guidelines issued by New York, while our employees outside New York largely continue to work remotely. While there are elevated risks
with our workforce working remotely, we have implemented additional mitigating controls to help reduce such risks. In addition, to better align our structure with
profitability and reduce expenses, effective May 11, 2020, we had furloughed approximately 28% of the employees at our parent company, Medallion Financial
Corp. As of December 31, 2020, 21% of employees, all of whom were employees of our parent company, Medallion Financial Corp., and no employees of our
consolidated subsidiaries remain on furlough. As part of our expense-cutting measures, effective March 2, 2021, we terminated such Medallion Financial Corp.
employees on furlough. Additionally, we closed our satellite offices in Long Island City, New York, Chicago, Illinois, and Boston, Massachusetts.
The Bank temporarily increased its cash levels by increasing its deposits, and in order to take advantage of the current lower interest rates. 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. RPAC received $747,000 under the Paycheck Protection Program in the second quarter, and has not yet applied for forgiveness, but
expects to do so.
With our consumer business, in March 2020, we adjusted our payment policies and procedures, and created a program to support our borrowers during the
pandemic. We have been negotiating payment terms with our borrowers, and allowed them to defer payments up to 180 days. As of December 31, 2020, there were
minimal consumer loans on deferral and the level of potential loans 90 days or more past due would have likely resulted in increased charge-offs on the consumer
loan portfolios had they not been granted. 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 the consumer portfolio remains to be seen. In addition, we increased our allowance for
loan losses on consumer loans, and continued to monitor our loan portfolios as market conditions changed in both March and June of 2020. Overall, the effects of
the pandemic on us could be exacerbated given that our business model is largely consumer-directed and the pandemic, and preventative measures taken to contain
or mitigate the pandemic, had and may increasingly have significant negative effects on consumer discretionary spending.
With our medallion business, we also adjusted our payment policies and procedures and allowed borrowers to defer payments up to 180 days. As of
December 31, 2020, there were no medallion loans on deferral and we determined that anticipated payment activity on our medallion portfolio was impossible to
quantify upon exit of the deferral moratorium, and therefore deemed all such loans as impaired. As a result, all medallion loans were placed on nonaccrual and
written down to a net collateral value of $90,300 for New York City medallions along with write downs in most other markets during the 2020 third quarter and we
wrote down the New York City collateral an additional $10,800, to $79,500 net in the 2020 fourth quarter. These writedowns of the medallion assets led to an
increase of provision of approximately $25,945,000 related to medallion loans and approximately an additional $20,142,000 related to collateral write down on
other owned assets.
Substantially all our medallion loans and related assets are concentrated in New York City. As a result of the COVID-19 pandemic, in March 2020, the
Governor of New York State declared states of emergency for both the State and City of New York, and, since March 2020, economic activity generally and taxi
ridership in particular have decreased dramatically in New York City. Despite New York City’s phased reopening plan, 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 New York City 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.
Since March 31, 2020, payments on medallion loans have decreased significantly compared to the payments during the first quarter of 2020 and in prior
periods. We are actively engaged with many borrowers about modifying their loan agreements, and as a result, we placed all medallion loans on TDR as we work
with borrowers. We will continue to monitor our medallion loan 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.
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. For the mezzanine portfolio, performance is slowly recovering although lingering impacts of COVID-19
continues to weigh on performance. Refer to “Risk Factors -- The ongoing COVID-19 pandemic, and the related significant negative impact on the global
economy and financial markets, have had and could further have a material adverse impact on our business, operating results, and financial condition.”
38
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We follow financial accounting and reporting policies that are in accordance with GAAP. Some of these significant accounting policies require
management to make difficult, subjective or complex judgments. The policies noted below, however, are deemed to be our “critical accounting policies” under the
definition given to this term by the SEC. According to the SEC, “critical accounting policies” mean those policies that are most important to the presentation of a
company’s financial condition and results of operations, and require management’s most difficult, subjective, or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
The judgments used by management in applying the critical accounting policies may be affected by deterioration in the economic environment, which may
result in changes to future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in
significant changes to the allowance for loan losses in future periods, and the inability to collect on outstanding loans could result in increased loan losses.
Allowance for Loan Losses
In analyzing the adequacy of the allowance for loan losses, the Company uses historical delinquency and actual loss rates with a three-year look-back
period for medallion loans and a one-year look-back period for recreation and home improvement loans, and uses historical loss experience and other projections
for commercial loans. The allowance 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 size 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. This evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.
Our methodology to calculate the general reserve portion of the allowance includes the use of quantitative and qualitative factors. We initially determine an
allowance based on quantitative loss factors for loans evaluated collectively for impairment. The quantitative loss factors are based primarily on historical loss
rates, after considering loan type, historical loss and delinquency experience. The quantitative loss factors applied in the methodology are periodically re-evaluated
and adjusted to reflect changes in historical loss levels or other risks. Qualitative loss factors are used to modify the reserve determined by the quantitative factors
and are designed to account for losses that may not be included in the quantitative calculation according to management’s best judgment. Performing loans are
recorded at book value and the general reserve maintained to absorb expected losses consistent with GAAP.
All medallion loans that reach 90 days or more delinquent require a specific allowance for those loans, which is determined on an individual basis. We
deem a loan impaired when, based on current information and events, it is probable that we will be unable to collect the amounts due in accordance with the
original contractual terms of the loan agreement, including scheduled principal and interest payments. All impaired loans also require a specific allowance. We
charge-off loans in the period that such loans are deemed uncollectible or when they reach 120 days delinquent regardless of whether the loan is a recreation, home
improvement, or medallion loan.
The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be responsive to changes in portfolio
credit quality and inherent credit losses. The changes are reflected in both the pooled formula reserve and in specific reserves as the collectability of larger
classified loans is regularly recalculated with new information as it becomes available. Management is primarily responsible for the overall adequacy of the
allowance.
Medallion Loan Collateral Valuation
Due to the low volume of market transfer activity as medallion values declined in recent years, the determination of taxi medallion collateral fair value has
been derived quarterly for each jurisdiction taking into consideration recent market transfer activity, to the extent it is available, as well as a discounted cash flow
model when trading activity alone was deemed insufficient or unreliable. In general, recent market transfers published by each jurisdiction have been analyzed to
derive the median transfer activity value. However, depending on the circumstances, when analyzing transfer activity, transactions which management determined
from available information not to be arms-length have been excluded from the calculation of the median transfer value. When discounted cash flow models have
been used, significant inputs typically include the discount rate, taxi fare/lease revenue, and associated expenses such as vehicle costs, fuel, credit card processing
fees, repair costs, and insurance premiums. A higher discount rate, lower taxi fare/lease revenue and higher associated expenses would each produce a lower fair
value. At period end, the transfer activity and, if applicable, discounted cash flow values, are taken into consideration to arrive at a fair value of the medallion
collateral in each jurisdiction. For the current period, transfer activity was the primary consideration utilized in our valuation process.
39
Goodwill and Intangible Assets
Goodwill and intangible assets arose as a result of the excess of the fair value that was determined by an independent third party expert over the book value
of several of our previously unconsolidated portfolio investment companies as of April 2, 2018. Goodwill is tested annually for impairment by a third party expert
and is reviewed by management quarterly. For the annual goodwill testing, the assessment is based upon the Bank goodwill of $150,803,000 and the race
organization intangible asset of $26,165,000, both of which utilized a step zero qualitative impairment analysis based on historical and projected financial data. The
Bank-related intangible assets are amortized over their approximate useful life.
Deferred Taxes
Deferred taxes 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 recognized subject to management’s judgment that it is more like than
not that it will be recognized. In addition, a valuation allowance is recorded when it is deemed that some or all of the deferred tax assets will not be realized due to
the temporary differences.
40
Average Balances and Rates
The following table shows the Company’s consolidated average balance sheets, interest income and expense, and the average interest earning/bearing assets
and liabilities, and which reflect the average yield on assets and average costs on liabilities as of and for the twelve months ended December 31, 2020 and 2019 and
the nine months ended December 31, 2018.
(Dollars in thousands)
Interest-earning assets
Interest earning cash equivalents
Federal funds sold
Investment securities
Loans
Recreation
Home improvement
Commercial
Medallion
Strategic partnerships
Total loans
Total interest-earning assets
Non-interest-earning assets
Cash
Equity investments
Loan collateral in process of foreclosure(1)
Goodwill and intangible assets
Income tax receivable
Other assets
Total non-interest-earning assets
Total assets
Interest-bearing liabilities
Deposits
DZ loan
SBA debentures and borrowings
Retail and privately placed notes
Preferred securities
Notes payable to banks
Other borrowings
Total interest-bearing liabilities
Non-interest-bearing liabilities
Deferred tax liability
Other liabilities (2)
Total non-interest-bearing liabilities
Total liabilities
Non-controlling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income
Net interest margin
Twelve Months Ended December 31,
2020
2019
Nine Months Ended December 31,
2018
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
$
1,528 $
65,783
46,691
37
129
997
2.42% $
0.20
2.14
— $
36,444
45,283
—
574
1,285
0.00% $
1.58
2.84
— $
45,836
44,789
—
508
850
0.00%
1.47
2.52
743,118 110,706
282,202 27,273
7,334
(1,518)
4
1,166,443
143,799
1,280,445 144,962
69,293
71,821
9
14.90
9.66
10.58
(2.11)
44.44
12.33
11.32
646,425 99,463
209,842 19,943
7,632
63,039
3,665
127,109
—
—
1,046,415
130,703
1,128,142 132,562
15.39
9.50
12.11
2.88
—
12.49
11.75
579,440 68,870
187,570 12,799
7,459
78,501
6,317
234,476
—
—
1,079,987 95,445
1,170,612 96,803
15.78
9.06
12.61
3.58
—
11.73
10.98
19,312
10,385
50,893
202,618
702
47,488
331,398
$ 1,611,843
$ 1,043,096 $ 22,330
—
—
2,633
71,490
6,813
70,384
966
33,000
1,246
32,246
163
8,270
1,258,486 34,151
4,959
29,174
34,133
1,292,619
71,904
247,320
$ 1,611,843
30,494
9,560
51,924
204,063
771
44,252
341,064
$ 1,469,206
12,131
10,665
56,397
210,441
—
37,542
327,176
$ 1,497,788
2.14% $ 916,416 $ 22,521
—
2,985
5,789
1,522
2,069
159
1,138,746 35,045
—
76,544
59,252
33,000
45,506
8,028
—
3.68
9.68
2.97
3.86
1.97
2.71
2.46% $ 891,588 $ 14,230
2,126
67,935
2,300
79,157
2,625
33,625
1,111
33,000
2,305
67,732
119
8,286
1,181,323 24,816
—
3.90
9.77
4.61
4.55
1.98
3.08
2.12%
4.15
3.86
10.36
4.47
4.52
1.91
2.79
7,602
28,331
35,933
1,174,679
31,450
263,077
$ 1,469,206
1,549
22,743
24,292
1,205,615
27,318
264,855
$ 1,497,788
$ 110,811
$ 97,517
$ 71,987
8.65%
8.64%
8.19%
(1)
(2)
Includes financed sales of this collateral to third parties reported separately from the loan portfolio, and that are conducted by the Bank of $3,535,
$8,163 and $3,134 as of December 31, 2020, 2019 and 2018.
Includes deferred financing costs of $5,805 and $5,105 as of December 31, 2020 and 2019.
During the twelve months ended December 31, 2020, our net loans receivable yielded 12.33% (compared to 12.49% for the twelve months ended December
31, 2019), mainly driven by the slight decline in the recreation loan average yield, which had been driven by the increase in the reserves as a result of COVID-19
as well as lower interest due to deferrals granted during the year. In addition, in 2020 there was a decline on the commercial loan yield as a result of the increase in
non-accrual loans, and in the medallion
41
portfolio, also due to all loans being placed on non-accrual. The debt, mainly certificates of deposit, helps fund the growing consumer loan business and as market
rates have decreased, so has the average cost of borrowing.
Rate/Volume Analysis
The following table presents the change in interest income and expense due to changes in the average balances (volume) and average rates, calculated for
the twelve months ended December 31, 2020 and 2019 and the nine months ended December 31, 2018.
(Dollars in thousands)
Interest-earning assets
Interest earning cash and cash equivalents
Federal funds sold
Investment securities
Loans
Recreation
Home improvement
Commercial
Medallion
Strategic partnerships
Total loans
Total interest-earning assets
Interest-bearing liabilities
Deposits
DZ loan
SBA debentures and borrowings
Retail and privately placed notes
Preferred securities
Notes payable to banks
Other borrowings
Total interest-bearing liabilities
Net
Twelve Months Ended December 31,
Nine Months Ended December 31,
Increase
(Decrease)
In Volume
2020
Increase
(Decrease)
Net
In Rate
Change
Increase
(Decrease)
In Volume
2019
Increase
(Decrease)
Net
In Rate
Change
Increase
(Decrease)
In Volume
2018
Increase
(Decrease)
In Rate
Net
Change
$
29 $
472
46
— $
(910)
(332)
29 $
(438)
(286)
— $
(294)
3
— $ — $
(219)
75
132
129
— $
142
30
— $ —
160
18
42
12
(2,756) 7,775
(3,832) 11,246 10,531
15,078
487 3,045
7,329
2,558
6,933
(850) (2,783)
(1,933)
(298)
803
(972) (3,217)
(2,245)
(5,182)
(1,734)
— —
—
—
—
8,911
21,080
(4,091) 4,820
(7,985) 13,095
8,620 $ (3,887) $ 4,733 $
$ 21,627 $ (9,227) $ 12,400 $
396
(1,101)
(3,448)
—
(1,427)
160
314
662
2,089
188
28
161
(153)
(1,460) (2,422)
(962)
— —
—
1,002
(2,413) (1,411)
1,174 $ (2,383) $ (1,209)
$
—
(190)
1,093
—
(515)
1
3,213 $ (3,402) $
—
(162)
(69)
(557)
(308)
2
3,602 $ (4,496) $
(189) $
—
(352)
1,024
(557)
(823)
3
$
(894) $
$ 18,025 $ (4,731) $ 13,294 $
2,913 $ 3,322 $
409 $
— (2,367)
(2,367)
(98)
32
(130)
(172) 2,292
2,464
24
—
(947)
(979)
(1)
1
(602) $
2,827 $ 2,225 $
9,222 $ (6,714) $ 2,508 $
24
32
(2)
1,203 $ 1,421
218 $
(720)
(679)
30
32
(19)
—
79
—
(82)
(190)
6
2
(617) $
715
1,791 $ (3,715) $ (1,924)
(41)
(2)
(19)
79
108
4
1,332 $
During the twelve months ended December 31, 2020, interest income increased primarily due to the increased volume of our consumer loan portfolios, even
as the average rate decreased on the recreation loan portfolio. Additionally, we continued to see a decline in our overall medallion portfolio as all loans had been
placed on non-accrual, and they have continued to age 120 days or more past due and be charged-off to loan collateral in process of foreclosure. Interest expense
decreased for 2020 primarily driven by the overall decrease in borrowing rates, mainly on the deposits.
Our interest expense is driven by the interest rates payable on our bank certificates of deposit, short-term credit facilities with banks, fixed-rate, long-term
debentures issued to the SBA, and other short-term notes payable. The Bank issues brokered bank certificates of deposit, which are our lowest borrowing costs.
The Bank is able to bid on these deposits at a wide variety of maturity levels which allows for improved interest rate management strategies.
Our cost of funds is primarily driven by the rates paid on our various debt instruments and their relative mix, and changes in the levels of average
borrowings outstanding. See Note 6 to the consolidated financial statements for details on the terms of our outstanding debt. Our debentures issued to the SBA
typically have terms of ten years.
42
We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities
outstanding during the period. The tables above as well as below show the average borrowings and related borrowing costs for the years ended December 31, 2020,
2019 and 2018.
(Dollars in thousands)
December 31, 2018 (1)
Deposits
DZ loan
SBA debentures and borrowings
Notes payable to banks
Retail notes
Preferred securities
Other borrowings
Total borrowings
Interest
Expense
Average
Balance
Average
Borrowing
Costs
$
$
14,230 $
2,928
3,049
3,118
3,500
1,423
119
28,367 $
891,588
81,256
79,016
71,353
33,625
33,000
8,286
1,198,124
2.14%
3.60
3.86
4.37
10.41
4.31
1.93
2.37
(1)
Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and three months ended March 31, 2018
under Investment Company Accounting.
We continue to seek SBA funding through Medallion Capital to the extent it offers attractive rates. SBA financing subjects its recipients to limits on the
amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the Small Business Investment Act of 1985, as amended, or the
SBIA, and SBA regulations. In July 2020, we obtained a $25,000,000 commitment from the SBA. We believe that financing operations primarily with short-term
floating rate secured bank debt has generally decreased our interest expense, but has also increased our exposure to the risk of increases in market interest rates,
which we mitigate with certain interest rate strategies. At December 31, 2020 and 2019, short-term adjustable rate debt constituted 4% of total debt.
Loans
The gross loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to
loan originators, and which is amortized to interest income over the life of the loan. During the twelve months ended December 31, 2020 and 2019, there was
continued growth in the consumer lending segments, which was partially offset by the continued shrinkage of the medallion portfolio as loans have continued to
age over 120 days and be transferred to loan collateral in the process of foreclosure and payments received from borrowers. In addition, as a result of the COVID-
19 pandemic, there was an increase in charge-offs and loans transferred for the medallion segment.
$
Twelve Months Ended December 31, 2020
(Dollars in thousands)
Gross loans – December 31, 2019
Loan originations
Principal payments, sales, and maturities
Charge-offs, net
Transfer to loan collateral in process of
foreclosure, net
Amortization of origination costs
Amortization of loan premium
FASB origination costs, net
Paid-in-kind interest
Transfer to other foreclosed property
Gross loans – December 31, 2020
$
Recreation
Home
Improvement
Commercial
Medallion
713,332 $
294,885
(187,989)
(14,457)
247,324 $
193,098
(105,813)
(1,229)
(14,871)
(7,809)
(191)
9,786
—
—
—
1,910
(320)
(937)
—
—
792,686 $
334,033 $
43
69,767 $
7,575
(13,183)
(28)
—
8
—
—
1,188
—
65,327 $
130,432
—
(13,207)
(42,648)
(32,383)
(131)
(2,531)
36
—
(1,800)
37,768
Strategic
Partnership
$
— $
1,663
(1,639)
—
—
—
—
—
—
—
24 $
$
Total
1,160,855
497,221
(321,831)
(58,362)
(47,254)
(6,022)
(3,042)
8,885
1,188
(1,800)
1,229,838
Twelve Months Ended December 31, 2019
(Dollars in thousands)
Gross loans – December 31, 2018
Loan originations
Principal payments, sales, and maturities
Charge-offs, net
Transfer to loan collateral in process of
foreclosure, net
Amortization of origination costs
Amortization of loan premium
FASB origination costs, net
Paid-in-kind interest
Gross loans – December 31, 2019
Recreation
Home
Improvement
Commercial
Medallion
Total
$
587,038 $
301,403
(146,873)
(17,419)
(14,512)
(6,428)
(247)
10,370
—
183,155 $
142,112
(76,157)
(786)
—
1,561
(416)
(2,145)
—
$
713,332 $
247,324 $
64,083 $
18,578
(13,553)
(819)
—
34
—
610
834
69,767 $
183,606
—
(15,070)
(18,664)
(16,836)
(119)
(2,626)
141
—
130,432
$
$
1,017,882
462,093
(251,653)
(37,688)
(31,348)
(4,952)
(3,289)
8,976
834
1,160,855
The following table presents the approximate maturities and sensitivity to change in interest rates for our loans as of December 31, 2020.
(Dollars in thousands)
Fixed-rate
Recreation
Home improvement
Commercial
Medallion
Adjustable-rate
Recreation
Home improvement
Commercial
Medallion
Total loans(1)(2)
(1) Excludes strategic partnership loans.
(2) As of December 31, 2020, there were no floating-rate loans.
Loan Maturity
After 1 to 5
years
After 5 to 15
years
Within 1 year
$
25,031 $
1,690
13,777
74
9,490
6,522
5,101
—
—
1,421
31,553 $
172,189 $
76,079
17,494
53,373
25,243
7,498
5,706
—
1,792
-
179,687 $
After 15 years
46,749
59
46,690
—
—
—
—
—
—
—
46,749
947,738 $
678,714
258,924
10,100
—
26
26
—
—
—
947,764 $
Total
1,191,707
756,542
336,885
63,547
34,733
14,046
10,833
—
1,792
1,421
1,205,753
$
$
$
$
44
Provision and Allowance for Loan Loss
During the twelve months ended December 31, 2020, New York taxi medallion values decreased to a net realizable value of $79,500, from $167,000 at
December 31, 2019, and all medallions were deemed impaired due to the current COVID-19 pandemic. The impairment and decline in medallion values led to an
increase in provision of approximately $25,945. For certain consumer loans, the reserve percentages were increased 25-100 basis points, also due to the COVID-19
pandemic. Both consumer and medallion loans were placed on deferral during the year, but as loans were no longer in deferral, there was continuing aging of
recreation and medallion loans to 120 days or more, and charged-down to their collateral value. For the twelve months ended December 31, 2019, New York taxi
medallion values decreased from $181,000 to $167,000.
(Dollars in thousands)
Allowance for loan losses – beginning balance
Charge-offs
Recreation
Home improvement
Commercial
Medallion
Total charge-offs
Recoveries
Recreation
Home improvement
Commercial
Medallion
Total recoveries
Net charge-offs (1)
Provision for loan losses
Allowance for loan losses – ending balance (2) (3)
Twelve Months Ended December 31,
2020
2019
$
46,093 $
36,395
(23,543)
(2,909)
(31)
(49,361)
(75,844)
9,086
1,680
3
6,713
17,482
(58,362)
69,817
57,548 $
(24,433)
(2,504)
(819)
(22,205)
(49,961)
7,014
1,718
—
3,541
12,273
(37,688)
47,386
46,093
$
(1)
(2)
(3)
As of December 31, 2020, net cumulative charge-offs of loans and loan collateral in process of foreclosure in the medallion portfolio were $279,188, some
of which represents collection opportunities for the Company.
As of December 31, 2020, the general reserves previously recorded for the Company’s medallion loan portfolio had been reversed as all loans had been
deemed impaired and written down to collateral value.
As of December 31, 2020, there was no allowance for loan loss and net charge-offs related to the strategic partnership loans.
The following tables set forth the allowance for loan losses by type as of December 31, 2020 and 2019.
December 31, 2020
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
December 31, 2019
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
Amount
Percentage
of Allowance
Allowance as
a Percent of
Loan Category
Allowance as a
Percent of
Nonaccrual
27,348
5,157
—
25,043
57,548
48%
9
—
43
100%
3.45%
1.54
—
66.31
4.68%
378.20%
NM
—
68.01
93.17%
Amount
Percentage
of Allowance
Allowance as
a Percent of
Loan Category
Allowance as a
Percent of
Nonaccrual
18,075
2,608
—
25,410
46,093
39%
6
—
55
100%
2.53%
1.05
—
19.48
3.97%
228.25%
NM
—
389.84
174.04%
$
$
$
$
45
As of December 31, 2020, there was an increase in the allowance for loan losses as related to the recreation loan portfolio as compared to December 31,
2019. This change was due to the significant increase in loans originated during the year, along with the increased in reserve percentages as a result of the COVID-
19 pandemic. For the medallion loans, there was a significant increase in the reserve as a percentage of the total loans which had been driven by all medallion loans
being deemed impaired, and also driven by the COVID-19 pandemic.
The following table sets forth the pre-tax changes in our unrealized appreciation (depreciation) on investments, for the three months ended March 31, 2018
under Investment Company Accounting.
(Dollars in thousands)
Balance December 31, 2017
Net change in unrealized
Appreciation on investments
Depreciation on investments
Reversal of unrealized appreciation
(depreciation) related to realized
Gains on investments
Losses on investments
Balance March 31, 2018
Medallion
Loans
Commercial
Loans
Investments
in
Subsidiaries
Equity
Investments
Investments
Other Than
Securities
Total
$
(20,338) $
(513) $
158,920 $
3,121 $
(1,490) $
139,700
—
(38,170)
—
18
38,795
—
(998)
—
—
(1,915)
37,797
(40,067)
—
34,747
(23,761)
—
—
(495)
—
—
197,715
—
—
2,123
—
—
(3,405)
—
34,747
172,177
Under both Bank Holding Company Accounting and Investment Company Accounting, we generally follow a practice of discontinuing the accrual of
interest income on our loans that are in arrears as to payments for a period of 90 days or more. We deliver a default notice and begin foreclosure and liquidation
proceedings when management determines that pursuit of these remedies is the most appropriate course of action under the circumstances. A loan is considered to
be delinquent if the borrower fails to make a payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment
terms of the loan with a borrower that cannot make payments in accordance with the original loan agreement. For loan modifications, the loan will only be returned
to accrual status if all past due interest and principal payments are brought fully current. For credit that is collateral based, we evaluate the anticipated net residual
value we would receive upon foreclosure of such loans, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequate
in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses,
expecting to locate and install a new operator to run the business and reduce the debt. We cannot predict the ultimate impact that the ongoing COVID-19 pandemic
will have on the loan portfolios due to the greater than typical uncertainty surrounding COVID-19 and its related significant negative effects on the economy and
financial markets.
For the consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches
120 days delinquent, the account is charged-off to realized losses. If the collateral is repossessed, a realized loss is recorded to write the collateral down to its net
realizable value, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is
written off as a realized loss, and any excess proceeds are recorded as a recovery. Proceeds collected on charged-off accounts are recorded as recoveries. All
collection, repossession, and recovery efforts are handled on behalf of the Bank by the servicer.
The following table shows the trend in loans 90 days or more past due as of the dates indicated.
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total loans 90 days or more past due
December 31, 2020
December 31, 2019
December 31, 2018
Amount
% (1)
Amount
% (1)
Amount
% (1)
$
$
5,343
170
75
1,290
6,878
0.5% $
0.0
0.0
0.1
0.6% $
5,800
184
107
2,572
8,663
0.5% $
0.0
0.0
0.2
0.7% $
4,133
135
279
16,678
21,225
0.4%
0.0
0.0
1.7
2.1%
(1)
Percentages are calculated against the total or managed loan portfolio, as appropriate.
46
We estimate that the weighted average loan-to-value ratio of our medallion loans was approximately 327%, 190%, and 220% as of December 31, 2020,
2019, and 2018.
Recreation and medallion loans that reach 120 days past due are charged down to collateral value and reclassified to loan collateral in process of
foreclosure. The following table shows the activity of loan collateral in process of foreclosure for the twelve months ended December 31, 2020 and 2019.
Twelve Months Ended December 31, 2020
(Dollars in thousands)
Loan collateral in process of foreclosure – December 31, 2019
Transfer from loans, net
Sales
Cash payments received
Collateral valuation adjustments
Loan collateral in process of foreclosure – December 31, 2020
Twelve Months Ended December 31, 2019
(Dollars in thousands)
Loan collateral in process of foreclosure – December 31, 2018
Transfer from loans, net
Sales
Cash payments received
Collateral valuation adjustments
Loan collateral in process of foreclosure – December 31, 2019
47
Recreation
Medallion
Total
1,476 $
14,871
(7,512)
—
(7,403)
1,432 $
51,235 $
32,403
(300)
(5,687)
(24,523)
53,128 $
52,711
47,274
(7,812)
(5,687)
(31,926)
54,560
Recreation
Medallion
Total
1,503 $
14,512
(7,591)
—
(6,948)
1,476 $
47,992 $
16,836
(1,515)
(7,697)
(4,381)
51,235 $
49,495
31,348
(9,106)
(7,697)
(11,329)
52,711
$
$
$
$
The following table presents the gain/loss experience on the investment portfolio for the three months ended March 31, 2018 under Investment Company
Accounting.
(Dollars in thousands)
Realized gains (losses) on loans and equity
investments
Medallion loans
Commercial loans
Total loans
Total realized losses on loans
and equity investments
Net realized losses on investments at Medallion
Bank and other controlled subsidiaries
Total managed realized losses on loans
and equity investments
Realized gains (losses) as a % of average
balances outstanding
Medallion loans
Commercial loans
Total loans
Net investments
Net investments at Medallion Bank and other
controlled subsidiaries
Managed net investments
March 31, 2018
$
$
(34,747)
2
(34,745)
(34,745)
(23,073)
$
(57,818)
(65.74)%
0.01
(45.96)
(30.89)
(9.66)%
(18.22)%
The following table sets forth the pre-tax changes in our unrealized and realized gains and losses in the investment portfolio for the three months ended
March 31, 2018 under Investment Company Accounting.
(Dollars in thousands)
Net change in unrealized appreciation
(depreciation) on investments
Unrealized appreciation
Unrealized depreciation
Net unrealized appreciation on investments in
Medallion Bank and other controlled subsidiaries
Realized gains
Realized losses
Net unrealized losses on investments other than
securities and other assets
Total
Net realized gains (losses) on investments
Realized gains
Realized losses
Other gains
Direct recoveries (charge-offs)
Total
48
March 31, 2018
$
$
$
$
(998)
(38,152)
29,115
—
34,747
(1,915)
22,797
—
(34,747)
—
2
(34,745)
SEGMENT RESULTS
We manage our financial results under four operating segments; recreation lending, home improvement lending, commercial lending, and medallion
lending. We also show results for two non-operating segments; RPAC and corporate and other investments. All results are for the twelve months ended
December 31, 2020 and 2019 and the nine months ended December 31, 2018.
Recreation Lending
The recreation lending segment is a high-growth prime and non-prime consumer finance business which is a significant source of income for us, accounting
for 76% and 75% of our interest income for the twelve months ended December 31, 2020 and 2019 and 71% for the nine months ended December 31, 2018. The
loans are secured primarily by RVs, boats, and trailers with RV loans making up 60% of the portfolio, boat loans making up 19% of the portfolio, and trailer loans
making up 12% of the portfolio as of December 31, 2020, compared to 61%, 19%, and 12% as of December 31, 2019. Recreation loans are made to borrowers
residing in all fifty states, with the highest concentrations in Texas, California, and Florida, at 17%, 10%, and 9% of loans outstanding at December 31, 2020 and
2019 and with no other states over 9%.
During the twelve months ended December 31, 2020 and 2019, the recreation portfolio continued to grow, leading to an increase in interest income and net
income for the year, even as the allowance percentage increased. During the nine months ended December 31, 2018, the recreation segment grew and also included
a third quarter sale of $55,979,000 of recreation loans for a gain of $3,093,000, included in non-interest income (expense).
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2020 and 2019 and the nine months
ended December 31, 2018.
(Dollars in thousands)
Selected Earnings Data
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after loss provision
Total other income (expense), net
Net income before taxes
Income tax provision
Net income after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status (1)
Charge-off%
(1)
Loans 90 days or more past due.
49
Twelve Months Ended December 31,
2020
2019
Nine Months Ended
December 31,
2018
$
$
$
$
$
$
110,706
13,013
97,693
23,736
73,957
(27,341)
46,616
(12,004)
34,612
792,686
27,348
765,338
777,605
621,735
4.59%
22.93
14.90
13.15
3.45
0.70
1.95
$
99,463
13,304
86,159
28,638
57,521
(23,490)
34,031
(8,813)
25,218
$
$
713,332
18,075
695,257
707,377
563,805
3.84%
17.19
15.39
13.33
2.53
0.84
2.69
68,870
6,986
61,884
15,118
46,766
(14,242)
32,524
(8,579)
23,945
587,038
6,856
580,182
590,746
434,527
5.48%
22.60
15.78
14.18
1.17
0.73
1.89
Home Improvement Lending
The home improvement lending segment works with contractors and financial service providers to finance residential home improvements and is
concentrated in swimming pools, roofs, windows, and solar panels at 27%, 24%, 13%, and 8% at December 31, 2020, as compared to 23%, 21%, 14%, and 12% of
total loans outstanding at December 31, 2019, with no other collateral types over 8%. Home improvement loans are made to borrowers residing in all fifty states,
with the highest concentrations in Florida, Texas, and Ohio at 11%, 11%, and 9% at December 31, 2020, as compared to 11%, 11%, and 10% of loans outstanding
at December 31, 2019, and with no other states over 9%.
For the twelve months ended December 31, 2020 and 2019, the home improvement loan portfolio continued to grow, leading to an increase in interest
income and overall net income. In September 2018, we sold $44,909,000 of home improvement loans for a gain of $2,079,000, which is included in other income
(expense).
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2020 and 2019 and the nine months
ended December 31, 2018.
(Dollars in thousands)
Selected Earnings Data
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after loss provision
Other income (expense), net
Net income before taxes
Income tax provision
Net income after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status (1)
Charge-off%
(1)
Loans 90 days or more past due.
Commercial Lending
Twelve Months Ended December 31,
2020
2019
Nine Months Ended
December 31,
2018
$
$
$
$
$
$
27,273
5,699
21,574
3,778
17,796
(9,611)
8,185
(2,108)
6,077
334,033
5,157
328,876
340,494
272,284
2.07%
10.35
9.66
7.62
1.54
0.05
0.44
$
19,943
4,757
15,186
1,598
13,588
(7,520)
6,068
(1,572)
4,496
$
$
247,324
2,608
244,716
252,704
201,605
2.20%
10.22
9.50
7.24
1.05
0.07
0.37
12,799
2,290
10,509
2,453
8,056
(3,093)
4,963
(1,319)
3,644
183,155
1,796
181,359
188,892
143,815
2.56%
11.30
9.06
7.44
0.98
0.07
0.46
We originate both senior and subordinated loans nationwide to businesses in a variety of industries, more than 53% of which are located in the Midwest
region, with the rest scattered across the country. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally
range in amount from $2,000,000 to $5,000,000 at origination, and typically include an equity component as part of the financing. The commercial lending
business has concentrations in manufacturing and professional, scientific, and technical services making up 57% and 14% of loans outstanding at December 31,
2020, and 63% and 13% at December 31, 2019.
50
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2020 and 2019 and the nine months
ended December 31, 2018. The commercial segment encompasses the mezzanine lending business, and the other legacy commercial loans (immaterial to total)
have been allocated to corporate and other investments.
(Dollars in thousands)
Selected Earnings Data
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after loss provision
Other income (expense), net
Net income before taxes
Income tax provision
Net income after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage(1)
Delinquency status (1) (2)
Charge-off% (3)
Twelve Months Ended December 31,
2020
2019
Nine Months Ended
December 31,
2018
$
$
$
$
$
$
6,926
2,538
4,388
—
4,388
(3,196)
1,192
(299)
893
62,037
—
62,037
80,622
65,924
1.07%
5.17
10.51
6.66
0.00
0.11
0.04
$
7,183
2,833
4,350
364
3,986
(1,149)
2,837
(684)
2,153
$
$
66,405
—
66,405
84,924
68,666
2.44%
12.21
11.39
6.90
0.00
0.15
1.30
7,076
1,502
5,574
—
5,574
(1,824)
3,750
(862)
2,888
59,973
—
59,973
93,807
53,719
4.27%
9.43
14.25
11.23
0.00
0.44
0.00
(1)
(2)
(3)
Ratio is based off of total commercial balances, and relates solely to the legacy commercial loans balances.
Loans 90 days or more past due.
Ratio is based on total commercial lending business, and relates to the total loan business.
Geographic Concentrations
Michigan
Illinois
North Carolina
Minnesota
Texas
California
Other (1)
Total
December 31, 2020
Total Gross
Loans
% of
Market
December 31, 2019
Total Gross
Loans
% of
Market
$
$
10,461
9,473
6,836
5,679
5,559
5,000
19,029
62,037
17% $
15
11
9
9
8
31
100% $
10,331
9,359
5,250
9,462
3,306
4,997
23,700
66,405
16%
14
8
14
5
8
35
100%
(1)
Includes seven other states, which were all under 7% as of December 31, 2020, and nine other states, which were all under 8% as of December 31, 2019.
51
Medallion Lending
The medallion lending segment operates mainly in the New York City, Newark, and Chicago markets. We have a long history of owning, managing, and
financing taxi fleets, taxi medallions, and corporate car services. For the twelve months ended December 31, 2020, we saw a significant decline in the medallion
collateral value from $167,000 at December 31, 2019 to $79,500 as of December 31, 2020, which was primarily due to the current COVID-19 pandemic, and we
recognized an additional net loss of $41,652,000 due to the reserves and write-down of collateral related to the loans in process of foreclosure. Additionally, we
had deemed all medallion loans impaired and placed them on nonaccrual in the third quarter of 2020. For the twelve months ended December 31, 2019, we saw the
taxi medallion values decline slightly in the New York City and Chicago markets, although we did see an improvement in collections. For the nine months ended
December 31, 2018, we saw a leveling off in the medallion values in the New York City market, while in other markets there were declines in values. During the
2018 fourth quarter, we deconsolidated Trust III, which resulted in a gain of $25,325,000, leading to an overall decline in medallion loans. All the loans are secured
by the medallions and enhanced by personal guarantees of the shareholders and owners.
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2020 and 2019 and the nine months
ended December 31, 2018.
(Dollars in thousands)
Selected Earnings Data
Total interest income (loss)
Total interest expense
Net interest loss
Provision for loan losses
Net interest loss after loss provision
Other income (expense), net
Net loss before taxes
Income tax benefit
Net loss after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status (1)
Charge-off%
(1)
Loans 90 days or more past due.
Geographic Concentration
New York City
Newark
All Other
Total
$
$
$
Twelve Months Ended December 31,
2020
2019
Nine Months Ended
December 31,
2018
$
$
$
(1,518)
3,610
(5,128)
42,276
(47,404)
(30,366)
(77,770)
19,520
(58,250)
37,768
25,043
12,725
124,554
98,636
(33.21)%
(165.21)
(2.11)
(7.14)
66.31
3.57
59.38
$
$
$
3,665
7,962
(4,297)
16,331
(20,628)
(10,493)
(31,121)
7,596
(23,525)
130,432
25,410
105,022
217,483
176,825
(9.73)%
(48.49)
2.88
(3.38)
19.48
2.04
14.68
6,317
10,125
(3,808)
41,437
(45,245)
9,742
(35,503)
7,938
(27,565)
183,606
27,743
155,863
273,501
294,465
(10.13)%
NM
3.58
(2.16)
15.11
9.43
7.76
December 31, 2020
Total Gross
Loans
% of
Market
December 31, 2019
Total Gross
Loans
% of
Market
33,657
3,811
300
37,768
89% $
10
1
100% $
115,340
14,316
776
130,432
88%
11
1
100%
$
$
52
Geographic Concentration
New York City
Newark
Chicago
All Other
Total
RPAC
December 31, 2020
December 31, 2019
Total Loan
Collateral in
Process of
Foreclosure
Loans
$
$
38,738
7,994
6,057
339
53,128
Total Loan
Collateral in
Process of
Foreclosure
Loans
% of
Market
73% $
15
11
1
100% $
41,494
2,277
6,425
1,039
51,235
% of
Market
81%
4
13
2
100%
We are the majority owner and managing member of RPAC Racing, LLC, a performance and marketing company for NASCAR. Revenues are mainly
earned through sponsorships and race winning activity over the ten month race season (February through November) during the year. As a result of COVID-19, the
race season was suspended from March 15, 2020 through May 17, 2020. As states began to reopen, NASCAR began racing and completed all races on a revised
schedule.
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2020 and 2019 and the nine months
ended December 31, 2018.
(Dollars in thousands)
Selected Earnings Data
Sponsorship, race winnings, and other income
Race and other expenses
Interest expense
Total expenses
Net income (loss) before taxes
Income tax (provision) benefit
Net income (loss) after taxes
Balance Sheet Data
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Corporate and Other Investments
$
$
$
Twelve Months Ended December 31,
2020
2019
Nine Months Ended
December 31,
2018
20,042
16,339
163
16,502
3,540
(889)
2,651
$
$
$
18,742
15,938
159
16,097
2,645
(329)
2,316
$
$
33,711
8,689
$
31,538
7,794
7.98%
NM
7.28%
(96.37)
14,368
18,597
121
18,718
(4,350)
1,108
(3,242)
29,925
7,649
(11.69)%
NM
This non-operating segment relates to our equity and investment securities as well as our legacy commercial business, other assets, liabilities, revenues, and
expenses not allocated to the operating segments. Commencing with the 2020 second quarter, the Bank began issuing loans related to the new strategic partnership
business, which is currently included within this segment, for a total of $24,000 of net loans as of December 31, 2020. This segment also reflects the elimination of
all intercompany activity among the consolidated entities.
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2020 and 2019 and the nine months
ended December 31, 2018.
53
(Dollars in thousands)
Selected Earnings Data
Total interest income
Total interest expense
Net interest loss
Total interest expense
Net interest loss
Other income (expense), net
Net loss before taxes
Income tax benefit
Net loss after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
$
$
$
Twelve Months Ended December 31,
2020
2019
Nine Months Ended
December 31,
2018
$
$
$
1,575
9,128
(7,553)
27
(7,580)
(11,164)
(18,744)
5,854
(12,890)
3,314
—
3,314
285,425
244,987
$
$
$
2,308
6,030
(3,722)
—
(3,722)
(8,401)
(12,123)
3,461
(8,662)
3,362
—
3,362
247,641
150,898
1,741
3,792
(2,051)
—
(2,051)
(6,489)
(8,540)
1,005
(7,535)
4,110
—
4,110
204,975
127,853
(5.06)%
(23.29)
(3.71)%
(14.26)
(4.07)%
(12.37)
Summary Consolidated Financial Ratios
The below presents selected financial ratios for the Company, for the twelve months ended December 31, 2020 and 2019 and the nine months ended
December 31, 2018.
(Dollars in thousands, Except per share data)
Selected financial ratios
Return on average assets (ROA)
Return on average equity (ROE)
Dividend payout ratio
Net interest margin
Other income ratio (2)
Total expense ratio (3)
Equity to assets (1)
Debt to equity (1)
Loans receivable to assets
Net charge-offs
Net charge-offs as a % of average loans receivable
Allowance coverage ratio
Twelve Months Ended
December 31, 2020
Twelve Months Ended
December 31, 2019
Nine Months Ended
December 31, 2018
(2.16)%
(10.90)
—
8.65
(0.46)
7.51
18.54
4.3x
71%
58,362
5.00%
4.68
(0.12)%
(0.59)
—
8.64
1.81
9.18
21.70
3.5x
72%
37,688
3.60%
3.97
(0.90)%
(4.62)
—
8.19
1.88
9.77
21.00
3.7x
71%
22,613
2.73%
3.58
(1)
(2)
(3)
Includes $73,153, $71,320 and $27,596 related to the non-controlling interests in consolidated subsidiaries as of December 31, 2020, 2019, and 2018.
Other income ratio represents other income divided by average interest earning assets, and excludes the gain on the deconsolidation of Trust III of $25,325
for the nine months ended December 31, 2018. See Note 20 for additional information.
Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average interest earning assets.
54
Consolidated Results of Operations
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Net loss attributable to shareholders was $34,783,000, or $1.42 per share, for the year ended December 31, 2020, compared to the net loss attributable to
shareholders of $1,762,000, or $0.07 per share, for the year ended December 31, 2019.
Total interest income was $144,962,000 for the year ended December 31, 2020, compared to $132,562,000 for the year ended December 31, 2019. The
increase in interest income reflected the continued growth in the consumer lending segments, which was partially offset by contraction in the medallion lending
segment, driven by both a decline in overall medallion loans along with all loans being placed on nonaccrual. The yield on interest earning assets was 11.32% for
2020, compared to 11.75% for 2019. Average interest earning assets were $1,280,445,000 for the year, an increase from $1,255,251,000 in the prior year.
Loans before the allowance for loan losses were $1,229,838,000 as of December 31, 2020, comprised of recreation ($792,686,000), home improvement
($334,033,000), commercial ($65,327,000), medallion ($37,768,000), and strategic partnership ($24,000) loans. The Company had an allowance for loan losses as
of December 31, 2020 of $57,548,000, which was attributable to the recreation (48%), medallion (43%), and home improvement (9%) loan portfolios. As of
December 31, 2019, loans before allowance for loan losses were $1,160,855,000, comprised of recreation ($713,332,000), home improvement ($247,324,000),
medallion ($130,432,000), and commercial ($69,767,000) loans. The Company had an allowance for loan losses as of December 31, 2019 of $46,093,000, which
was attributable to medallion (55%), recreation (39%), and home improvement (6%) loans.
Loans increased $68,983,000, or 6%, from December 31, 2019 to $1.2 billion as of December 31, 2020 as a result of $497,221,000 of loan originations,
partially offset by principal payments, net charge-offs (mainly on medallion loans), and transfers to loan collateral in process of foreclosure. The provision for loan
losses was $69,817,000 for the year ended December 31, 2020, compared to $47,386,000 for 2019. The increase was mainly due to all medallion loans being
deemed impaired due to the continued uncertainty of the potential continued impact of the COVID-19 pandemic on those borrowers. In addition, New York City
and almost all other market net collateral values decreased, and the loans were written down, leading to an increase in provisions of approximately $25,945,000.
Additionally, this change reflected the increase of reserve percentages ranging from 25 to 100 basis points on the recreation subprime loan business, related to the
uncertainty about the potential impact on the businesses as a result of COVID-19. The charge-off ratios on the loan portfolios increased to 5.00% for the year
ended December 31, 2020 compared to 3.60% for the prior year, mostly in the medallion segment. See Note 4 for additional information on loans and the
allowance for loan losses.
Interest expense was $34,151,000 for the year ended December 31, 2020, compared to $35,045,000 for the year ended December 31, 2019. The average
cost of borrowed funds was 2.71% for 2020, compared to 3.08% for 2019, mainly driven by the decline in market rates for deposits. Average debt outstanding was
$1,258,257,000 for 2020, compared to $1,138,746,000 for 2019. This increase was driven by the issuance additional certificates of deposits to increase our
liquidity and help fund the growing consumer segment along with the new issuance of privately placed notes. See page 41 for a table which shows average
balances and cost of funds for our funding sources.
Net interest income was $110,811,000 for the year ended December 31, 2020, compared to $97,517,000 for the prior year. The net interest margin was
8.65%, compared to 8.64% for the year ended December 31, 2019, reflecting the above.
Net other income (loss), which is comprised of sponsorship and race winnings, prepayment fees, servicing fee income, late charges, write-downs of loan
collateral, impairment of equity investments, and other miscellaneous income was a loss of $5,936,000 for the year ended December 31, 2020, compared to income
of $20,387,000 for the year ended December 31, 2019. The decline was mainly due to significant reductions in collateral values for the New York City taxi
medallions and other markets, along with a $4,145,000 gain on debt extinguishment in 2019, and a $3,510,000 charge in connection with the writeoff of a non-core
sports-related investment in 2020, all which was partly offset by an increase in sponsorship and race winnings in the year ended December 31, 2020.
Operating expenses were $72,039,000 for the year ended December 31, 2020, compared to $68,181,000 for the prior year. Salaries and benefits were
$28,172,000 for 2020, an increase from $24,971,000 for 2019, which was mainly attributable to increased salaries related to the Bank due to its continued growth,
an increase in bonuses for the entire Company, as well as increased stock option expense. Race team costs were $8,366,000 in 2020, compared to $8,996,000 for
2019, which reflected the condensed race schedule and lower travel and racing costs. Professional fees were $8,047,000 for the year, an increase from the
$7,402,000 for 2019, primarily reflective of legal costs for a variety of corporate matters. Loan servicing costs were $6,737,000 for the year, up from $5,253,000
for 2019, primarily reflecting the increased costs of servicing the growing recreation and home improvement consumer loans, which have grown 17% from
December 31, 2019. Loan collection costs declined from $6,638,000 for 2019, to $5,454,000 for 2020, due to improvement in contracts with the collectors.
Occupancy and other operating expenses were $15,263,000 for the year, which increased $342,000, or 2%, compared to the prior year, due to race related other
costs, partly offset by lower travel, meals and entertainment expenses as a result of the shut-downs related to COVID-19.
55
Total income tax benefit was $10,074,000 for 2020, compared to an income tax provision of $341,000 for 2019. The 2020 year benefit included $1,228,000
of benefit related to a change in the effective tax rate, while the 2019 year included benefits of $380,000 attributable to net operating loss revaluations, $916,000 of
benefits related to a change in the effective income tax rate and $600,000 tax benefit related to the settlement of a state audit. See Note 8 for more information.
Loan collateral in process of foreclosure was $54,460,000 at December 31, 2020, an increase from $52,711,000 at December 31, 2019. The increase was
primarily reflective of additional loans having reached 120 days past due and being charged down to their collateral value and reclassified to loan collateral in
process of foreclosure, partly offset by the continued decline in collateral values on the medallion portfolio.
For the Twelve Months Ended December 31, 2019 Compared to the Nine Months Ended December 31, 2018
Net loss attributable to stockholders was $1,762,000 or $0.07 per diluted common share for the twelve months ended December 31, 2019, compared to a net
loss of $10,172,000 or $0.42 per diluted common share for the nine months ended December 31, 2018.
Total interest income was $132,562,000 for the twelve months ended December 31, 2019, compared to $96,803,000 for the nine months ended December
31, 2018. Interest income reflected the continued growth in the consumer lending segments partly offset by the contraction in the lower yielding medallion lending
segment. The yield on interest earning assets was 11.75% for the twelve months ended December 31, 2019, an improvement from 10.98% for the nine months
ended December 31, 2018. Average interest earning assets were $1,128,479,000 for the twelve months ended December 31, 2019, a decline from $1,170,612,000
for the nine months ended December 31, 2018.
Loans before allowance for loan losses were $1,160,855,000 as of December 31, 2019, comprised of recreation ($713,332,000), home improvement
($247,324,000), medallion ($130,432,000), and commercial ($69,767,000) loans. The Company had an allowance for loan losses as of December 31, 2019 of
$46,093,000, which was attributable to medallion (55%), recreation (39%), and home improvement (6%) loans. As of December 31, 2018, loans before allowance
for loan loss were $1,017,882,000, which were comprised of recreation ($587,038,000), home improvement ($183,155,000), medallion ($183,606,000), and
commercial ($64,083,000) loans. The Company had an allowance for loan losses as of December 31, 2018 of $36,395,000, which was attributable to the medallion
(76%), recreation (19%), and home improvement (5%) loan portfolios. Loans increased $142,973,000, or 14%, from the prior year end primarily due to
$462,093,000 of loan originations mostly in the consumer segments, offset partly by principal payments, transfer to loans in process of foreclosure, and net charge-
offs. The provision for loan losses was $47,386,000 for the twelve months ended December 31, 2019, compared to $59,008,000 for the nine months ended
December 31, 2018. The improvement was reflective of lower net charge-offs on the medallion portfolio, along with taxi medallion values remaining relatively
consistent during 2019. The charge off ratios on the loan portfolio increased to 3.60% for the twelve months ended December 31, 2019 compared to 2.73% for the
nine months ended December 31, 2018, driven by the recreation segment. See Note 4 for additional information on loans and the allowance for loan losses.
Interest expense was $35,045,000 for the twelve months ended December 31, 2019, compared to $24,816,000 for the nine months ended December 31,
2018. The average cost of borrowed funds was 3.08%, compared to 2.79%, mainly driven by new borrowings at higher rates and the roll off of lower cost
borrowings. Average debt outstanding was $1,138,746,000 for the twelve months ended December 31, 2019, compared to $1,181,323,000 for the nine months
ended December 31, 2018. See page 41 for a table which shows average balances and cost of funds for our funding sources.
Net interest income was $97,517,000 for the twelve months ended December 31, 2019, compared to $71,987,000 for the nine months ended December 31,
2018, and the net interest margin was 8.64%, compared to 8.19%, reflecting the above.
Noninterest income, which is comprised of sponsorship and race winnings, prepayment fees, servicing fee income, late charges, write-downs of loan
collateral, impairment of equity investments, and other miscellaneous income was $20,387,000 for the twelve months ended December 31, 2019, compared to
$41,946,000 for the nine months ended December 31, 2018. The decrease was primarily driven by the one-time gain on the deconsolidation of Trust III of
$25,325,000 in the prior year.
Operating expenses were $68,181,000 for the twelve months ended December 31, 2019, compared to $62,081,000 for the nine months December 31, 2018.
Salaries and benefits expense was $24,971,000 for the twelve months ended December 31, 2019 compared to $19,357,000 for the nine months ended December 31,
2018, professional fees were $7,402,000 for the twelve months ended December 31, 2019, compared to $8,609,000 for the nine months ended December 31, 2018,
primarily reflecting legal costs for a variety of corporate and investment-related matters, and collections costs were $6,638,000 for the twelve months ended
December 31, 2019, compared to $5,207,000 for the nine months ended December 31, 2018. The remaining expenses for the twelve months ended December 31,
2019 included race team costs of $8,996,000, loan servicing costs of $5,253,000, primarily reflecting costs of
56
servicing the recreation and home improvement consumer loans, and occupancy and other expenses of $14,921,000, whereas for the nine months ended December
31, 2018, race team costs were $7,121,000, loan servicing costs were $3,470,000, and occupancy and other operating expenses were $18,317,000, which included
the impairment on goodwill of $5,615,000
Total income tax expense was $341,000 for the twelve months ended December 31, 2019, compared to $709,000 for the nine months ended December 31,
2018. The current year tax expense included $891,000 due to changes in effective state income tax rates, partly offset by $380,000, $640,000 and $309,000 of
benefit due to the revaluation of the net operating losses, changes in state income tax accruals and income attributable to non-controlling interest. See Note 8 for
more information.
Loan collateral in process of foreclosure was $52,711,000 at December 31, 2019, an increase from $49,495,000 at December 31, 2018, reflecting
$31,348,000 of net loans transferred, partly offset by sales, cash payments, and valuation adjustments incurred during the current year.
Goodwill and intangible assets were $203,339,000 at December 31, 2019, down from $204,785,000 at December 31, 2018, reflecting the amortization of
the intangible assets during 2019. See Note 2 for further information regarding goodwill and intangible assets.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of consumer, commercial, and
medallion loans, and investment securities) reprice on a different basis over time in comparison to our interest-bearing liabilities (consisting primarily of bank
certificates of deposit, credit facilities and borrowings with banks and other lenders, and SBA debentures and borrowings).
Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates,
although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Abrupt increases in market rates of interest may
have an adverse impact on our earnings until we are able to originate new loans at the higher prevailing interest rates. Conversely, having interest-earning assets
that mature or reprice more frequently on average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result
in declining net earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning assets and
interest-bearing liabilities results in interest rate risk.
The effect of changes in interest rates is mitigated by regular turnover of the portfolios. We believe that the average life of our loan portfolios varies to some
extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the
interest rate payable on the borrower’s loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate
environment. However, borrowers may prepay for a variety of other reasons, such as to monetize increases in the underlying collateral values. In addition, we
manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting
repricing intervals on certificates of deposit, for terms of up to five years.
A relative measure of interest rate risk can be derived from our interest rate sensitivity gap. The interest rate sensitivity gap represents the difference
between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified intervals of time. The gap is considered to be positive
when repriceable assets exceed repriceable liabilities, and negative when repriceable liabilities exceed repriceable assets. A relative measure of interest rate
sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a
percentage of total assets.
57
The following table presents our interest rate sensitivity gap at December 31, 2020. The principal amounts of interest earning assets are assigned to the time
frames in which such principal amounts are contractually obligated to be repriced. We have not reflected an assumed annual prepayment rate for such assets in this
table.
(Dollars in thousands)
Earning assets
Floating-rate
Adjustable rate
Fixed-rate
Cash
Total earning assets
Interest bearing liabilities
Deposits
Retail and privately placed notes
SBA debentures and borrowings
Preferred securities
Notes payable to banks
Other borrowings
Total liabilities
Interest rate gap
Cumulative interest rate gap
December 31, 2019 (2)
December 31, 2018 (2)
December 31, 2020 Cumulative Rate Gap (1)
More
Than 2
and Less
Than 3
Years
More
Than
1 and Less
Than 2
Years
More
Than 3
and Less
Than 4
Years
Less
Than
1 Year
More
Than 4
and Less
Than 5
Years
More
Than
5 and Less
Than 6
Years
Thereafter
Total
$
58,977 $
6,523
26,845
54,743
$ 147,088 $
— $
8,258
37,141
—
45,399 $
— $
1,845
44,606
—
46,451 $
— $
40
53,989
—
54,029 $
— $
—
56,643
—
56,643 $
— $
26
60,328
—
60,354 $
— $
—
58,977
16,692
954,388 1,233,940
54,743
954,388 $ 1,364,352
—
33,625
22,508
33,000
30,421
500
— $
$ 393,835 $ 241,605 $ 190,387 $ 120,040 $ 121,955 $
—
—
14,000
14,000
—
—
—
—
—
747
14,000 $
$ 513,889 $ 249,047 $ 195,387 $ 161,880 $ 136,702 $
$ (366,801) $ (203,648) $ (148,936) $ (107,851) $
46,354 $
(80,059) $
$ (366,801) $ (570,449) $ (719,385) $ (827,236) $ (907,295) $ (860,941) $
36,000
5,000
—
840
—
—
5,000
—
—
—
—
—
—
—
7,442
33,600
7,500
—
—
—
— $ 1,067,822
103,225
68,008
33,000
31,261
8,689
41,100 $ 1,312,005
52,347
913,288 $
—
52,347 $
$ (260,024) $ (500,953) $ (651,546) $ (689,819) $ (748,187) $ (706,935) $
$ (232,323) $ (409,272) $ (563,100) $ (638,264) $ (600,146) $ (554,335) $
83,402 $
59,833 $
—
—
(1)
(2)
The ratio of the cumulative one year gap to total interest rate sensitive assets was (27%), as of December 31, 2020, and was (21%) as of December 31, 2019
and 2018.
Excludes federal funds sold and investment securities.
Our interest rate sensitive assets were $1,364,352,000 and interest rate sensitive liabilities were $1,312,005,000 at December 31, 2020. The one-year
cumulative interest rate gap was a negative $366,801,000 or 27% of interest rate sensitive assets. We seek to manage interest rate risk by originating adjustable-rate
loans, by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, and by other options consistent with
managing interest rate risk.
With the cessation of LIBOR at the end of 2021, we are currently reviewing the impact on our loans and borrowings. We do not have lendings tied to
LIBOR and do not expect a significant impact on our loans. We expect to rely on our lenders to adjust and communicate rate adjustments, however, we do not
expect a material impact on our borrowings.
Liquidity and Capital Resources
Our sources of liquidity are with a variety of local and regional banking institutions, unfunded commitments to sell debentures to the SBA, loan
amortization and prepayments, private issuances of debt securities, participations or sales of loans to third parties, the disposition of other assets of the Company,
and dividends from Medallion Capital and the Bank, and are subject to compliance with regulatory ratios. As of December 31, 2020, we had unfunded
commitments from the SBA of $25,000,000.
Additionally, the Bank has access to independent sources of funds for our business originated at the Bank, primarily through brokered certificates of
deposit. The Bank has $45,000,000 available under federal funds lines with several commercial banks. In addition, the Bank can retain earnings in its business to
fund future growth.
In February 2021, we completed a private placement to certain institutional investors of $25,000,000 aggregate principal amount of 7.25% unsecured senior
notes due February 2026, with interest payable semiannually. A follow-on offering of these notes in March 2021 raised an additional $3,250,000.
58
In December 2020, we completed a private placement to certain institutional investors of $33,600,000 aggregate principal amount of 7.50% unsecured
senior notes due December 2027, with interest payable semiannually. A follow-on offering of these notes in both February and March 2021 raised an additional
$8,500,000.
The net proceeds from the December 2020 and February 2021 private placements will be used for general corporate purposes, including repayment of
outstanding debt such as the maturing 9.00% retail notes in April 2021 and may also be used to pay down other borrowings outstanding, possibly including some
borrowings at a discount.
In December 2019, the Bank closed an initial public offering of $46,000,000 aggregate liquidation amount, yielding net proceeds of $42,485,000, of its
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F. Dividends are payable quarterly from the date of issuance to, but excluding April 1,
2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is expected to be three-month Secured
Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.
In March 2019, we completed a private placement to certain institutional investors of $30,000,000 aggregate principal amount of 8.25% unsecured senior
notes due 2024, with interest payable semiannually. A follow-on offering of these notes in the 2019 third quarter raised an additional $6,000,000.
The components of our debt were as follows at December 31, 2020, exclusive of deferred financing costs of $5,805,000. See Note 6 to the consolidated
financial statements for details of the contractual terms of our borrowings.
(Dollars in thousands)
Deposits (2)
Retail and privately placed notes
SBA debentures and borrowings
Preferred securities
Notes payable to banks
Other borrowings
Total outstanding debt
Balance
Percentage
Rate (1)
$
$
1,068,072
103,225
68,008
33,000
31,261
8,689
1,312,255
81%
8
5
3
2
1
100%
1.71%
8.25
3.36
2.35
3.67
1.91
2.37%
(1) Weighted average contractual rate as of December 31, 2020.
(2)
Balance includes $250 of strategic partner reserve deposits as of December 31, 2020.
We have employment agreements with certain key officers for either one-, two- or five-year terms. They all expire at various dates through 2025, with
payments under these agreements of approximately $12,056,000 as of December 31, 2020.
Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all contractual obligations at
December 31, 2020, but does not reflect the additional notes issued in February 2021, as described above.
(Dollars in thousands)
Deposits (2)
Retail and privately placed notes
SBA debentures and borrowings
Preferred securities
Notes payable to banks
Other borrowings
Operating lease obligations
Total
Less than
1 year
1 – 2 years
2 – 3 years 3 – 4 years 4 – 5 years
More than
5 years
Total (1)
Payments due by period
$ 393,835 $ 241,605 $ 190,387 $ 120,040 $ 121,955 $
—
14,000
—
—
747
2,390
$ 483,643 $ 251,733 $ 198,023 $ 163,413 $ 139,092 $
33,625
22,508
—
30,701
500
2,474
36,000
5,000
—
—
—
2,373
—
—
—
280
7,442
2,406
—
5,000
—
280
—
2,356
— $ 1,067,822
103,225
33,600
68,008
21,500
33,000
33,000
31,261
—
8,689
—
3,521
15,520
91,621 $ 1,327,525
(1)
(2)
Total debt is exclusive of deferred financing costs of $5,805.
Balance excludes $250 of strategic reserve deposits as of December 31, 2020.
Approximately $730,000,000 of our borrowing relationships have maturity dates during 2021 through 2022, including almost $635,000,000 of brokered
CD’s. We have been in active and ongoing discussions with each of these lenders and, to date, have
59
extended each of the facilities as they matured. We have arranged for changes to the terms of the notes and payment and borrowing base calculations which we
anticipate will facilitate our operations for the foreseeable future. As a result of the cash flow shortages due to the slowdown in the taxi industry resulting from the
COVID-19 pandemic, we received 180 day payment deferrals that terminated in August and modifications to provide for interest only payments through the end of
2020 for the notes payable to banks.
On July 16, 2019, we paid $10,819,000 at maturity in satisfaction of all our outstanding obligations under one of our credit facilities. In connection with this
payment, we obtained a waiver from one of our other lenders, with a term note of $1,839,000, of certain resulting repayment and other obligations, which waiver
expires on June 15, 2021.
In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of them at times when it may be
advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of our portfolio, the proceeds of such
liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating
income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no
assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates,
our cost of funds would increase, which would reduce our net interest income.
We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments
are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an
effort to limit our exposure to interest rate fluctuations. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that
the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity a hypothetical immediate 1% increase in interest
rates would result in an increase to net income as of December 31, 2020 by $1,183,000 on an annualized basis, and the impact of such an immediate increase of 1%
over a one year period would have been ($1,763,000) at December 31, 2020. Although management believes that this measure is indicative of our sensitivity to
interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business
developments that could affect net income from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that
actual results would not differ materially from the potential outcome simulated by these estimates.
We continue to work with investment banking firms and other financial intermediaries to investigate the viability of a number of other financing options
which include, among others, the sale or spinoff of certain assets or divisions, the development of a securitization conduit program, and other independent
financing for certain subsidiaries or asset classes. These financing options would also provide additional sources of funds for both external expansion and
continuation of internal growth.
The following table illustrates sources of available funds for us and each of our subsidiaries, and amounts outstanding under credit facilities and their
respective end of period weighted average interest rates at December 31, 2020. See Note 6 to the consolidated financial statements for additional information about
each credit facility.
60
(Dollars in thousands)
Cash and cash equivalents
Brokered CDs & other
borrowed funds
Average interest rate
Maturity
Retail and privately placed
notes
Average interest rate
Maturity
SBA debentures and
borrowings
Amounts undisbursed
Amounts outstanding
Average interest rate
Maturity
Bank loans
Average interest rate
Maturity
Preferred securities
Average interest rate
Maturity
Other borrowings
Average interest rate
Maturity
Total cash
Total debt outstanding
Medallion
Financial Corp.
33,743
$
MB
MFC
MCI
FSVC
RPAC and
Other
(2 ) $
58,877
$
4,261
$
10,674
$
69
$
4,416
December 31, 2020(1)
112,040
$
December 31, 2019(1)
67,821
$
—
—
—
1,068,072
1.71%
1/21-12/25
103,225
8.25%
4/21-12/27
—
—
—
—
—
19,734
3.75%
2/21-9/21
33,000
2.35%
9/37
—
—
—
33,743
155,959
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
58,877
1,068,072
—
—
—
—
—
—
—
—
—
—
11,527
3.54%
2/21 - 12/23
—
—
—
—
—
—
4,261
11,527
$
$
$
$
—
—
—
—
—
—
79,000
25,000
54,000
3.39%
3/21- 9/30
—
—
—
—
—
—
—
—
—
10,674
54,000
$
$
—
—
—
—
—
—
14,008
—
14,008
3.25%
4/21
—
—
—
—
—
—
—
—
—
69
14,008
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,689
1.91%
1,068,072
1.71%
1/21-12/25
103,225
8.25%
4/21-12/27
93,008
25,000
68,008
3.36%
3/21-9/30
31,261
3.67%
2/21-12/23
33,000
2.35%
9/37
8,689
1.91%
954,245
2.35%
1/20-9/24
69,625
8.61%
4/21-3/24
74,746
3,000
71,746
3.42%
2/20-3/29
33,183
4.11%
9/20-12/23
33,000
4.01%
9/37
7,794
2.00%
12/21 - 6/25
4,416
$
8,689
$
12/21 - 6/25
112,040
1,312,255
$
$
$
$
3/20-12/20
67,821
1,169,593
(1)
(2)
Total debt is exclusive of deferred financing costs of $5,805 and $5,105 as of December 31, 2020 and 2019.
Includes $2,970 of an interest reserve associated with the 2019 private placement, which can be used for no other purpose for three years.
Loan amortization, prepayments, and sales also provide a source of funding for us. Prepayments on loans are influenced significantly by general interest
rates, medallion loan market values, economic conditions, and competition.
We also generate liquidity through deposits generated at the Bank, borrowing arrangements with other banks, and through the issuance of SBA debentures,
as well as from cash flow from operations. In addition, we may choose to participate a greater portion of our loan portfolio to third parties. We are actively seeking
additional sources of liquidity; however, given current market conditions, there can be no assurance that we will be able to secure additional liquidity on terms
favorable to us or at all. If that occurs, we may decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become
more favorable; or we may be required to dispose of assets when we would not otherwise do so, and at prices which may be below the net book value of such
assets in order for us to repay indebtedness on a timely basis.
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.” The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit
losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. Under the new standard, the concepts used by
entities to account for credit losses on financial instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is
removed. Loss estimates are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and
supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards
for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected
credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 2019 for public entities, with early adoption
permitted. In November 2019 the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such as us, to fiscal years
61
beginning after December 15, 2022. We are assessing the impact the update will have on our financial statements, and expect the update to have a material impact
on our accounting for estimated credit losses on our loans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business activities contain elements of risk. We consider the principal types of risk to be fluctuations in interest rates and portfolio valuations. We
consider the management of risk essential to conducting our businesses. Accordingly, our risk management systems and procedures are designed to identify and
analyze our risks, to set appropriate policies and limits, and to continually monitor these risks and limits by means of reliable administrative and information
systems and other policies and programs.
In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of them at times when it may be
advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of our portfolio, the proceeds of such
liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating
income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no
assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates,
our cost of funds would increase, which would reduce our net interest income. We use a combination of long-term and short-term borrowings and equity capital to
finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-
rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. We have analyzed the potential
impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing
interest rate sensitivity a hypothetical immediate 1% increase in interest rates would result in an increase to net income as of December 31, 2020 by $1,183,000 on
an annualized basis, and the impact of such an immediate increase of 1% over a one year period would have been ($1,763,000) at December 31, 2020. Although
management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and
composition of the assets on the balance sheet, and other business developments that could affect net income from operations in a particular quarter or for the year
taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements set forth under Item 15 (A) (1) in this Annual Report on Form 10-K, which financial statements are
incorporated herein by reference in response to this Item 8.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a—
15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, and have concluded that they are effective as of December 31, 2020 to provide reasonable
assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed,
summarized, and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
62
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting
is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and
principal financial officers and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes
those policies and procedures that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and
directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control-Integrated
Framework (2013). Based on its assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of
December 31, 2020.
We believe that the consolidated financial statements included in this report fairly represent our consolidated financial position and consolidated results of
operations for all periods presented.
Our Independent Registered Public Accounting Firm, Mazars USA LLP, has audited and issued a report on management’s assessment of our internal
control over financial reporting. The report of Mazars USA LLP appears below.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have
evaluated our internal control over financial reporting to determine whether any changes occurred during the 2020 fourth quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting, and have concluded that there have been no changes that occurred during the
2020 fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
63
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Medallion Financial Corp.
Opinion on Internal Control over Financial Reporting
We have audited Medallion Financial Corp. and subsidiaries’ (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on
criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on
criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance
sheets of Medallion Financial Corp. and subsidiaries (the “Company”) as of December 31, 2020 and 2019 and the related consolidated statements of operations,
other comprehensive income (loss), changes in stockholders’ equity and changes in net assets, and cash flows for each of the three years in the three-year period
ended December 31, 2020, and selected financial ratios and other data (see note 14) for the year ended December 31, 2018 of the Company, and our report dated
March 15, 2021 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies and procedures may deteriorate.
/s/ Mazars USA LLP
Edison, New Jersey
March 15, 2021
64
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2021 for our fiscal year 2021 Annual Meeting of
Shareholders under the captions “Our Directors and Executive Officers,” “Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting
Compliance.”
ITEM 11.
EXECUTIVE COMPENSATION
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2021 for our fiscal year 2021 Annual Meeting of
Shareholders under the captions “Corporate Governance,” “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation.”
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2021 for our fiscal year 2021 Annual Meeting of
Shareholders under the captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2021 for our fiscal year 2021 Annual Meeting of
Shareholders under the captions “Certain Relationships and Related Party Transactions”, “Our Directors and Executive Officers,” and “Corporate Governance.”
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2021 for our fiscal year 2021 Annual Meeting of
Shareholders under the caption “Principal Accountant Fees and Services.”
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements of Medallion Financial Corp. and the Report of Independent Public Accountants thereon are included as set forth on
the Index to Financial Statements on F-1.
2. FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements on F-1.
65
3. EXHIBITS
Number
Description
3.1(a)
Restated Medallion Financial Corp. Certificate of Incorporation. Filed as Exhibit 3.1 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 000-27812) and incorporated by reference herein.
3.1(b)
Amendment to Restated Certificate of Incorporation. Filed as Exhibit 3.1.1 to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998 (File No. 000-27812) and incorporated by reference herein.
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
Amended and Restated By-Laws of Medallion Financial Corp. Filed as Exhibit 3.1 to the Current Report on Form 8-K filed
on April 27, 2018 (File No. 001-37747) and incorporated by reference herein.
Description of Registered Securities of Medallion Financial Corp. Filed as Exhibit 4.1 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2019, as amended by Amendment No. 1 thereto filed on June 5, 2020 (File No. 001-
37747) and incorporated by reference herein.
Fixed/Floating Rate Junior Subordinated Note, dated June 7, 2007, by Medallion Financial Corp., in favor of Medallion
Financing Trust I. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188) and
incorporated by reference herein.
Indenture, dated April 15, 2016, between Medallion Financial Corp. and Wilmington Trust, National Association. Filed as
Exhibit d.6 to the Registration Statement on Form N-2 filed on April 15, 2016 (File No. 333-206692) and incorporated by
reference herein.
First Supplemental Indenture, dated April 15, 2016, between Medallion Financial Corp. and Wilmington Trust, National
Association. Filed as Exhibit d.7 to the Registration Statement on Form N-2 filed on April 15, 2016 (File No. 333-206692)
and incorporated by reference herein.
Note, effective March 1, 2017, by Freshstart Venture Capital Corp., in favor of Small Business Administration. Filed as
Exhibit 4.1 to the Current Report on Form 8-K filed on January 31, 2017 (File No. 814-00188) and incorporated by reference
herein.
Amendment No. 1 to Note, dated and effective as of January 31, 2018, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on February 5, 2018 (File
No. 814-00188) and incorporated by reference herein.
Amendment No. 2 to Note, dated and effective as of January 31, 2019, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on February 1, 2019 (File
No. 001-33747) and incorporated by reference herein.
Amendment No. 3 to Note, dated and effective as of February 15, 2019, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on February 21, 2019 (File
No. 001-37747) and incorporated by reference herein.
Amendment No. 4 to Note, dated and effective as of March 14, 2019, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on March 15, 2019 (File
No. 001-37747) and incorporated by reference herein.
Amendment No. 5 to Note, dated and effective as of March 27, 2019, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on March 29, 2019 (File
No. 001-37747) and incorporated by reference herein.
Amendment No. 6 to Note, dated and effective as of January 30, 2020, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on February 3, 2020 (File
No. 001-37747) and incorporated by reference herein.
Amendment No. 7 to Note, dated and effective as of March 27, 2020, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.11 to the Annual Report on Form 10-K for fiscal year ended
December 31, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 8 to Note, dated and effective as of June 1, 2020, by and between U.S. Small Business Administration and
Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on June 4, 2020 (File No. 001-
37747) and incorporated by reference herein.
Amendment No. 9 to Note, dated and effective as of September 1, 2020, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on September 3, 2020 (File
No. 001-37747) and incorporated by reference herein.
4.15
4.16
4.17
4.18
4.19
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Amendment No. 10 to Note, dated and effective as of September 14, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on
September 15, 2020 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 11 to Note, dated and effective as of September 23, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on
September 24, 2020 (File No. 001-37747) and incorporated by reference herein.
Form of Note Purchase Agreement, including the form of Note attached thereto. Filed as Exhibit 4.1 to the Current Report on
Form 8-K filed on March 26, 2019 (File No. 001-37747) and incorporated by reference herein.
Form of Note Purchase Agreement, including the form of Note attached thereto. Filed as Exhibit 4.1 to the Current Report on
Form 8-K filed on December 23, 2020 (File No. 001-37747) and incorporated by reference herein.
Form of Note Purchase Agreement, including the form of Note attached thereto. Filed as Exhibit 4.1 to the Current Report on
Form 8-K filed on March 1, 2020 (File No. 001-37747) and incorporated by reference herein.
First Amended and Restated Employment Agreement, between Medallion Financial Corp. and Alvin Murstein dated May 29,
1998. Filed as Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 814-
00188) and incorporated by reference herein.*
Amendment No. 1 to First Amended and Restated Employment Agreement, dated and effective as of April 27, 2017, by and
between Medallion Financial Corp. and Alvin Murstein. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
May 3, 2017 (File No. 814-00188) and incorporated by reference herein.*
Amendment No. 2 to First Amended and Restated Employment Agreement, dated and effective as of December 22, 2017, by
and between Medallion Financial Corp. and Alvin Murstein. Filed as Exhibit 10.3 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 2017 (File No. 814-00188) and incorporated by reference herein.*
First Amended and Restated Employment Agreement, between Medallion Financial Corp. and Andrew Murstein dated
May 29, 1998. Filed as Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File
No. 814-00188) and incorporated by reference herein.*
Amendment No. 1 to First Amended and Restated Employment Agreement, dated and effective as of April 27, 2017, by and
between Medallion Financial Corp. and Andrew Murstein. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on
May 3, 2017 (File No. 814-00188) and incorporated by reference herein.*
Amendment No. 2 to First Amended and Restated Employment Agreement, dated and effective as of December 22, 2017, by
and between Medallion Financial Corp. and Andrew Murstein. Filed as Exhibit 10.6 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2017 (File No. 814-00188) and incorporated by reference herein.*
Employment Agreement, dated June 27, 2016, between Donald Poulton, Medallion Financial Corp. and Medallion Bank.
Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on June 30, 2016 (File No. 814-00188) and incorporated by
reference herein.*
Letter Agreement, dated March 7, 2017, by and between Medallion Financial Corp. and Larry D. Hall. Filed as Exhibit 10.8
to the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (File No. 814-00188) and incorporated by
reference herein.*
2006 Employee Stock Option Plan. Filed as Exhibit II to our definitive proxy statement for our 2006 Annual Meeting of
Shareholders filed on April 28, 2006 (File No. 814-00188) and incorporated by reference herein.*
First Amended and Restated 2006 Non-Employee Director Stock Option Plan. Filed as Exhibit B to Amendment No. 3 to
Form 40-APP filed on June 18, 2012 (File No. 812-13666) and incorporated by reference herein.*
2015 Employee Restricted Stock Plan. Filed as Exhibit B to Amendment No. 1 to Form 40-APP filed on December 11, 2015
(File No. 812-14433) and incorporated by reference herein.*
2015 Non-Employee Director Stock Option Plan. Filed as Exhibit B to Amendment No. 2 to Form 40-APP filed on
January 14, 2016 (File No. 812-14458) and incorporated by reference herein.*
2018 Equity Incentive Plan. Filed as Annex A to our definitive proxy statement for our 2018 Annual Meeting of
Shareholders filed on April 30, 2018 (File No. 001-37747) and incorporated by reference herein.*
Amendment to Medallion Financial Corp. 2018 Equity Incentive Plan. Filed as Annex A to our definitive proxy statement
for our 2020 Annual Meeting of Shareholders filed on April 28, 2020 (File No. 001-37747) and incorporated by reference
herein.*
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Indenture of Lease, dated October 31, 1997, by and between Sage Realty Corporation, as Agent and Landlord, and Medallion
Financial Corp., as Tenant. Filed as Exhibit 10.64 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (File No. 812-09744) and incorporated by reference herein.
First Amendment of Lease, dated September 6, 2005, by and between Medallion Financial Corp. and Sage Realty
Corporation. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 12, 2005 (File No. 814-00188) and
incorporated by reference herein.
Second Amendment of Lease, dated August 5, 2015, by and between Sage Realty Corporation and Medallion Financial
Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 7, 2015 (File No. 814-00188) and
incorporated by reference herein.
Agreement of Lease, dated July 3, 2002, by and between B-LINE Holdings, L.C. and Medallion Bank. Filed as Exhibit 10.17
to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No. 001-37747) and incorporated by
reference herein.
Amendment of Lease Agreement, dated October 29, 2004, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.18 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No. 001-
37747) and incorporated by reference herein.
Assignment of Lease, dated July 6, 2006, by and between Medallion Bank and Zerop Medical, LLC, and consented and
agreed to by B-LINE Holdings, L.C. Filed as Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2018 (File No. 001-37747) and incorporated by reference herein.
Second Amendment of Lease Agreement, dated January 9, 2007, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No. 001-
37747) and incorporated by reference herein.
Third Amendment of Lease Agreement, dated October 31, 2007, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.21 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No. 001-
37747) and incorporated by reference herein.
Third Amendment of Lease Agreement, dated November 15, 2011, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.22 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No. 001-
37747) and incorporated by reference herein.
Fourth Amendment of Lease Agreement, dated November 21, 2011, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.23 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No. 001-
37747) and incorporated by reference herein.
Fifth Amendment of Lease Agreement, dated November 26, 2012, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.24 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No. 001-
37747) and incorporated by reference herein.
Sixth Amendment of Lease Agreement, dated January 26, 2017, by and between Investment Property Group, LLC, as
successor-in-interest to B-LINE Holdings, L.C., and Medallion Bank. Filed as Exhibit 10.25 to the Annual Report on Form
10-K for the fiscal year ended December 31, 2018 (File No. 001-37747) and incorporated by reference herein.
Seventh Amendment of Lease Agreement, dated May 10, 2017, by and between Investment Property Group, LLC and
Medallion Bank. Filed as Exhibit 10.26 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File
No. 001-37747) and incorporated by reference herein.
Eighth Amendment of Lease Agreement, dated March 28, 2018, by and between Investment Property Group, LLC and
Medallion Bank. Filed as Exhibit 10.27 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File
No. 001-37747) and incorporated by reference herein.
Letter from Mountain High Real Estate Advisors, Inc. to Medallion Bank, dated July 23, 2018, regarding 8th Amendment
Lease Commencement. Filed as Exhibit 10.28 to the Annual Report on Form 10-K for the fiscal year ended December 31,
2018 (File No. 001-37747) and incorporated by reference herein.
Ninth Amendment to Agreement of Lease, dated August 19, 2019, by and between Investment Property Group, LLC and
Medallion Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 21, 2019 (File No. 001-37747) and
incorporated by reference herein.
Commitment Letter, dated July 31, 2020, by the Small Business Administration to Medallion Capital, Inc., accepted and
agreed to by Medallion Capital, Inc. on August 3, 2020. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
August 3, 2020 (filed No. 001-33747) and incorporated by reference herein.
10.32
Junior Subordinated Indenture, dated as of June 7, 2007, between Medallion Financing Trust I and Wilmington Trust
Company as trustee. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188) and
incorporated by reference herein.
10.33
Purchase Agreement, dated as of June 7, 2007, among Medallion Financial Corp., Medallion Financing Trust I, and Merrill
Lynch International. Filed as Exhibit 10.3 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188) and
incorporated by reference herein.
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
Custodian Agreement, effective July 23, 2003, among Wells Fargo Bank Minnesota, National Association, as custodian, and
Medallion Financial Corp., Medallion Funding Corp. and Freshstart Venture Capital Corp. Filed as Exhibit j.1 to the
Registration Statement on Form N-2 filed on December 20, 2011 (File No. 333-178644) and incorporated by reference
herein.
Loan Agreement, effective as of January 25, 2017, by and among U.S. Small Business Administration, Freshstart Venture
Capital Corp. and Medallion Financial Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 31,
2017 (File No. 814-00188) and incorporated by reference herein.
Amendment No. 1 to Loan Agreement, dated as of October 20, 2017, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 26, 2017 (File
No. 814-00188) and incorporated by reference herein.
Amendment No. 2 to Loan Agreement, dated and effective as of January 31, 2018, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
February 5, 2018 (File No. 814-00188) and incorporated by reference herein.
Amendment No. 3 to Loan Agreement, dated and effective as of January 31, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
February 1, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 4 to Loan Agreement, dated and effective as of February 15, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
February 21, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 5 to Loan Agreement, dated and effective as of March 14, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March
15, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 6 to Loan Agreement, dated and effective as of March 27, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March
29, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 7 to Loan Agreement, dated and effective as of January 30, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
February 3, 2020 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 8 to Loan Agreement, dated and effective as of March 27, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.42 to the Annual Report on Form 10-K filed for the
Fiscal Year ended December 31, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 9 to Loan Agreement, dated and effective as of June 1, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on June 4,
2020 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 10 to Loan Agreement, dated and effective as of September 1, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
September 3, 2020 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 11 to Loan Agreement, dated and effective as of September 14, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
September 15, 2020 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 12 to Loan Agreement, dated and effective as of September 23, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
September 24, 2020 (File No. 001-37747) and incorporated by reference herein.
21.1
List of Subsidiaries of Medallion Financial Corp. Filed herewith.
23.1
31.1
Consent of Mazars USA LLP, independent registered public accounting firm, related to reports on financial statements of
Medallion Financial Corp. Filed herewith.
Certification of Alvin Murstein pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-
Oxley Act of 2002. Filed herewith.
31.2
32.1
32.2
Certification of Larry D. Hall pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-
Oxley Act of 2002. Filed herewith.
Certification of Alvin Murstein pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. Filed herewith.
Certification of Larry D. Hall pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. Filed herewith.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags
are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this Annual Report on Form 10-K.
ITEM 16.
FORM 10-K SUMMARY
Not applicable.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange of Act of 1934, registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEDALLION FINANCIAL CORP.
Date:
March 15, 2021
By:
/s/ Alvin Murstein
Alvin Murstein
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signatures
/s/ Alvin Murstein
Alvin Murstein
/s/ Larry D. Hall
Larry D. Hall
/s/ Andrew M. Murstein
Andrew M. Murstein
/s/ John Everets
John Everets
/s/ Cynthia Hallenbeck
Cynthia Hallenbeck
/s/ Frederick A. Menowitz
Frederick A. Menowitz
/s/ David L. Rudnick
David L. Rudnick
/s/ Allan J. Tanenbaum
Allan J. Tanenbaum
Title
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
President and Director
Director
Director
Director
Director
Director
67
Date
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
MEDALLION FINANCIAL CORP.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Other Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Changes in Stockholders’ Equity and Changes in Net Assets for the Years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the Years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
Page
F-2
F-5
F-6
F-8
F-9
F-12
F-14
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Medallion Financial Corp.
Opinion on the Consolidated Financial Statements and Selected Financial Ratios and Other Data
We have audited the accompanying consolidated balance sheets of Medallion Financial Corp. and subsidiaries (the “Company”) as of December 31, 2020 and
2019, and the related consolidated statements of operations, other comprehensive income (loss), changes in stockholders’ equity and changes in net assets, and cash
flows for each of the three years in the three-year period ended December 31, 2020 and the related notes to the financial statements and the selected financial ratios
and other data (see Note 14) for the three months ended March 31, 2018 (collectively referred to as the “consolidated financial statements and selected financial
ratios and other data”). In our opinion, the consolidated financial statements and selected financial ratios and other data present fairly, in all material respects, the
financial position of the Company as of December 31, 2020 and 2019, and the results of its operations, changes in stockholders’ equity and net assets, and cash
flows for each of the three years in the three-year period ended December 31, 2020, and the selected financial ratios and other data for the year ended December
31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal
control over financial reporting as of December 31, 2020, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2021 expressed an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements and selected financial ratios and other data are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements and selected financial ratios and other data based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements and selected financial ratios and other data are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements and selected financial ratios
and other data, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements and selected financial ratios and other data. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements
and selected financial ratios and other data. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and
(2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on
the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses
Critical Audit Matter Description
As discussed, in Notes 2 and 4 to the consolidated financial statements, the allowance for loans losses is assessed on a regular basis on loans segregated into
homogenous pools based on similarities. Through the evaluation, general allowances for loan losses are assessed based on historical delinquency and actual loss
rates. General allowances are 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 size of the loan
F-2
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. Management also analyzes and considers several other relevant internal and external factors. Considering the estimation and judgment
required by management in determining adjustments for loan losses, our audit of the allowance for loan losses and the related disclosures required a high degree of
auditor judgment regarding the qualitative adjustments.
How the Critical Matter Was Addressed in the Audit
Our audit procedures related to the allowance for loan loss included the following, among others:
• We tested the effectiveness of controls over the Company’s allowance for loan loss analysis inclusive of the controls over loan charge-off activity and
including additional considerations with respect to current economic conditions and management’s review of the adequacy of the allowance for loan
loss.
• We evaluated management’s judgement and assumptions used in the development of the qualitative adjustments for reasonableness, and the reliability
of the underlying data on which the adjustments are based.
• We tested the mathematical accuracy of (i) the historical charge-off activity, (ii) the quantitative measure of the qualitative loss factors, and (iii) the
formula analysis model calculations.
• We evaluated analytics and trends of the overall allowance loan loss analysis to assess for reasonableness.
Income Taxes
Critical Audit Matter Description
As discussed in Notes 2 and 8 to the consolidated financial statements, the Company’s management is required to interpret and apply tax laws and regulations in
determining the amount of its deferred tax asset and provision. When an uncertain tax position is identified by management, the Company must evaluate whether it
is more likely to be sustained than not on the basis of its technical merits. A valuation allowance is provided against a deferred tax asset when it is more likely than
not the same 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 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. Considering the estimation and judgement required by management in determining the deferred tax valuation allowance, our audit of the
account and the related disclosures required a high degree of auditor judgement regarding the valuation allowance.
How the Critical Matter Was Addressed in the Audit
Our audit procedures related to income taxes and valuation allowance included the following, among others:
• We tested the effectiveness of controls over the Company’s income taxes, including those over the deferred tax asset valuation allowance analysis.
• We tested the mathematical accuracy of the deferred tax asset valuation allowance analysis.
• We evaluated, with the assistance of our tax specialists, the Company’s deferred tax asset valuation by performing the following:
o
o
Obtaining management opinions regarding the analysis and evaluating management’s judgements related to the assumptions used in the
determination of the estimate of future taxable income.
Evaluating and testing management’s process, including the completeness and accuracy of data inputs used as a basis for assumptions in the
analysis.
Impairment Assessment of Goodwill and Long-Lived Assets
Critical Audit Matter Description
As discussed in Note 2 to the consolidated financial statements, the Company’s goodwill and long-lived 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. Goodwill and long lived assets are tested
for impairment at least annually at the reporting unit level. The determination of the fair value of the reporting units requires management to make significant
estimates and assumptions related to forecasts of future revenues and expenses and discount rates. Considering the estimation and judgement required by
management in determining the future revenues, our audit of the impairment assessment of goodwill and long-lived assets required a high degree of auditor
judgement.
F-3
How the Critical Matter Was Addressed in the Audit
Our audit procedures related to the impairment assessment of goodwill and long-lived assets included the following, among others:
• We tested the effectiveness of controls over the Company’s goodwill and long-lived assets impairment tests, including controls over the determination
of the fair value and discounted cash flow methodology.
• We evaluated management’s process and discounted cash flow model of the reporting units. This included evaluating the reasonableness of the
assumptions used by a Company engaged valuation specialist.
• We evaluated whether the assumptions used were reasonable by considering the past performance of reporting units.
• We substantively tested management’s estimate, including evaluating their judgements and assumptions, which included evaluation of key financial data
for accuracy.
/s/ Mazars USA LLP
We have served as the Company’s auditor since 2005.
Edison, New Jersey
March 15, 2021
F-4
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
Assets
Cash and cash equivalents (1)
Federal funds sold
Equity investments
Investment securities
Loans
Allowance for loan losses
Net loans receivable
Accrued interest receivable
Property, equipment, and right-of-use lease asset, net
Loan collateral in process of foreclosure (2)
Goodwill
Intangible assets, net
Income tax receivable
Other assets
Total assets
Liabilities
Accounts payable and accrued expenses (3)
Accrued interest payable
Deposits (4)
Short-term borrowings
Deferred tax liabilities, net
Operating lease liabilities
Long-term debt (5)
Total liabilities
Commitments and contingencies (6)
Stockholders’ equity
Preferred stock (1,000,000 shares of $0.01 par value stock authorized-none outstanding)
Common stock (50,000,000 shares of $0.01 par value stock authorized- 27,828,871
shares at December 31, 2020 and 27,597,802 shares at December 31, 2019 issued)
Additional paid in capital
Treasury stock (2,951,243 shares at December 31, 2020 and December 31, 2019)
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Total stockholders’ equity
Non-controlling interest in consolidated subsidiaries
Total equity
Total liabilities and equity
Number of shares outstanding
Book value per share
December 31, 2020
December 31, 2019
$
$
$
$
$
54,743 $
57,297
9,746
46,792
1,229,838
(57,548)
1,172,290
10,338
12,404
54,560
150,803
51,090
1,757
20,591
1,642,411 $
14,902 $
4,673
1,065,398
87,334
807
11,018
153,718
1,337,850
—
278
277,539
(24,919)
2,012
(23,502)
231,408
73,153
304,561
1,642,411 $
24,877,628
9.30 $
17,700
50,121
10,079
48,998
1,160,855
(46,093)
1,114,762
8,662
14,375
52,711
150,803
52,536
1,516
19,404
1,541,667
16,234
4,398
951,651
38,223
9,341
12,738
174,614
1,207,199
—
276
275,511
(24,919)
999
11,281
263,148
71,320
334,468
1,541,667
24,646,559
10.68
(1)
(2)
(3)
(4)
(5)
(6)
Includes restricted cash of $2,970 as of December 31, 2020 and 2019.
Includes financed sales of this collateral to third parties that are reported separately from the loan portfolio, and that are conducted by Medallion Bank of $3,535 and $8,163 as of
December 31, 2020 and 2019.
Includes the short-term portion of lease liabilities of $2,004 and $2,085 as of December 31, 2020 and 2019. Refer to Note 7 for more details.
Includes $2,674 and $2,594 of deferred financing costs as of December 31, 2020 and 2019. Refer to Note 6 for more details.
Includes $3,131 and $2,511 of deferred financing costs as of December 31, 2020 and 2019. Refer to Note 6 for more details.
Refer to Note 11 for details.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-5
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Bank Holding Company Accounting
Combined (1)
December 31, 2018
$
December 31, 2020
$
$
143,701
1,208
53
—
—
—
—
144,962
22,330
2,006
9,815
—
34,151
110,811
69,817
40,994
(24,523 )
20,042
(2,985 )
—
—
—
1,530
(5,936 )
28,172
8,366
8,047
6,737
5,454
2,833
1,822
1,445
375
—
8,788
72,039
(36,981 )
10,074
(26,907 )
—
—
—
—
—
—
—
—
—
$
$
$
$
(26,907 )
7,876
(34,783 )
(1.42 )
(1.42 )
—
$
$
$
$
For the Years Ended
December 31, 2019
130,167
2,225
170
—
—
—
—
132,562
22,521
3,242
9,282
—
35,045
97,517
47,386
50,131
(4,381 )
18,742
—
4,145
—
—
1,881
20,387
24,971
8,996
7,402
5,253
6,638
2,419
1,722
1,446
1,138
—
8,196
68,181
2,337
(341 )
1,996
—
—
—
—
—
—
—
—
—
1,996
3,758
(1,762 )
(0.07 )
(0.07 )
—
$
$
$
$
95,080
1,644
133
3,287
28
654
10
100,836
14,230
4,441
6,145
3,551
28,367
72,469
59,008
13,461
(2,188 )
14,368
(939 )
—
25,325
4,946
494
42,006
21,706
7,121
9,332
3,470
5,207
2,040
1,703
1,083
1,448
5,615
7,464
66,189
(10,722 )
(373 )
(11,095 )
(34,745 )
8,426
(26,319 )
29,115
(1,915 )
(4,403 )
(8,122 )
14,675
(11,644 )
(22,739 )
2,307
(25,046 )
(1.03 )
(1.03 )
—
(Dollars in thousands, except share and per share data)
Interest and fees on loans
Interest and dividends on investment securities
Medallion lease income
Interest income on investments
Dividend income from controlled subsidiaries
Interest income from affiliated investments
Interest income from controlled subsidiaries
Total interest income (2)/total investment income (2)
Interest on deposits
Interest on short-term borrowings
Interest on long-term debt
Interest expense
Total interest expense (3)
Net interest income/net investment income
Provision for loan losses
Net interest income after provision for loan losses
Other income (loss)
Writedown of loan collateral in process of foreclosure
Sponsorship and race winnings, net
Gain (loss) on equity investments
Gain on the extinguishment of debt
Gain on deconsolidation of Trust III
Gain on sale of loans
Other income
Total other income (loss), net
Other expenses
Salaries and employee benefits
Race team related expenses
Professional fees
Loan servicing fees
Collection costs
Rent expense
Regulatory fees
Amortization of intangible assets
Travel, meals, and entertainment
Intangible asset impairment
Other expenses
Total other expenses (4)
Income (loss) before income taxes/net investment loss before taxes (4)
Income tax (provision) benefit
Net income (loss) after taxes/net investment income (loss) after taxes
Net realized losses on investments (5)
Income tax benefit
Total net realized losses on investments
Net change in unrealized appreciation on Medallion Bank and other
controlled subsidiaries
Net change in unrealized depreciation on investments other than securities
Net change in unrealized appreciation (depreciation) on investments
Income tax (provision) benefit
Net unrealized appreciation on investments
Net realized/unrealized gains (losses) on investments
Net income (loss) after taxes/net increase (decrease) on net assets resulting
from operations
Less: income attributable to the non-controlling interest
Total net income (loss) attributable to Medallion Financial Corp./net
increase (decrease) on net assets resulting from operations
Basic net loss per share
Diluted net loss per share
Distributions declared per share
Weighted average common shares outstanding
Basic
Diluted
(1)
Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under
Investment Company Accounting.
F-6
24,445,452
24,445,452
24,342,979
24,342,979
24,214,978
24,214,978
(2)
(3)
(4)
(5)
Included in interest and investment income is $1,188, $834, and $1,869 of paid in kind interest for the years ended December 31, 2020, 2019, and 2018.
Average borrowings outstanding were $1,258,486, $1,138,746, and $1,198,124, and the related average borrowing costs were 2.71%, 3.08%, and 2.37% for
the years ended December 31, 2020, 2019, and 2018.
Includes $256 of net revenues received from Medallion Bank for the year ended December 31, 2018, primarily for expense reimbursements. See Notes 5
and 12 for additional information.
There were no net losses on investment securities of affiliated issuers for the year ended December 31, 2018.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-7
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Bank Holding Company Accounting
Combined (1)
For the Years Ended
(Dollars in thousands)
Net income (loss) after taxes/net decrease on net assets resulting from operations
Other comprehensive income (loss), net of tax
Total comprehensive income (loss)
Less: comprehensive income attributable to the non-controlling interest
Total comprehensive loss attributable to Medallion Financial Corp.
$
December 31, 2020
$
(26,907) $
1,013
(25,894)
7,876
(33,770) $
December 31, 2019 December 31, 2018
(22,739)
(82)
(22,821)
2,307
(25,128)
1,996 $
1,081
3,077
3,758
(681) $
(1)
Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under
Investment Company Accounting.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-8
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND CHANGES IN NET ASSETS
Common
Stock
Shares
Common
Stock
Preferred
Stock
Capital in
Excess of
Par
Treasury
Stock
Shares
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
27,597,802 $
—
— $ 275,511 (2,951,243) $ (24,919) $ 11,281 $
— (34,783)
—
—
—
Non-
controlling
Interest
Total
Stockholders’
Equity
263,148 $ 71,320 $ 334,468
(26,907)
(34,783)
Total
Equity
7,876
999 $
—
(Dollars in thousands)
Balance at December 31, 2019
Net income (loss)
Distributions to non-controlling
interest
Stock-based compensation
Issuance of restricted stock, net
Forfeiture of restricted stock, net
Issuance of restricted stock units, net
Net change in unrealized gains on
investments, net of tax
Balance at December 31, 2020
—
—
229,408
(8,755)
10,416
—
27,828,871 $
276 $
—
—
2
—
—
—
—
278 $
—
—
—
—
—
—
2,028
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,030
—
—
—
(6,043)
—
—
—
—
(6,043)
2,030
—
—
—
—
—
—
- $ 277,539 (2,951,243) $ (24,919) $ (23,502) $
—
—
1,013
2,012 $
1,013
1,013
231,408 $ 73,153 $ 304,561
—
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-9
(Dollars in thousands)
Balance at December 31, 2018
Net income (loss)
Non-controlling interest equity raised
by Medallion Bank (1)
Distributions to non-controlling
interest
Stock-based compensation
Issuance of restricted stock, net
Forfeiture of restricted stock, net
Net change in unrealized gains on
investments, net of tax
Balance at December 31, 2019
Common
Stock
Shares
Common
Stock
Preferred
Stock
Capital in
Excess of
Par
Treasury
Stock
Shares
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
27,385,600 $
—
274 $
—
— $ 274,292 (2,951,243) $ (24,919) $ 13,043 $
(1,762)
—
—
—
—
Non-
controlling
Interest
Total
Stockholders’
Equity
262,608 $ 27,596 $ 290,204
1,996
(1,762)
Total
Equity
3,758
(82) $
—
—
—
—
—
—
—
—
—
—
216,148
(3,946)
—
2
—
—
—
—
—
—
—
1,219
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
27,597,802 $
—
276 $
—
—
—
- $ 275,511 (2,951,243) $ (24,919) $ 11,281 $
—
—
—
—
—
—
—
1,081
999 $
— 42,485
42,485
—
1,221
—
—
(2,519)
—
—
—
(2,519)
1,221
—
—
1,081
1,081
263,148 $ 71,320 $ 334,468
—
(1)
Refer to Note 18 for details.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-10
27,294,327 $
Common
Stock
Shares
—
—
95,726
27,390,053
(Dollars in
thousands)
Balance at
December 31,
2017
Net increase
(decrease) in
net assets
resulting
from
operations
Stock-based
compensation
expense
Issuance of
restricted
stock, net
Balance at
March 31,
2018
Adoption of
Bank Holding
Company
Accounting
Balance at
April 2, 2018 27,390,053
Net loss
—
Distributions
to non-
controlling
interest
Stock-based
compensation
Issuance of
restricted
stock, net
Forfeiture of
restricted
stock, net
Net change in
unrealized
losses on
investments,
net of tax
Balance at
December 31,
2018
(4,453)
—
—
—
—
—
27,385,600 $
Bank Holding & Investment Company Accounting
Common
Preferred
Stock
Stock
Capital in
Excess of
Par
Treasury
Stock
Shares
Treasury
Stock
Investment Company
Accounting
Accumulated
Undistributed
Net Investment
Loss
Net
Unrealized
Appreciation
on Investments,
Net of tax
Bank Holding Company Accounting
Bank Holding &
Investment
Company
Accounting
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Stockholders’
Equity
Non-
controlling
Interest
Total
Equity
273 $
— $ 273,716 (2,951,243) $ (24,919) $
(65,592) $
103,681 $
— $
— $
287,159 $
— $ 287,159
—
—
—
—
—
(38,299)
23,425
—
—
(14,874)
—
(14,874)
1
—
151
—
—
—
—
—
—
152
—
152
—
—
—
—
—
—
—
—
—
—
—
274
— 273,867 (2,951,243) (24,919)
(103,891)
127,106
—
—
272,437
— 272,437
—
—
—
—
—
103,891
(127,106) 23,215
—
—
—
—
274
—
— 273,867 (2,951,243) (24,919)
—
—
—
—
—
—
—
—
—
—
—
425
—
—
—
—
—
—
— 23,215
— (10,172)
—
—
272,437 27,065 299,502
(7,865)
(10,172)
2,307
—
—
—
—
—
—
—
(1,776)
(1,776)
425
—
425
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(82)
(82)
—
(82)
274 $
— $ 274,292 (2,951,243) $ (24,919) $
— $
— $ 13,043 $
(82) $
262,608 $ 27,596 $ 290,204
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-11
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)/net decrease in net assets resulting from operations
Adjustments to reconcile net income (loss)/net decrease in net assets resulting from operations to net cash
provided by operating activities:
Provision for loan losses
Paid-in-kind interest
Depreciation and amortization
Amortization of origination fees, net
(Decrease) increase in deferred and other tax liabilities, net
Net change in value of loan collateral in process of foreclosure
Net realized (gains) losses on sale of investments
Net change in unrealized (appreciation) depreciation on investments
Stock-based compensation expense
Gain on deconsolidation of Trust III
Gain on extinguishment of debt
Intangible asset impairment
(Increase) decrease in accrued interest receivable
Decrease in other assets
Decrease in accounts payable and accrued expenses
Increase in accrued interest payable
Loans originated
Proceeds from principal receipts, sales, and maturities of loans
Capital returned by Medallion Bank and other controlled subsidiaries, net
Net change in unrealized depreciation on investment other than securities
Increase in unrealized appreciation on Medallion Bank and other controlled
subsidiaries
Net realized losses on investments
Increase in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
Proceeds from principal receipts, sales, and maturities of loans
Purchases of investments
Proceeds from principal receipts, sales, and maturities of investments
Proceeds from the sale and principal payments on loan collateral in process of foreclosure
Net cash used for investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from time deposits and funds borrowed
Repayments of time deposits and funds borrowed
Purchase of federal funds
Repayments of federal funds
Non-controlling interest equity raised by Medallion Bank
Distributions to non-controlling interests
Payments of declared distributions
Net cash provided by (used for) financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents, beginning of period (2)(3)
Cash and cash equivalents, end of period (3)
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest
Cash paid during the period for income taxes
NON-CASH INVESTING
Loans transferred to loan collateral in process of foreclosure, net
Loans transferred to other foreclosed property
Bank Holding Company Accounting
Combined (1)
2020
Year Ended December 31,
2019
2018
$
(26,907) $
1,996 $
(22,739)
69,817
(1,188)
7,714
6,022
(8,776)
31,926
4,305
—
2,030
—
—
—
(1,676)
2,223
(7,206)
422
—
—
—
—
—
—
—
78,706
(506,106)
321,831
(15,580)
15,399
13,499
(170,957)
668,577
(526,064)
—
—
—
(6,043)
—
136,470
44,219
67,821
112,040 $
31,204 $
104
47,254 $
1,800
47,386
(834)
7,499
4,952
853
11,838
(1,820)
1,734
1,221
—
(4,145)
—
(1,249)
2,838
(8,024)
690
—
—
—
—
—
—
—
64,935
(471,069)
251,653
(10,507)
7,119
16,294
(206,510)
525,842
(414,277)
4,000
(4,000)
42,485
(2,367)
—
151,683
10,108
57,713
67,821 $
32,008 $
310
31,348 $
—
59,008
(1,869)
5,564
3,132
13,637
9,926
(5,921)
6,457
576
(25,325)
—
5,615
797
1,309
(675)
139
(8,193)
13,279
93
1,915
(29,115)
34,745
4,196
66,551
(333,740)
302,409
(10,376)
6,417
11,593
(23,697)
364,139
(389,951)
8,000
(8,000)
—
(1,776)
(66)
(27,654)
15,200
42,513
57,713
25,102
85
32,125
—
$
$
$
(1)
Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under
Investment Company Accounting.
F-12
(2)
(3)
Included in the beginning balance for the year ended December 31, 2018 was $29,923 of cash, cash equivalents, and federal funds sold as a result of the
consolidation of previously unconsolidated subsidiaries and excludes $100 of cash held by the Company on deposit with the Bank.
Includes federal funds sold.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-13
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES
Medallion Financial Corp., or the Company, is a finance company organized as a Delaware corporation that reports as a bank holding company, but is not a
bank holding company for regulatory purposes. The Company conducts its business through various wholly-owned subsidiaries including its primary operating
company, Medallion Bank, or the Bank, a Federal Deposit Insurance Corporation, or FDIC, insured industrial bank that originates consumer loans, raises deposits,
and conducts other banking activities. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state
agencies, and undergoes examinations by those agencies. The Bank was initially formed for the primary purpose of originating commercial loans in three
categories: 1) loans to finance the purchase of taxi medallions, 2) asset-based commercial loans, and 3) SBA 7(a) loans. Subsequent to its formation, the Bank
began originating consumer loans to finance the purchases of recreational vehicles, or RVs, boats, and other related items, and to finance home improvements. The
Company also conducts business through Medallion Funding LLC, or MFC, a Small Business Investment Company, or SBIC, which originates and services taxi
medallion and commercial loans.
The Company also conducts business through its subsidiaries Medallion Capital, Inc., or MCI, an SBIC which conducts a mezzanine financing business,
and Freshstart Venture Capital Corp., or FSVC, an SBIC that originated and services medallion and commercial loans. MFC, MCI, and FSVC, as SBICs, are
regulated by the Small Business Administration, or SBA. MCI and FSVC are financed in part by the SBA.
The Company has a controlling ownership stake in Medallion Motorsports, LLC, the primary owner of RPAC Racing, LLC, or RPAC, a professional car
racing team that competes in the Monster Energy NASCAR Cup Series, which is also consolidated with the Company.
The Company formed a wholly-owned subsidiary, Medallion Servicing Corporation, or MSC, to provide loan services to the Bank. The Company has
assigned all of its loan servicing rights for the Bank, which consists of servicing medallion loans originated by the Bank, to MSC, which bills and collects the
related service fee income from the Bank, and is allocated and charged by the Company for MSC’s share of these servicing costs.
Beginning in 2019, the Bank began the process to build out a strategic partnership program with financial technology, or fintech, companies. The Bank
entered into an initial partnership in 2020 and began issuing its first loans, while continuing to explore opportunities with additional fintech companies.
Taxi Medallion Loan Trust III, or Trust III, was established for the purpose of owning medallion loans originated by MFC or others. Trust III is a variable
interest entity, or VIE, and MFC was the primary beneficiary until the 2018 fourth quarter. As a result, the Company consolidated Trust III in its financial results
until consummation of a restructuring in the 2018 fourth quarter. For a discussion of the restructuring, see Note 20. 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 December 31,
2020, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin
Trust.
MFC, through several wholly-owned subsidiaries, or together, Medallion Chicago, purchased $8,689,000 of City of Chicago taxi medallions out of
foreclosure, some of which are leased to fleet operators. The 159 medallions are carried at a net realizable value of $2,932,000 in other assets on the Company’s
consolidated balance sheet at December 31, 2020, compared to a net realizable value of $3,091,000 at December 31, 2019.
F-14
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change to Bank Holding Company Accounting
Effective April 2, 2018, the Company withdrew its previous election to be regulated as a business development company, or BDC, under the Investment
Company Act of 1940, or the 1940 Act. Prior to such time, the Company was a closed-end, non-diversified management investment company that had elected to be
treated as a BDC under the 1940 Act. Accordingly, commencing with the three months ended June 30, 2018, the Company (which now consolidates the results of
the Bank and its other subsidiaries) reports in accordance with Bank Holding Company Accounting; periods prior to such change in status are reported in
accordance with Investment Company Accounting. Significant accounting policies that differ between such periods are described in more detail below.
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 loans 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 commencing with the
three months ended June 30, 2018. All significant intercompany transactions, balances, and profits (losses) have been eliminated in consolidation. As a result of the
Company’s election to withdraw from being regulated as a BDC under the 1940 Act, effective April 2, 2018, the Bank and various other Company subsidiaries
were not consolidated with the Company prior to the three months ended June 30, 2018.
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 $1,500,000 of interest-bearing funds deposited in other banks, that are mainly callable, with terms of 4 to 7 years.
Fair Value of Assets and Liabilities
The Company follows the Financial Accounting Standards Board, or FASB, 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 16 and 17 to the consolidated financial statements.
F-15
Equity Investments
The Company follows FASB ASC Topic 321, Investments – Equity Securities, or ASC 321, which requires all applicable investment in equity securities
with readily determinable value to be valued as such, and those that do not are measured at cost, less any impairment plus or minus any observable price change.
Equity investments of $9,746,000 and $10,079,000 at December 31, 2020 and 2019, comprised mainly of nonmarketable stock and stock warrants, are recorded at
cost less any impairment plus or minus observable price changes. As of December 31, 2020 and 2019, the Company determined that there was no impairment or
observable price change.
Investment Securities (Bank Holding Company Accounting)
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 $278,000 and $248,000 at December 31, 2020 and 2019,
and $291,000 and $79,000 was amortized to interest income for the years ended December 31, 2020 and 2019, and $80,000 was amortized to interest income for
the nine months ended December 31, 2018. The Bank, a previously unconsolidated subsidiary under Investment Company Accounting prior to April 2, 2018,
amortized $21,000 to interest income for the three months ended March 31, 2018. 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 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 stockholder’s equity, which were recorded net of the income tax effect, will be reversed.
Other Investment Valuation (Investment Company Accounting)
Prior to April 2, 2018, under the 1940 Act, the Company’s investment in the Bank, as a wholly owned portfolio investment, was subject to quarterly
assessments of fair value. The Company conducted a thorough valuation analysis, and also received an opinion regarding the valuation from an independent third
party to assist the Board of Directors in its determination of the fair value of the Bank on at least an annual basis. The Company’s analysis included factors such as
various regulatory restrictions that were established at the Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as
the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues
are primarily derived from non-financial activities) which expired in July 2013 and the lack of any new charter issuances since the moratorium’s expiration.
Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that the Bank had little value beyond its recorded
book value. As a result of this valuation process, the Company had previously used the Bank’s actual results of operations as the best estimate of changes in fair
value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the 2015 second quarter, the Company first became
aware of external interest in the Bank and its portfolio assets at values in excess of their book value. Expression of interest in the Bank from both investment
bankers and interested parties has continued. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors
determined that the Bank had a fair value in excess of book value. In addition, in the 2016 third quarter there was a court ruling involving a marketplace lender that
the Company believes heightened the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation
specialist to assist the Board of Directors in their determination of the Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and
additional appreciation of $128,918,000 was recorded in 2016, $7,849,000 was recorded in 2017, and $39,826,000 was recorded in the 2018 first quarter. Refer to
Note 5 for additional details.
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.
F-16
Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At December 31,
2020 and 2019, net loan origination costs were $20,684,000 and $17,839,000. Net amortization to income for the years ended December 31, 2020, 2019 and 2018
was $6,021,000, $4,952,000, and 3,128,000 ($3,993,000 when combined with the Bank).
Interest income is recorded on the accrual basis. Medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is
reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they
are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination
has been made to apply all cash receipts to principal. The consumer portfolio has different characteristics, typified by a larger number of lower dollar loans that
have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is likely the Company will be
unable to collect all amounts due according to the contractual terms of the original loan agreement. Management considers loans that are in bankruptcy status, but
have not been charged-off, to be impaired. These loans are placed on nonaccrual, when they become 90 days past due, or earlier if they enter bankruptcy, and are
charged off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and
recovery efforts against both the borrower and the underlying collateral are initiated. For the recreation loan portfolio, the process to repossess the collateral is
started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged off. If the collateral is repossessed, a
loss is recorded to write the collateral down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction
proceeds are applied to the account, and any remaining balance is written off. Proceeds collected on charged-off accounts are recorded as a recovery. Total loans
90 days or more past due were $6,878,000 at December 31, 2020, or 0.57% of the total loan portfolio, compared to $8,663,000, or 0.76% at December 31, 2019.
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a 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 2019, all consumer loans
which are party to a Chapter 13 bankruptcy are immediately classified as TDRs. The Company’s policy with regard to bankrupt loans is take an immediate 40%
write down of the loan balance. As a result of the Consolidated Appropriations Act, 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, companies may elect to (a) suspend the requirements of US GAAP for
loan modifications related to COVID-19 that would otherwise be categorized as TDRs and (b) suspend any determination of a loan modified as a result of the
effects of COVID-19 as a TDR, including impairment for accounting purposes. Any such suspension is applicable for the term of the loan modification, but solely
with respect to any modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019, and shall not
apply to any adverse impact on the credit of a borrower that is not related to COVID-19. As of December 31, 2020, there were no consumer or medallion loan
modifications related to COVID-19 that would have otherwise been classified as a TDR, and therefore there was no need for the Company to elect this relief
under the CARES Act during 2020. However, we expect to have loan modifications related to COVID-19 that would apply under this provision of the CARES Act
in the future.
Loan collateral in process of foreclosure primarily includes medallion loans that have reached 120 days past due and have been charged down to their net
realizable value, in addition to consumer repossessed collateral in the process of being sold. The medallion loan component reflects that the collection activities on
the loans have transitioned from working with the borrower to the liquidation of the collateral securing the loans.
The Company had $15,367,000 and $28,833,000 of net loans pledged as collateral under borrowing arrangements at December 31, 2020 and 2019.
The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing, or FASB
ASC 860, which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with
FASB ASC 860, the Company had elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for
others by the Company and its affiliates was $107,131,000 and $113,581,000 at December 31, 2020 and 2019. The Company has evaluated the servicing aspect of
its business in accordance with FASB ASC 860, which relates to servicing assets held by MFC (related to the remaining assets in Trust III) and the Bank, and
determined that no material servicing asset or liability existed as of December 31, 2020 and 2019. The Company assigned its servicing rights of the Bank’s
portfolio to MSC. The costs of servicing were allocated to MSC by the Company, and the servicing fee income was billed to and collected from the Bank by MSC.
F-17
Allowance for Loan Losses (Bank Holding Company Accounting)
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the
loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral, prevailing economic conditions, and excess concentration risks. In analyzing the adequacy of the allowance for loan losses, the
Company uses historical delinquency and actual loss rates with a one year lookback period for consumer loans. For commercial loans deemed nonperforming, the
historical loss experience and other projections are looked at. For medallion loans, delinquent nonperforming loans are valued at the median sales price for the
collateral over the most recent quarter, historically non-delinquent nonperforming loans are valued at either the median sales price for the collateral over the most
recent quarter or the discounted cash flow if such loans were modified and it is clear that sources other than the taxi business were instrumental in keeping such
loans current, and performing medallion loans are reserved utilizing historical loss ratios over a three-year lookback period. This evaluation is inherently
subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. As a result of COVID-19, there was an
increase in the reserve percentages of 50 basis points on the recreation subprime loan business during the twelve months ended December 31, 2020. In addition, the
Company determined that anticipated payment activity on the medallion portfolio was impossible to quantify upon exit of the six month deferral period with
borrowers, and therefore deemed all such loans as impaired. As a result, all medallion loans were written down to collateral value, net of liquidation costs, of
$79,500 for New York City medallions. In total, write-downs on medallion assets were approximately $46,087,000 during 2020. 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.
Unrealized Appreciation (Depreciation) and Realized Gains (Losses) on Investments (Investment Company Accounting)
Prior to April 2, 2018, under Investment Company Accounting, the Company’s loans, net of participations and any unearned discount, were considered
investment securities under the 1940 Act and recorded at fair value. As part of the fair value methodology, loans were valued at cost adjusted for any unrealized
appreciation (depreciation). Since no ready market existed for these loans, the fair value was determined in good faith by the Board of Directors. In determining the
fair value, the Board of Directors considered factors such as the financial condition of the borrower, the adequacy of the collateral, individual credit risks, cash
flows of the borrower, market conditions for loans (e.g. values used by other lenders and any active bid/ask market), historical loss experience, and the
relationships between current and projected market rates and portfolio rates of interest and maturities. Investments other than securities, which represent collateral
received from defaulted borrowers, were valued similarly.
Under Investment Company Accounting, the Company recognized unrealized appreciation (depreciation) on investments as the amount by which the fair
value estimated by the Company is greater (less) than the cost basis of the investment portfolio. Realized gains or losses on investments were generated through
sales of investments, foreclosure on specific collateral, and writeoffs of loans or assets acquired in satisfaction of loans, net of recoveries. Refer to Note 5 for
additional details.
F-18
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 December 31, 2020 and 2019, the Company had goodwill
of $150,803,000, which all related to the Bank, and intangible assets of $51,090,000 and $52,536,000, and the Company recognized $1,445,000, $1,446,000 and
$1,083,000 of amortization expense on the intangible assets for the twelve months ended December 31, 2020, 2019, and 2018. Additionally, loan portfolio
premiums of $12,387,000 were determined as of April 2, 2018, of which $2,717,000 and $5,758,000 were outstanding at December 31, 2020 and 2019, and of
which $3,041,000, $3,289,000 and $3,339,000 were amortized to interest income for the twelve months ended December 31, 2020, 2019, and 2018. The Company
engaged an expert to assess the goodwill and intangibles for impairment at December 31, 2020 and 2019, who concluded there was no impairment on the Bank and
on the RPAC intangible asset.
The table below shows the details of the intangible assets of the dates presented.
(Dollars in thousands)
Brand-related intellectual property
Home improvement contractor relationships
Race organization
Total intangible assets
December 31, 2020 December 31, 2019
20,075
$
6,296
26,165
52,536
18,974 $
5,951
26,165
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 $412,000, $418,000, and $422,000 for the years ended December 31, 2020, 2019, and 2018.
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 $2,558,000, $2,348,000, and $1,864,000 for the years ended
December 31, 2020, 2019, and 2018, recorded as interest expense. In addition, the Company capitalizes certain costs for transactions in the process of completion
(other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon completion or termination of
the transaction, any accumulated amounts will be amortized against income over an appropriate period, or written off. The amounts on the Company’s balance
sheet for all of these purposes were $5,805,000 and $5,105,000 at December 31, 2020 and 2019.
F-19
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)/net increase (decrease) in net assets 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.
(Dollars in thousands, except share and per share data)
Net loss/net increase in net assets resulting from
operations available to common stockholders
Weighted average common shares outstanding applicable
to basic EPS
Effect of dilutive stock options
Effect of restricted stock grants
Adjusted weighted average common shares outstanding
applicable to diluted EPS
Basic loss per share
Diluted loss per share
2020
Years Ended December 31,
2019
2018
$
(34,783) $
(1,762) $
(25,046)
24,445,452
—
—
24,342,979
—
—
24,214,978
—
—
$
24,445,452
(1.42) $
(1.42)
24,342,979
(0.07) $
(0.07)
24,214,978
(1.03)
(1.03)
Potentially dilutive common shares excluded from the above calculations aggregated 934,003, 462,180, and 100,000 shares as of December 31, 2020, 2019,
and 2018.
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/ net increase in net assets 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/net increase net assets 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.
F-20
During 2020, 2019, and 2018, the Company issued 229,408, 216,148, and 101,010 restricted shares of stock-based compensation awards, issued 444,557,
449,450, and 39,000 shares of other stock-based compensation awards, and issued 47,156, 26,040, and 0 of restricted share units of stock based compensation
awards, and recognized $2,030,000, $1,221,000, and $576,000, or $0.08, $0.05, and $0.02, per diluted common share for each respective year, of non-cash stock-
based compensation expense related to the grants. As of December 31, 2020, the total remaining unrecognized compensation cost related to unvested stock options
and restricted stock was $2,405,000, which is expected to be recognized over the next 16 quarters. See Note 9 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, such as certain purchases of assets, with the Company or its affiliates.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as defined in the
regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for federal deposit insurance, the FDIC ordered that the
Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%, which could preclude its ability to pay dividends to the Company, and that an adequate
allowance for loan losses be maintained. As of December 31, 2020, the Bank’s Tier 1 leverage ratio was 16.93%. The Bank’s actual capital amounts and ratios and
the regulatory minimum ratios are presented in the following table.
Regulatory
Minimum
(Dollars in thousands)
Common equity tier 1 capital
Tier 1 capital
Total capital
Average assets
Risk-weighted assets
Leverage ratio (1)
Common equity tier 1 capital ratio (2)
Tier 1 capital ratio (3)
Total capital ratio (3)
Well-Capitalized
—
—
—
—
—
5.0%
6.5
8.0
10.0
—
—
—
—
—
4.0%
7.0
8.5
10.5
December 31, 2020
148,507
$
217,295
233,460
1,283,664
1,243,783
December 31, 2019
158,187
$
226,975
241,842
1,172,866
1,144,337
16.9%
11.9
17.5
18.8
19.4%
13.8
19.8
21.1
(1)
(2)
(3)
Calculated by dividing Tier 1 capital by average assets.
Calculated by subtracting preferred stock or non-controlling interests from Tier 1 capital and dividing by risk-weighted assets.
Calculated by dividing Tier 1 or total capital by risk-weighted assets.
In the table above, the minimum risk-based ratios as of December 31, 2020 and 2019 reflect the capital conservation buffer of 2.5%. The minimum
regulatory requirements, inclusive of the capital conservation buffer, were the binding requirements for the risk-based requirements, and the “well-capitalized”
requirements were the binding requirements for Tier 1 leverage capital as of both December 31, 2020 and 2019.
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. 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
F-21
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 December 31, 2020 and 2019 consisted of the following:
December 31, 2020
(Dollars in thousands)
Mortgage-backed securities, principally obligations of US
federal agencies
State and municipalities
Total
December 31, 2019
(Dollars in thousands)
Mortgage-backed securities, principally obligations of US
federal agencies
State and municipalities
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
34,929 $
10,226
45,155 $
1,495 $
189
1,684 $
(45) $
(2)
(47) $
36,379
10,413
46,792
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
36,335 $
12,279
48,614 $
411 $
186
597 $
(112) $
(101)
(213) $
36,634
12,364
48,998
The amortized cost and estimated market value of investment securities as of December 31, 2020 by contractual maturity are shown below. Actual
maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Amortized
Cost
Fair
Value
$
$
25 $
12,485
14,499
18,146
45,155 $
25
12,956
15,214
18,597
46,792
F-22
The following tables show information pertaining to securities with gross unrealized losses at December 31, 2020 and 2019, aggregated by investment
category and length of time that individual securities have been in a continuous loss position follows.
December 31, 2020
(Dollars in thousands)
Mortgage-backed securities, principally obligations of US
federal agencies
State and municipalities
Total
December 31, 2019
(Dollars in thousands)
Mortgage-backed securities, principally obligations of US
federal agencies
State and municipalities
Total
Less than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Twelve Months and Over
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
(45) $
—
(45) $
4,028 $
—
4,028 $
— $
(2)
(2) $
—
196
196
Less than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Twelve Months and Over
Gross
Unrealized
Losses
Fair
Value
(74) $
(17)
(91) $
8,291 $
2,099
10,390 $
(38) $
(84)
(122) $
4,939
2,739
7,678
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 December 31, 2020 and 2019.
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Strategic partnership
Total gross loans
Allowance for loan losses
Total net loans
As of December 31, 2020
As of December 31, 2019
As a
Percent of
Gross Loans
65% $
27
5
3
—
100%
Amount
713,332
247,324
69,767
130,432
—
1,160,855
As a
Percent of
Gross Loans
62%
21
6
11
—
100%
(46,093)
$ 1,114,762
$
Amount
792,686
334,033
65,327
37,768
24
1,229,838
(57,548)
$ 1,172,290
F-23
The following tables show the activity of the gross loans for the twelve months ended December 31, 2020 and 2019.
Twelve Months Ended December 31, 2020
(Dollars in thousands)
Gross loans – December 31, 2019
Loan originations
Principal payments, sales, and maturities
Charge-offs, net
Transfer to loan collateral in process of foreclosure, net
Amortization of origination costs
Amortization of loan premium
FASB origination costs, net
Paid-in-kind interest
Transfer to other foreclosed property
Gross loans – December 31, 2020
Home
Strategic
Partnership
Total
Recreation
$
713,332 $
294,885
(187,989)
(14,457)
(14,871)
(7,809)
(191)
9,786
—
—
792,686 $
$
Improvement Commercial Medallion
130,432
—
(13,207)
(42,648)
(32,383)
(131)
(2,531)
36
—
(1,800)
$
37,768
247,324 $
193,098
(105,813)
(1,229)
—
1,910
(320)
(937)
—
—
334,033 $
69,767 $
7,575
(13,183)
(28)
—
8
—
—
1,188
—
65,327 $
$
— $ 1,160,855
497,221
1,663
(321,831)
(1,639)
(58,362)
—
(47,254)
—
(6,022)
—
(3,042)
—
8,885
—
1,188
—
—
(1,800)
24 $ 1,229,838
Twelve Months Ended December 31, 2019
(Dollars in thousands)
Gross loans – December 31, 2018
Loan originations
Principal payments, sales, and maturities
Charge-offs, net
Transfer to loan collateral in process of
foreclosure, net
Amortization of origination costs
Amortization of loan premium
FASB origination costs, net
Paid-in-kind interest
Gross loans – December 31, 2019
Recreation
Home
Improvement
Commercial
Medallion
Total
$
587,038 $
301,403
(146,873)
(17,419)
(14,512)
(6,428)
(247)
10,370
—
183,155 $
142,112
(76,157)
(786)
—
1,561
(416)
(2,145)
—
$
713,332 $
247,324 $
64,083 $
18,578
(13,553)
(819)
—
34
—
610
834
69,767 $
183,606
—
(15,070)
(18,664)
(16,836)
(119)
(2,626)
141
—
130,432
$
$
1,017,882
462,093
(251,653)
(37,688)
(31,348)
(4,952)
(3,289)
8,976
834
1,160,855
The following table sets forth the activity in the allowance for loan losses for the twelve months ended December 31, 2020 and 2019.
(Dollars in thousands)
Allowance for loan losses – beginning balance
Charge-offs
Recreation
Home improvement
Commercial
Medallion
Total charge-offs
Recoveries
Recreation
Home improvement
Commercial
Medallion
Total recoveries
Net charge-offs (1)
Provision for loan losses
Allowance for loan losses – ending balance (2) (3)
Twelve Months Ended
December 31, 2020 December 31, 2019
36,395
$
46,093 $
(23,543)
(2,909)
(31)
(49,361)
(75,844)
9,086
1,680
3
6,713
17,482
(58,362)
69,817
57,548 $
(24,433)
(2,504)
(819)
(22,205)
(49,961)
7,014
1,718
—
3,541
12,273
(37,688)
47,386
46,093
$
F-24
(1)
(2)
(3)
As of December 31, 2020, cumulative charge-offs of loans and loan collateral in process of foreclosure in the medallion loan portfolio were $279,188, some
of which represents collection opportunities for the Company.
As of December 31, 2020, the general reserves previously recorded for the Company’s medallion loan portfolio had been reversed as all loans had been
deemed impaired and written down to collateral value.
As of December 31, 2020, there was no allowance for loan losses and net charge-offs related to the strategic partnership loans.
The following tables set forth the allowance for loan losses by type as of December 31, 2020 and 2019.
December 31, 2020
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
December 31, 2019
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
Amount
Percentage
of Allowance
Allowance as
a Percent of
Loan Category
Allowance as
a Percent of
Nonaccrual
27,348
5,157
—
25,043
57,548
48%
9
—
43
100%
3.45%
1.54
—
66.31
4.68%
378.20%
NM
—
68.01
93.17%
Amount
Percentage
of Allowance
Allowance as
a Percent of
Loan Category
Allowance as
a Percent of
Nonaccrual
18,075
2,608
—
25,410
46,093
39%
6
—
55
100%
2.53%
1.05
—
19.48
3.97%
228.25%
NM
—
389.84
174.04%
$
$
$
$
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)
Total nonaccrual loans
Interest foregone for the year
Amount of foregone interest applied to principal
for the year
Interest foregone life-to-date
Amount of foregone interest applied to principal
life-to-date
Percentage of nonaccrual loans to gross loan portfolio
Percentage of allowance for loan losses to nonaccrual loans
2020
December 31,
2019
$
$
61,767
3,311
$
26,484
2,152
2018
34,877
1,153
602
5,252
254
2,744
792
5%
93
471
2%
174
535
1,952
1,214
3%
104
F-25
The following tables present the performance status of loans as of December 31, 2020 and 2019.
December 31, 2020
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Strategic partnership
Total
December 31, 2019
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
Performing
Nonperforming
Total
Percentage of
Nonperforming
to Total
785,047 $
333,862
48,731
—
24
1,167,664 $
7,639 $
171
16,596
37,768 (1)
—
62,174 (2) $
792,686
334,033
65,327
37,768
24
1,229,838
0.96%
0.05
25.40
100.00
0.00
5.06%
Performing
Nonperforming
Total
Percentage of
Nonperforming
to Total
705,070 $
247,139
57,905
88,248
1,098,362 $
8,262 $
185
11,862
42,184
62,493 (2) $
713,332
247,324
69,767
130,432
1,160,855
1.16%
0.07
17.00
32.34
5.38%
$
$
$
$
(1)
(2)
Includes medallion loan premiums of $1,615 as of December 31, 2020.
Includes $408 and $36,009 of TDRs as of December 31, 2020 and 2019, which are accruing and paying currently, but which are considered
nonperforming loans under GAAP.
For those performing 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 December 31, 2020 and 2019, all of which had
an allowance recorded against the principal balance.
(Dollars in thousands)
With an allowance recorded
Recreation
Home improvement
Commercial
Medallion
Total nonperforming loans with an allowance
(Dollars in thousands)
With an allowance recorded
Recreation
Home improvement
Commercial
Medallion
Total nonperforming loans with an allowance
December 31, 2020
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
December 31, 2019
Unpaid
Principal
Balance
Related
Allowance
$
$
7,639 $
171
16,596
37,768
62,174 $
7,639 $
171
16,600
38,368
62,778 $
264 $
3
—
25,043
25,310 $
8,262 $
185
11,862
42,184
62,493 $
8,262 $
185
11,867
42,650
62,964 $
329
3
—
14,824
15,156
For the Twelve Months Ended
December 31, 2020
December 31, 2019
Average
Investment
Recorded
Interest Income
(Expense)
Recognized
Average
Investment
Recorded
Interest Income
(Expense)
Recognized
7,949 $
172
16,884
40,928
65,933 $
560
2
123
465
1,150
$
$
8,317 $
185
7,886
44,721
61,109 $
471
—
392
346
1,209
$
$
F-26
The following tables show the aging of all loans as of December 31, 2020 and 2019.
December 31, 2020
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Strategic partnership
Total
Days Past Due
30-59
60-89
90 +
$
$
22,058 $
813
—
2,019
—
24,890 $
7,582 $
218
—
973
—
8,773 $
5,343 $
170
75
1,290
—
6,878 $
Total (1)
Current
Total
34,983 $ 732,391 $ 767,374 $
336,885
335,684
65,340
65,265
36,153
31,871
24
24
40,541 $ 1,165,235 $ 1,205,776 $
1,201
75
4,282
—
(1)
Excludes loan premiums of $2,717 resulting from purchase price accounting and $21,345 of capitalized loan origination costs.
December 31, 2019
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
Days Past Due
30-59
60-89
90 +
$
$
27,357 $
931
—
12,491
40,779 $
8,426 $
427
—
2,118
10,971 $
5,800 $
184
107
2,572
8,663 $
Total (1)
Current
Total
41,583 $ 648,227 $ 689,810 $
250,830
249,288
1,542
69,767
69,660
107
17,181
126,287
109,106
60,413 $ 1,076,281 $ 1,136,694 $
Recorded
Investment
90 Days and
Accruing
Recorded
Investment
90 Days and
Accruing
—
—
—
—
—
—
—
—
—
—
—
(1)
Excludes loan premiums of $5,758 resulting from purchase price accounting and $18,403 of capitalized loan origination costs.
The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 327% and 190% as of December 31, 2020
and 2019.
The following table shows the TDR’s which the Company entered into during the year ended December 31, 2020.
(Dollars in thousands)
Recreation loans
Commercial loans
Medallion loans
Number of Loans
Pre-
Modification
Investment
Post-
Modification
Investment
77
1
59
1,053
1,821
33,505
749
1,821
33,505
During the twelve months ended December 31, 2020, five medallion loans modified as troubled debt restructurings were in default and had an investment
value of $738,000 as of December 31, 2020, net of $331,000 of an allowance for loan loss, 43 recreation loans modified as troubled debt restructuring were in
default and had an investment value of $433,000 as of December 31, 2020, net of a $15,000 allowance for loan losses, and no commercial loans modified as
trouble debt restructurings were in default.
The following table shows the TDR’s which the Company entered into during the year ended December 31, 2019.
(Dollars in thousands)
Recreation loans
Medallion loans
Number of Loans
Pre-
Modification
Investment
Post-
Modification
Investment
294 $
71
4,433 $
31,376
2,831
31,385
During the year ended December 31, 2019, four medallion loans modified as a troubled debt restructurings were in default and had an investment value of
$1,023,000 as of December 31, 2019, net of $428,000 of an allowance for loan loss, and 213 recreation loans modified as troubled debt restructurings were in
default and had an investment value of $1,905,000 as of December 31, 2019, net of a $76,000 allowance for loan losses.
F-27
The following tables show the activity of the loan collateral in process of foreclosure, which relates only to the recreation and medallion loans, for the
twelve months ended December 31, 2020 and 2019.
Twelve Months Ended December 31, 2020
(Dollars in thousands)
Loan collateral in process of foreclosure – December 31, 2019
Transfer from loans, net
Sales
Cash payments received
Collateral valuation adjustments
Loan collateral in process of foreclosure – December 31, 2020
Twelve Months Ended December 31, 2019
(Dollars in thousands)
Loan collateral in process of foreclosure – December 31, 2018
Transfer from loans, net
Sales
Cash payments received
Collateral valuation adjustments
Loan collateral in process of foreclosure – December 31, 2019
Recreation
Medallion
Total
1,476 $
14,871
(7,512)
—
(7,403)
1,432 $
51,235 $
32,403
(300)
(5,687)
(24,523)
53,128 $
52,711
47,274
(7,812)
(5,687)
(31,926)
54,560
Recreation
Medallion
Total
1,503 $
14,512
(7,591)
—
(6,948)
1,476 $
47,992 $
16,836
(1,515)
(7,697)
(4,381)
51,235 $
49,495
31,348
(9,106)
(7,697)
(11,329)
52,711
$
$
$
$
(5) UNREALIZED APPRECIATION (DEPRECIATION) AND REALIZED GAINS (LOSSES) ON INVESTMENTS (Investment Company Accounting)
The following table sets forth the pre-tax change in the Company’s unrealized appreciation (depreciation) on investments for the three months ended
March 31, 2018 under Investment Company Accounting.
(Dollars in thousands)
Balance December 31, 2017
Net change in unrealized
Appreciation on investments
Depreciation on investments
Reversal of unrealized appreciation
(depreciation) related to realized
Gains on investments
Losses on investments
Balance March 31, 2018
Medallion
Loans
Commercial
Loans
Investments
in
Subsidiaries
Equity
Investments
Investments
Other Than
Securities
$
(20,338) $
(513) $
158,920 $
3,121 $
(1,490) $
Total
139,700
—
(38,170)
—
18
38,795
—
(998)
—
—
(1,915)
37,797
(40,067)
—
34,747
(23,761) $
$
—
—
(495) $
—
—
197,715 $
—
—
2,123 $
—
—
(3,405) $
—
34,747
172,177
F-28
The following table sets forth the pre-tax changes in our unrealized and realized gains and losses in the investment portfolio for the three months ended
March 31, 2018 under Investment Company Accounting.
(Dollars in thousands)
Net change in unrealized appreciation
(depreciation) on investments
Unrealized appreciation
Unrealized depreciation
Net unrealized appreciation on investments in
Medallion Bank and other controlled subsidiaries
Realized gains
Realized losses
Net unrealized losses on investments other than
securities and other assets
Total
Net realized gains (losses) on investments
Realized gains
Realized losses
Other gains
Direct charge-offs
Total
(6) FUNDS BORROWED
The outstanding balances of funds borrowed were as follows.
Three Months Ended
March 31, 2018
$
$
$
$
(998)
(38,152)
29,115
—
34,747
(1,915)
22,797
—
(34,747)
—
2
(34,745)
(Dollars in thousands)
Deposits (3)
Retail and privately placed
notes (4)
SBA debentures and
borrowings
Preferred securities (4)
Notes payable to banks
Other borrowings
Total
Payments Due for the Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
December
31, 2020(1)
December
31, 2019(1)
Interest
Rate (2)
$ 393,835 $ 241,605 $ 190,387 $ 120,040 $ 121,955 $
— $ 1,067,822 $ 954,245
1.71%
33,625
—
—
36,000
—
33,600
103,225
69,625
8.25%
22,508
—
30,701
500
71,746
33,000
33,183
7,794
$ 481,169 $ 249,327 $ 195,667 $ 161,040 $ 136,702 $ 88,100 $ 1,312,005 $ 1,169,593
14,000
—
—
747
68,008
33,000
31,261
8,689
21,500
33,000
—
—
5,000
—
280
—
5,000
—
—
—
—
—
280
7,442
3.36%
2.35%
3.67%
1.91%
2.37%
Excludes deferred financing costs of $5,805 and $5,105 as of December 31, 2020 and 2019.
(1)
(2) Weighted average contractual rate as of December 31, 2020.
(3)
(4)
Balance excludes $250 of strategic partner reserve deposits as of December 31, 2020.
Relates to loans held at Medallion Financial Corp. (parent company only).
F-29
(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 highly competitive with market rates paid by other financial institutions.
Additionally, a brokerage fee is paid, depending on the maturity of the deposits, which averages less than 0.15%. Interest on the deposits is accrued daily and paid
monthly, quarterly, semiannually, or at maturity. The Bank did not have any individual time deposits greater than $100,000 as of December 31, 2020. In October
2020, the Bank began to originate time deposits through an internet listing service. These deposits are from other financial institutions, which as of December
2020, had $995,000 in listing services deposits. The following table presents the maturity of the broker pools, excluding strategic partner reserve deposits, as of
December 31, 2020.
(Dollars in thousands)
Three months or less
Over three months through six months
Over six months through one year
Over one year
Total deposits
December 31, 2020
125,766
$
117,602
150,467
673,987
1,067,822
$
(B) SBA DEBENTURES AND BORROWINGS
Over the years, the SBA has approved commitments for MCI and FSVC, typically for a four and half year term and a 1% fee, which was paid. During 2017,
the SBA restructured FSVC’s debentures with SBA totaling $33,485,000 in principal into a new loan by the SBA to FSVC in the principal amount of $34,024,756,
or the SBA Loan. In connection with the SBA Loan, FSVC executed a Note, or the SBA Note, with an effective date of March 1, 2017, in favor of SBA, in the
principal amount of $34,024,756. The SBA Loan bears interest at a rate of 3.25% per annum, required a minimum of $5,000,000 of principal and interest to be paid
on or before February 1, 2018 (which was paid) and a minimum of $7,600,000 of principal and interest to be paid on or before March 27, 2019 (which was paid),
and all remaining unpaid principal and interest on or before February 1, 2020, the final maturity date, which was extended to the maturity date of the Company’s
publicly-traded 9.000% Senior Notes, which is currently April 15, 2021; or the Public Debt, provided, however, that (1) upon the Company’s refinancing of such
senior notes, the maturity date shall mean the earlier of (a) the maturity date of such refinanced debt or (b) April 30, 2024, and (2) upon the Company’s repayment
of such senior notes without refinancing, the maturity date shall mean April 30, 2024. As of December 31, 2020, $175,485,000 of commitments had been fully
utilized, there were $25,000,000 of commitments available, and $68,008,000 was outstanding, including $14,008,000 under the SBA Note.
On July 31, 2020, MCI accepted a commitment from the SBA for $25,000,000 in debenture financing with a ten-year term. MCI can draw funds under the
commitment, in whole or in part, until September 24, 2024. In connection with the commitment, MCI paid the SBA a leverage fee of $250,000, with the remaining
$500,000 of the fee to be paid pro rata as MCI draws under the commitment. Of the committed amount, $8,500,000 has been reserved to replace $8,500,000 of
debentures which mature in 2021. The remaining balance of $16,500,000 is drawable upon the infusion of $8,250,000 of capital from either the capitalization of
retained earnings or capital infusion from the Company. As of December 31, 2020, none of the commitments had been drawn.
(C) NOTES PAYABLE TO BANKS
The Company and its subsidiaries have entered into note agreements with a variety of local and regional banking institutions over the years. The notes are
typically secured by various assets of the underlying borrower.
F-30
The table below summarizes the key attributes of the Company’s various borrowing arrangements with these lenders as of December 31, 2020.
(Dollars in thousands)
Borrower
Medallion
Financial Corp.
Medallion
Chicago
Medallion
Funding
# of
Lenders/
Notes
Note
Dates
Maturity
Dates
5/5
4/11 - 8/14
2/21 - 9/21
Type
Term loans
and demand
notes secured
by pledged
loans (2)
Term loans
secured by
owned Chicago
taxi
Note
Amounts
Balance
Outstanding at
December 31,
2020
Payment
Average
Interest
Rate at
December 31,
2020
Interest Rate
Index(1)
$
19,734 (2) $
19,734 Interest only(3)
3.75%
Various(3)
2/23 11/11 - 12/11
2/21
medallions (4)
18,449
10,687
1/1
11/18
12/23
Term loan
unsecured
1,400
39,583 $
840
31,261
$
$134 of
principal &
interest paid
monthly
$70
principal &
interest paid
quarterly
3.50%
N/A
4.00%
N/A
(1)
(2)
(3)
(4)
At December 31, 2020, 30 day LIBOR was 0.14%, 360 day LIBOR was 0.34%, and the prime rate was 3.25%.
One note has an interest rate of Prime, one note has an interest rate of Prime plus 0.50%, one note has a fixed interest rate of 3.75%, one note has an interest
rate of LIBOR plus 3.75%, and the other interest rates on these borrowings are LIBOR plus 2%.
Various agreements call for remittance of all principal received on pledged loans subject to minimum monthly payments ranging from $12 to $85.
Guaranteed by the Company.
On July 6, 2019, the Company paid $10,819,000 at maturity in satisfaction of all its outstanding obligations under one of its credit facilities. In connection
with this payment, the Company obtained a waiver from one of its other lenders, with a term note of $1,839,000, of certain resulting repayment and other
obligations, which waiver expires on June 15, 2021.
In March 2019, the Company used some of the proceeds of the privately placed notes to pay off one of the notes payable to banks at a 50% discount,
resulting in a gain on debt extinguishment of $4,145,000 in the 2019 first quarter.
In November 2018, MFC entered into a note to the benefit of DZ Bank for $1,400,000 at a 4.00% interest rate due December 2023, as part of the
restructuring of the DZ loan. See Note 20 for more information.
As a result of the cash flow shortages due to the slowdown in the taxi industry resulting from the COVID-19 pandemic, the Company received 180 day
payment deferrals that terminated in August and modifications to provide for interest only payments from September through the end of 2020 for the notes payable
to banks described above. Beginning in 2021, the Company returned to repaying the principal balance along with interest.
(D) 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. The Company will use 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. The Company will use 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
F-31
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.
(E) PREFERRED SECURITIES
In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold
$35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bear a variable rate of
interest of 90 day LIBOR (0.24% at December 31, 2020) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly
in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased
from a third party investor. At December 31, 2020, $33,000,000 was outstanding on the preferred securities.
(F) OTHER BORROWINGS
In November and December 2017, RPAC amended the terms of various promissory notes with affiliate Richard Petty (refer to Note 12 for more details). At
December 31, 2020, the total outstanding on these notes was $7,442,000 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. As of December 31, 2020,
the total outstanding balance of such loan was $747,000 at a 1.00% annual interest rate due in five years. Under the terms of the note, RPAC could be granted
forgiveness for all or a portion of the balance if the loan proceeds are used in accordance with the requirements set forth in the PPP. As of December 31, 2020,
RPAC had not applied for forgiveness of this loan.
(G) COVENANT COMPLIANCE
Certain of the Company’s debt agreements contain restrictions that require the Company and its subsidiaries to maintain certain financial ratios, including
debt to equity and minimum net worth. The Company was in compliance with such restrictions as of December 31, 2020.
(7) 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 twelve months ended December 31, 2020 and 2019.
(Dollars in thousands)
Operating lease costs
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Right-of-use asset obtained in exchange for lease liability
December 31, 2020
$
2,384 $
December 31, 2019
2,184
2,821
251
2,419
2,413
The following table presents the breakout of the operating leases as of December 31, 2020 and 2019.
F-32
(Dollars in thousands)
Operating lease right-of-use assets
Other current liabilities
Operating lease liabilities
Total operating lease liabilities
Weighted average remaining lease term
Weighted average discount rate
At December 31, 2020, maturities of the lease liabilities were as follows.
$
December 31, 2020
11,737 $
2,004
11,018
13,022
6.4 years
5.54%
December 31, 2019
13,482
2,085
12,738
14,823
7.3 years
5.54%
(Dollars in thousands)
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less imputed interest
Total operating lease liabilities
$
$
2,474
2,406
2,356
2,373
2,390
3,521
15,520
2,498
13,022
Occupancy expense was $2,833,000, $2,436,000, and $2,287,000 for the years ended December 31, 2020, 2019, and 2018.
(8) 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 December 31, 2020 and 2019.
(Dollars in thousands)
Goodwill and other intangibles
Provision for loan losses
Net operating loss carryforwards (1)
Accrued expenses, compensation, and other assets
Unrealized gains on other investments
Total deferred tax liability
Valuation allowance
Deferred tax liability, net
Taxes receivable
Net deferred and other tax liabilities
2020
2019
$
$
(44,799) $
19,556
30,493
1,174
(6,769)
(345)
(462)
(807)
1,757
950 $
(45,595)
19,198
22,607
1,701
(6,790)
(8,879)
(462)
(9,341)
1,516
(7,825)
(1)
As of December 31, 2020, the Company and its subsidiaries had an estimated $124,150 of net operating loss carryforwards, $1,712 which expires at various
dates between December 31, 2026 and December 31, 2035, and which had a net asset value of $30,031 as of December 31, 2020.
F-33
The components of our tax (provision) benefit for the years ended December 31, 2020, 2019, and 2018 were as follows.
(Dollars in thousands)
Current
Federal
State
Deferred
Federal
State
Net (provision) benefit for income taxes
2020
2019
2018
$
$
— $
(260)
7,702
2,632
10,074 $
— $
519
(489)
(371)
(341) $
(2,797)
(1,078)
5,270
(1,464)
(69)
The following table presents a reconciliation of statutory federal income tax (provision) benefit to consolidated actual income tax (provision) benefit
reported for the years ended December 31, 2020, 2019, and 2018.
(Dollars in thousands)
Statutory Federal income tax (provision) benefit at 21%
State and local income taxes, net of federal income
tax benefit
Revaluation of net operating losses
Change in effective state income tax rate
Change in state income tax accruals
Income attributable to non-controlling interest
Non deductible expenses
Utilization of carry forwards
Appreciation of Medallion Bank
Other
Total income tax (provision) benefit
2020
2019
2018
$
7,766 $
(642) $
4,935
1,518
1,228
(145)
(260)
460
(453)
—
—
(40)
10,074 $
(120)
380
(891)
640
309
—
—
—
(17)
(341) $
440
—
(2,564)
—
—
—
(910)
(1,974)
4
(69)
$
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 December 31, 2020.
The Company has filed tax returns in many states. Federal, New York State, New York City, and Utah state tax filings of the Company for the tax years
2017 through the present are the more significant filings that are open for examination.
(9) 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, 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 862,069 remained
issuable as of December 31, 2020. Awards under the 2018 Plan are subject to certain limitations as set forth in the 2018 Plan, which will terminate when all shares
of common stock authorized for delivery have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors
pursuant to the 2018 Plan, whichever occurs first.
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
F-34
approved, and these remaining shares were rolled into the 2018 Plan. Awards under the 2015 Restricted Stock Plan are subject to certain limitations as set forth in
the 2015 Restricted Stock Plan. The 2015 Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the 2015 Restricted
Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2015 Restricted
Stock Plan, whichever occurs first.
The Company had a stock option plan, or the 2006 Stock Option Plan, available to grant both incentive and nonqualified stock options to employees. The
2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provided for the issuance of a
maximum of 800,000 shares of common stock of the Company. No additional shares are available for issuance under the 2006 Stock Option Plan. The 2006 Stock
Option Plan was administered by the Compensation Committee of the Board of Directors. The option price per share could not be less than the current market
value of the Company’s common stock on the date the option was granted. The term and vesting periods of the options were determined by the Compensation
Committee, provided that the maximum term of an option could not exceed a period of ten years.
The Company’s Board of Directors approved the 2015 Non-Employee Director Stock Option Plan, or the 2015 Director Plan, on March 12, 2015, which
was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on
February 29, 2016. A total of 300,000 shares of the Company’s common stock were issuable under the 2015 Director Plan, and 258,334 remained issuable as of
June 15, 2018. Effective June 15, 2018, the 2018 Plan was approved, and these remaining shares were rolled into the 2018 Plan. Under the 2015 Director Plan,
unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the 2015 Director Plan, the
Company granted options to purchase 12,000 shares of the Company’s common stock to a non-employee director upon election to the Board of Directors, with an
adjustment for directors who were elected to serve less than a full term. The option price per share could not be less than the current market value of the
Company’s common stock on the date the option was granted. Options granted under the 2015 Director Plan are exercisable annually, as defined in the 2015
Director Plan. The term of the options could not exceed ten years.
The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan, or the Amended Director Plan, on April 16, 2009, which
was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the
SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock were issuable under the Amended Director Plan. No additional shares are
available for issuance under the Amended Director Plan. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors
comprised of directors who are not eligible for grants under the Amended Director Plan, the Company would grant options to purchase 9,000 shares of the
Company’s common stock to an Eligible Director upon election to the Board of Directors, with an adjustment for directors who were elected to serve less than a
full term. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. Options
granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options could not exceed ten years.
Additional shares are only available for future issuance under the 2018 Plan. At December 31, 2020, 951,669 options on the Company’s common stock
were outstanding under the Company’s plans, of which 178,307 options were exercisable. Additionally, there were 416,140 unvested shares of the Company’s
common stock outstanding and 62,780 unvested restricted share units under the Company’s restricted stock plans.
The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant
date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of options
granted was $3.09, $3.10, and $1.06 per share for the years ended December 31, 2020, 2019, and 2018. The following assumption categories are used to determine
the value of any option grants.
Risk free interest rate
Expected dividend yield
Expected life of option in years (1)
Expected volatility (2)
Expected life is calculated using the simplified method.
(1)
(2) We determine our expected volatility based on our historical volatility.
F-35
2020
Year ended December 31,
2019
2018
1.23%
—
6.25
51.03%
2.29%
0.66
6.25
49.03%
2.82%
4.86
6.00
30.00%
The following table presents the activity for the stock option programs for the years ended December 31, 2020, 2019, and 2018.
Outstanding at December 31, 2017
Granted
Cancelled
Exercised (1)
Outstanding at December 31, 2018
Granted
Cancelled
Exercised (1)
Outstanding at December 31, 2019
Granted
Cancelled
Exercised (1)
Outstanding at December 31, 2020 (2)
Options exercisable at
December 31, 2018
December 31, 2019
December 31, 2020 (2)
Number of
Options
320,626
39,000
(214,960)
—
144,666
449,450
(44,076)
—
550,040
444,557
(42,928)
—
951,669
Exercise
Price Per
Share
$2.14-13.84 $
5.27-5.58
9.22-9.24
—
2.14-13.84
5.21-7.25
6.55-13.84
—
2.14-13.53
4.89-6.68
2.22-13.53
—
$2.14-12.55 $
Weighted
Average
Exercise Price
8.78
5.46
9.22
—
7.23
6.61
9.00
—
6.58
6.24
6.91
—
6.41
81,889
62,778
178,307
$2.14-13.84 $
2.14-13.53
2.14-12.55
9.25
7.60
6.33
(1)
(2)
The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at the exercise date and the related
exercise price of the underlying options, was $0 for 2020, 2019, and 2018.
The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at December 31, 2020 and the related
exercise price of the underlying options, was $45,000 for outstanding options and $43,000 for exercisable options as of December 31, 2020. The remaining
contractual life was 8.60 years for outstanding options and 7.23 years for exercisable options at December 31, 2020.
The following table presents the activity for the restricted stock programs for the years ended December 31, 2020, 2019, and 2018.
Outstanding at December 31, 2017
Granted
Cancelled
Vested (1)
Outstanding at December 31, 2018
Granted
Cancelled
Vested (1)
Outstanding at December 31, 2019
Granted
Cancelled
Vested (1)
Outstanding at December 31, 2020 (2)
Number of
Shares
408,582
101,010
(9,737)
(308,940)
190,915
216,148
(3,946)
(118,238)
284,879
229,408
(8,755)
(89,392)
416,140
Grant
Price Per
Share
$2.06-10.38 $
3.93-5.27
3.93-9.08
2.06-10.38
2.14-5.27
4.80-7.25
3.93-6.55
2.06-4.80
3.95-7.25
4.89-6.68
3.95-7.25
3.95-6.55
$4.39-7.25 $
Weighted
Average
Grant Price
3.45
4.41
4.66
3.35
4.06
6.59
4.97
3.89
6.01
6.21
6.93
5.37
6.24
(1)
(2)
The aggregate fair value of the restricted stock vested was $579,000, $736,000, and $1,270,000 for 2020, 2019, and 2018.
The aggregate fair value of the restricted stock was $2,039,000 as of December 31, 2020. The remaining vesting period was 2.03 years at December 31,
2020.
F-36
During the twelve months ended December 31, 2020, the Company granted 47,156 restricted stock units that vest on June 19, 2021 with a grant price of
$3.16. Unitholders have the option of deferring settlement until a future date if the recipient makes a formal election under the guidelines of IRC Section 409A,
which was done for 16,524 units. The remaining 10,416 units vested and settled.
The following table presents the activity for the unvested options outstanding under the plans for the year ended December 31, 2020.
Outstanding at December 31, 2019
Granted
Cancelled
Vested
Outstanding at December 31, 2020
Number of
Options
Exercise Price
Per Share
487,262
444,557
(20,630)
(137,827)
773,362
$2.14-7.25 $
4.89-6.68
6.55-7.25
2.14-6.55
$4.89-7.25 $
Weighted
Average
Exercise Price
6.45
6.24
6.76
6.05
6.42
The intrinsic value of the options vested was $45,000, $43,000, and $32,000 in 2020, 2019, and 2018.
(10) SEGMENT REPORTING
The Company has six business segments, which include four lending and two non-operating segments, which are reflective of how Company management
makes decisions about its business and operations.
The four lending segments reflect the main types of lending performed at the Company, which are recreation, home improvement, commercial, and
medallion. The recreation and home improvement lending segments are conducted by the Bank in all fifty states, with the highest concentrations in Texas, Florida,
and California, at 15%, 10%, and 9% of loans outstanding and with no other states over 9% as of December 31, 2020. The recreation lending segment is a
consumer finance business that works with third-party dealers and financial service providers for the purpose of financing RVs, boats, and other consumer
recreational equipment, of which RVs, boats, and trailers make up 60%, 19%, and 12% of the segment portfolio as of December 31, 2020. The home improvement
lending segment works with contractors and financial service providers to finance residential home improvements concentrated in swimming pools, roofs,
windows, and solar panels, at 27%, 24%, 13%, and 8% of total home improvement loans outstanding, and with no other product lines over 8% as of December 31,
2020. The commercial lending segment focuses on enterprise wide industries, including manufacturing and various other industries, in which 53% of these loans
are made in the Midwest. The medallion lending segment arose in connection with the financing of medallions, taxis, and related assets, of which 89% were in
New York City as of December 31, 2020.
In addition, our non-operating segments include RPAC, which is a race car team, and our corporate and other investments segment, which includes items
not allocated to our operating segments such as investment securities, equity investments, intercompany eliminations, and other corporate elements. As a result of
COVID-19, the race season had been suspended from March 15, 2020 through May 17, 2020. As states began to reopen, NASCAR resumed races and completed
all races scheduled. Commencing with the second quarter 2020, the Bank began issuing loans related to the new strategic partnership business, which is currently
included within the corporate and other investment segment due to its small size.
As part of the segment reporting, capital ratios for all operating segments have been normalized at 20%, which approximates the percentage of consolidated
total equity divided by total assets, with the net adjustment applied to corporate and other investments. In addition, the commercial segment exclusively represents
the mezzanine lending business, and the legacy commercial loan business (immaterial to total) has been re-allocated to corporate and other investments.
F-37
The following tables present segment data as of and for the twelve months ended December 31, 2020 and 2019, and as of and for the nine months ended
December 31, 2018.
Year Ended December 31, 2020
Consumer Lending
Commercial
Lending
Medallion
Lending
RPAC
Corporate and Other
Investments
(Dollars in thousands)
Total interest income
Total interest expense
Net interest income (loss)
Provision for loan losses
Net interest income (loss) after loss
provision
Sponsorship and race winnings
Race team related expenses
Other income (expense), net
Net income (loss) before taxes
Income tax (provision) benefit
Net income (loss) after taxes
Balance Sheet Data
Total loans net
Total assets
Total funds borrowed
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status(2)
Charge-off ratio
Recreation
110,706
$
13,013
97,693
23,736
$
Home
Improvement
27,273
5,699
21,574
3,778
$
73,957
—
—
(27,341)
46,616
(12,004)
$
34,612
17,796
—
—
(9,611)
8,185
(2,108)
$
6,077
$
$
$
6,926
2,538
4,388
—
4,388
—
—
(3,196)
1,192
(299)
893
$
(1,518)
3,610
(5,128)
42,276
(47,404)
—
—
(30,366)
(77,770)
19,520
(58,250)
$
$
$
$
—
163
(163)
—
(163)
20,042
(8,366)
(7,973)
3,540
(889)
$
2,651
$
—
33,711
8,689
$
765,338
777,605
621,735
$
328,876
340,494
272,284
$
62,037
80,622
65,924
12,725
124,554
98,636
4.59%
22.93
14.90
13.15
3.45
0.70
1.95
2.07%
10.35
9.66
7.62
1.54
0.05
0.44
1.07%
5.17
10.51
6.66
0.00
0.11
0.04
(1)
(1)
(3)
(33.21%)
(165.21)
(2.11)
(7.14)
66.31
3.57
59.38
7.98%
(363.66)
N/A
N/A
N/A
N/A
N/A
(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.
F-38
1,575
9,128
(7,553)
27
(7,580)
—
—
(11,164)
(18,744)
5,854
(12,890)
Consolidated
144,962
$
34,151
110,811
69,817
40,994
20,042
(8,366)
(89,651)
(36,981)
10,074
(26,907)
$
3,314
285,425
244,987
$ 1,172,290
1,642,411
1,312,255
(5.06%)
(23.29)
N/A
N/A
N/A
N/A
N/A
(2.16)%
(10.90)
11.32
8.65
4.68
0.57
5.00
Commercial
Lending
Medallion
Lending
RPAC
Corporate and Other
Investments
Year Ended December 31, 2019
Consumer Lending
(Dollars in thousands)
Total interest income
Total interest expense
Net interest income (loss)
Provision for loan losses
Net interest income (loss) after loss
provision
Sponsorship and race winnings
Race team related expenses
Other income (expense), net
Net income (loss) before taxes
Income tax (provision) benefit
Net income (loss) after taxes
Balance Sheet Data
Total loans net
Total assets
Total funds borrowed
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status(2)
Charge-off ratio
Recreation
99,463
$
13,304
86,159
28,638
$
Home
Improvement
19,943
4,757
15,186
1,598
$
57,521
—
—
(23,490)
34,031
(8,813)
$
25,218
13,588
—
—
(7,520)
6,068
(1,572)
$
4,496
$
$
$
7,183
2,833
4,350
364
3,986
—
—
(1,149)
2,837
(684)
2,153
$
3,665
7,962
(4,297)
16,331
(20,628)
—
—
(10,493)
(31,121)
7,596
(23,525)
$
$
$
$
695,257
707,377
563,805
$
244,716
252,704
201,605
$
66,405
84,924
68,666
105,022
217,483
176,825
3.84%
17.19
15.39
13.33
2.53
0.84
2.69
2.20%
10.22
9.50
7.24
1.05
0.07
0.37
2.44%
12.21
11.39
6.90
0.00
0.15
1.30
(1)
(1)
(3)
(9.73%)
(48.49)
2.88
(3.38)
19.48
2.04
14.68
$
—
159
(159)
—
(159)
18,742
(8,996)
(6,942)
2,645
(329)
$
2,316
$
—
31,538
7,794
7.28%
(96.37)
N/A
N/A
N/A
N/A
N/A
(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.
F-39
2,308
6,030
(3,722)
455
(4,177)
—
—
(7,946)
(12,123)
3,461
(8,662)
Consolidated
132,562
$
35,045
97,517
47,386
50,131
18,742
(8,996)
(57,540)
2,337
(341)
1,996
$
3,362
247,641
150,898
$ 1,114,762
1,541,667
1,169,593
(3.71%)
(14.26)
N/A
N/A
N/A
N/A
N/A
(0.12)%
(0.59)
11.75
8.64
3.97
0.76
3.60
Nine Months Ended December 31, 2018
Consumer Lending
(Dollars in thousands)
Total interest income
Total interest expense
Net interest income (loss)
Provision for loan losses
Net interest income (loss) after loss
provision
Sponsorship and race winnings
Race team related expenses
Other income (expense), net
Net income (loss) before taxes
Income tax (provision) benefit
Net income (loss) after taxes
Balance Sheet Data
Total loans net
Total assets
Total funds borrowed
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status(2)
Charge-off ratio
Commercial
Lending
Medallion
Lending
RPAC
Recreation
68,870
$
6,986
61,884
15,118
$
Home
Improvement
12,799
2,290
10,509
2,453
$
46,766
—
—
(14,242)
32,524
(8,579)
$
23,945
8,056
—
—
(3,093)
4,963
(1,319)
$
3,644
$
$
$
7,076
1,502
5,574
—
5,574
—
—
(1,824)
3,750
(862)
2,888
$
6,317
10,125
(3,808)
41,437
(45,245)
—
—
9,742
(35,503)
7,938
(27,565)
$
580,182
590,746
434,527
$
181,359
188,892
143,815
$
59,973
93,807
53,719
155,863
273,501
294,465
$
Corporate
and Other
Investments
1,741
3,792
(2,051)
—
Consolidated
96,803
$
24,816
71,987
59,008
(2,051)
—
—
(6,489)
(8,540)
1,005
(7,535)
$
12,979
14,368
(7,121)
(27,382)
(7,156)
(709)
(7,865)
4,110
204,975
127,853
$
981,487
1,381,846
1,062,028
$
$
$
$
$
—
121
(121)
—
(121)
14,368
(7,121)
(11,476)
(4,350)
1,108
(3,242)
—
29,925
7,649
5.48%
22.60
15.78
14.18
1.17
0.73
1.89
2.56%
11.30
9.06
7.44
0.98
0.07
0.46
4.27%
9.43
14.25
11.23
0.00
0.44
0.00
(1)
(10.13)%
NM
3.58
(2.16)
15.11
9.43
7.21
(11.69)%
NM
N/A
N/A
N/A
N/A
N/A
(4.07)%
(12.37)
N/A
N/A
N/A
N/A
N/A
(0.90)%
(4.62)
10.98
8.19
3.58
2.14
2.73
(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.
(11) 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 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
and one agreement with a two-year term that does not have a renewal period. In the event of a change in control, as defined, during the employment period, the
agreements provide for severance compensation to the executive in an amount equal to the balance of the salary, bonus, and value of fringe benefits which the
executive would be entitled to receive for the remainder of the employment period. Employment agreements expire at various dates through 2025, with future
minimum payments under these agreements of approximately $12,056,000 as follows.
(Dollars in thousands)
2021
2022
2023
2024
2025
Thereafter
Total
$
$
3,965
3,081
2,073
2,073
864
—
12,056
F-40
(B) OTHER COMMITMENTS
The Company had no commitments to extend credit or make investments outstanding at December 31, 2020. Generally, any commitments would be on the
same terms as loans to or investments in existing borrowers or investees, and generally have fixed expiration dates. Since some commitments would be expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
(C) LITIGATION
The Company and its subsidiaries become defendants to various legal proceedings arising from the normal course of business. In the opinion of
management, based on the advice of legal counsel, there is no proceeding pending, or to the knowledge of management threatened, which in the event of an
adverse decision could result in a material adverse impact on the financial condition or results of operations of the Company.
(D) REGULATORY
In the ordinary course of business, the Company and its subsidiaries are subject to inquiries from certain regulators. During 2014, FSVC was examined by
the SBA. The foregoing regulatory examination was resolved in January 2017 as a result of FSVC transfer to liquidation status and the restructure of the FSVC
loan described in Note 6.
(12) RELATED PARTY TRANSACTIONS
Certain directors, officers, and stockholders of the Company are also directors and officers of its main consolidated subsidiaries, MFC, MCI, FSVC, and the
Bank, as well as other subsidiaries. Officer salaries are set by the Board of Directors of the Company.
Jeffrey Rudnick, the son of one of the Company’s directors, was an officer of LAX Group, LLC, or LAX, one of the Company’s equity investments that
sold its assets on December 16, 2020. Mr. Rudnick receives a salary from LAX of $178,000 per year, which was reduced to $133,000 in the 2020 second quarter,
and certain equity from LAX consisting of 10% ownership in LAX Class B stock, vesting at 3.34% per year; 5% of any new equity raised from outside investors at
a valuation of $1,500,000 or higher; and 10% of LAX’s profits as a year-end bonus. In addition, Mr. Rudnick 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 $7,442,000, that earns interest at an annual rate of 2%
through March 2022, none of which has been paid to date.
In the 2019 second quarter, RPAC entered into a sponsorship agreement with Victory Junction, a 501(c)(3) public charity of which Richard Petty is a board
member, for $7,000,000 of sponsorship payments to RPAC during the 2019 race car season, of which $5,600,000 was subsequently earned and received in 2019,
and the balance which was written off as it was not expected to be received.
The Company had assigned its servicing rights to the Bank portfolio to MSC, a wholly-owned entity that had been unconsolidated under Investment
Company Accounting. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed and collected from the Bank by MSC.
As a result, $1,290,000 of servicing fee income was earned by MSC for the three months ended March 31, 2018.
For the three months ended March 31, 2018, other income received from the Bank that was not eliminated under Investment Company Accounting was
$256,000.
F-41
(13) STOCKHOLDERS’/SHAREHOLDERS’ EQUITY
In November 2003, the Company announced a stock repurchase program which authorized the repurchase of up to $10,000,000 of common stock. In
November 2004, the repurchase program was increased by an additional $10,000,000, which was further increased to a total of $20,000,000 in July 2014, and
which was further increased to a total of $26,000,000 in July 2015. As of December 31, 2020, a total of 2,931,125 shares had been repurchased for $24,587,000,
and $22,874,509 of shares remain authorized for repurchase under the program. There were no purchases in 2020, 2019, and 2018.
(14) SELECTED FINANCIAL RATIOS AND OTHER DATA (Investment Company Accounting)
The following table provides selected financial ratios and other data for the periods indicated.
(Dollars in thousands, except per share data)
Net share data
Net asset value at the beginning of the year
Net investment income (loss)
Income tax provision (benefit)
Net realized gains (losses) on investments
Net change in unrealized appreciation on investments
Net increase (decrease) in net assets resulting from
operations
Issuance of common stock
Total increase (decrease) in net asset value
Net asset value at the end of the period/year (1)
Per share market value at beginning of year
Per share market value at end of period/year
Total return (2)
Ratios/supplemental data
Total shareholders’ equity (net assets)
Average net assets
Total expense ratio (3) (4)
Operating expenses to average net assets (4)
Net investment income (loss) after income taxes to average
net assets (4)
$
$
$
$
Three
Months
Ended
March 31,
2018
11.80
(0.15)
0.03
(1.44)
0.94
(0.62)
(0.03)
(0.65)
11.15
3.53
4.65
(129%)
272,437
284,021
10.02%
5.87
(4.61)
(1)
(2)
Includes $0.00 of undistributed net investment income per share as of March 31, 2018 and $0.00 of undistributed net realized gains per share for the period
presented.
Total return is calculated by dividing the change in market value of a share of common stock during the year, assuming the reinvestment of distributions on
the payment date, by the per share market value at the beginning of the year.
Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average net assets.
(3)
(4) MSC has assumed certain of the Company’s servicing obligations, and as a result, servicing fee income of $1,290, and operating expenses of $1,150, which
formerly were the Company’s, were now MSC’s for the three months ended March 31, 2018. Excluding the impact of the MSC amounts, the total expense
ratio, operating expense ratio, and net investment income (loss) ratio would have been 11.75%, 6.88%, and 7.51% in the March 31, 2018 quarter.
F-42
(15) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Investment Plan, or the 401(k) Plan, which covers all full-time and part-time employees of the Company who have attained the
age of 21 and have a minimum of thirty (30) days of service, including the employees of Medallion Bank. Under the 401(k) Plan, an employee may elect to defer
not less than 1% of total annual compensation, up to the applicable limits set forth in the Internal Revenue Code. Employee contributions are invested in various
mutual funds according to the directions of the employee. Once eligible full-time employees have completed a minimum of one (1) year of service, and part time
employees have worked at least 500 hours, the Company matches employee contributions to the 401(k) Plan in an amount per employee equal to one-third of the
first 6% of the employee’s annual contributions, subject to legal limits. The Company’s 401(k) plan expense, including amounts for the employees of Medallion
Bank and other consolidated subsidiaries in the prior year periods, was approximately $203,000, $193,000, and $182,000 for the years ended December 31, 2020,
2019, and 2018.
(16) 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)
(b)
(c)
(d)
(e)
(f)
Cash – Book value equals fair value.
Equity securities – The Company’s equity securities are recorded at cost less impairment plus or minus observable price changes.
Investment securities – The Company’s investments are recorded at the estimated fair value of such investments.
Loans receivable – The Company’s loans are recorded at book value which approximated fair value.
Floating rate borrowings – Due to the short-term nature of these instruments, the carrying amount approximates fair value.
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
December 31, 2020 and December 31, 2019, the estimated fair value of these off-balance-sheet instruments was not material.
(g)
Fixed rate borrowings – The fair value of the debentures payable to the SBA is estimated based on current market interest rates for similar debt.
(Dollars in thousands)
Financial assets
Cash, cash equivalents, and federal funds sold (1)
Equity investments
Investment securities
Loans receivable
Accrued interest receivable (2)
Financial liabilities
Funds borrowed (3)
Accrued interest payable (2)
December 31, 2020
December 31, 2019
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
112,040 $
9,746
46,792
1,172,290
10,338
112,040 $
9,746
46,792
1,172,290
10,338
67,821 $
10,079
48,998
1,114,762
8,662
67,821
10,079
48,998
1,114,762
8,662
1,312,255
4,673
1,312,591
4,673
1,169,593
4,398
1,171,274
4,398
(1)
(2)
(3)
Categorized as level 1 within the fair value hierarchy, excluding $1,500 of interest-bearing deposits categorized as level 2. See Note 17.
Categorized as level 3 within the fair value hierarchy. See Note 17.
As of December 31, 2020 and 2019, publicly traded unsecured notes traded at a premium to par of $336 and $1,681.
F-43
(17) 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)
B)
C)
D)
Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
Quoted price for identical or similar assets or liabilities in non-active markets (for example, corporate and municipal bonds, which trade
infrequently);
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
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for
substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including
loans, securities, and derivatives).
Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the
overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the
assets or liability (examples include certain private equity investments, and certain residential and commercial mortgage-related assets, including loans,
securities, and derivatives).
A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a
reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category
as of the beginning of the quarter in which the reclassifications occur.
Equity investments were recorded at cost less impairment plus or minus observable price changes. Commencing 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.
F-44
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
December 31, 2020 and 2019.
December 31, 2020
(Dollars in thousands)
Assets
Interest-bearing deposits
Available for sale investment securities
Total(1)
Level 1
Level 2
Level 3
Total
$
$
— $
—
— $
1,500 $
46,792
48,292 $
— $
—
— $
1,500
46,792
48,292
(1)
Total unrealized gains of $1,013, net of tax, was included in accumulated other comprehensive income (loss) for the twelve months ended December 31,
2020 related to these assets.
December 31, 2019
(Dollars in thousands)
Assets
Available for sale investment securities (1)
Total
Level 1
Level 2
Level 3
Total
$
$
— $
— $
48,998 $
48,998 $
— $
— $
48,998
48,998
(1)
Total unrealized gains of $1,081, net of tax, was included in accumulated other comprehensive income (loss) for the twelve months ended December 31,
2019 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
December 31, 2020 and 2019.
December 31, 2020
(Dollars in thousands)
Assets
Equity investments
Impaired loans
Loan collateral in process of foreclosure
Total
December 31, 2019
(Dollars in thousands)
Assets
Equity investments
Impaired loans
Loan collateral in process of foreclosure
Total
Level 1
Level 2
Level 3
Total
— $
—
—
— $
— $
—
—
— $
9,746 $
62,174
54,560
126,480 $
9,746
62,174
54,560
126,480
Level 1
Level 2
Level 3
Total
— $
—
—
— $
— $
—
—
— $
10,079 $
34,915
52,711
97,705 $
10,079
34,915
52,711
97,705
$
$
$
$
F-45
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
December 31, 2020 and 2019.
(Dollars in thousands)
Equity investments
Fair Value
at 12/31/20
Valuation Techniques
Unobservable Inputs
$
8,291 Investee financial analysis
Financial condition and operating
performance of the borrower (1)
Range
(Weighted Average)
N/A
Impaired loans
1,455 Precedent market transaction
62,174 Market approach
Loan collateral in process of
foreclosure
53,128 Market approach
Collateral support
Offering price
Historical and actual loss
experience
Median transfer price (2)
Collateral value
Median transfer price (2)
1,432
Collateral value (3)
N/A
$8.73 / share
1.50% - 6.00%
60% of balance
$0.6 - 108.7
N/A
$0.6 - 108.7
$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.
(Dollars in thousands)
Equity Investments
Fair Value
at 12/31/19
Valuation Techniques
Unobservable Inputs
$
7,435 Investee financial analysis
Financial condition and operating
1,189 Investee book value adjusted for
market appreciation
Public company comparables
1,455 Precedent market transaction
performance of the borrower
Collateral support
Financial condition and operating
performance of the investee
Business enterprise value
Business enterprise value/revenue
multiples
Discount for lack of marketability
Offering price
Range
(Weighted Average)
N/A
N/A
N/A
$4,855 – $6,120
1.59-5.98x
25%
$8.73 / share
(18) MEDALLION BANK PREFERRED STOCK (Non-controlling interest)
On December 17, 2019, the Bank closed an initial public offering of 1,840,000 shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred
Stock, Series F, with a $46,000,000 aggregate liquidation amount, yielding net proceeds of $42,485,000, which were recorded in the Bank’s shareholders’ equity.
Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a
floating rate equal to a benchmark rate (which is expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.
On 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
F-46
business lending by providing capital to qualified smaller banks at favorable rates. The Bank pays a dividend rate of 9% on the Series E.
(19) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The following shows the condensed financial information of Medallion Financial Corp. (parent company only).
Condensed Balance Sheets
(Dollars in thousands)
Assets
Cash
Net loans receivable
Loan collateral in process of foreclosure
Goodwill and intangible assets
Investment in bank subsidiaries
Investment in non-bank subsidiaries
Income tax receivable
Other assets
Total assets
Liabilities
Other liabilities
Intercompany payables
Short-term borrowings
Deferred tax liabilities
Long-term borrowings
Total liabilities
Total stockholders’ equity
Total liabilities and equity
Condensed Statements of Operations
(Dollars in thousands)
Interest income
Interest expense
Net interest loss
Provision for loan losses
Net interest loss after provision for loan losses
Other income (expense), net
Loss before income taxes and undistributed earnings of
subsidiaries
Income tax benefit
Loss before undistributed earnings of subsidiaries
Undistributed earnings (losses) of subsidiaries
Net income (loss) attributable to parent company
December 31, 2020 December 31, 2019
$
$
$
$
33,743 $
12,293
9,960
175,731
149,686
88,165
1,470
10,912
481,960 $
21,302 $
51,352
53,359
24,172
100,367
250,552
231,408
481,960 $
4,477
26,802
11,104
177,176
158,201
92,856
4,708
14,111
489,435
18,660
54,904
8,188
30,728
113,807
226,287
263,148
489,435
Year Ended
December 31, 2020
$
December 31, 2019
(2,824) $
8,602
(11,426)
5,127
(16,553)
(22,062)
Nine Months Ended
December 31, 2018
(1,958)
5,480
(7,438)
19,190
(26,628)
(16,913)
(2,552) $
8,856
(11,408)
6,377
(17,785)
(13,686)
(38,615)
10,454
(28,161)
(6,622)
(34,783) $
(31,471)
7,013
(24,458)
22,696
(1,762) $
(43,541)
5,328
(38,213)
28,041
(10,172)
$
F-47
Condensed Statements of Other Comprehensive Income (Loss)
(Dollars in thousands)
Net loss
Other comprehensive income (loss)
Total comprehensive income (loss) attributable to Medallion Financial
Corp.
Condensed Statements of Cash Flow
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash provided by
operating activities:
Equity in undistributed (earnings) losses of subsidiaries
Provision for loan losses
Depreciation and amortization
Change in deferred and other tax assets/liabilities, net
Net change in loan collateral in process of foreclosure
Net change in unrealized depreciation on investments
Stock-based compensation expense
Decrease in other assets
Increase in deferred financing costs
Decrease in intercompany payables
Increase in other liabilities
Net cash used by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
Proceeds from principal receipts, sales, and maturities of loans and investments
Purchases of investments
Proceeds from sale and principal payments of loan collateral in process of
foreclosure
Dividends from subsidiaries
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from funds borrowed
Repayments of funds borrowed
Net cash provided by (used for) financing activities
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Year Ended
December 31, 2020 December 31, 2019
$
(34,783) $
1,013
Nine Months Ended
December 31, 2018
(10,172)
(82)
(1,762) $
1,081
$
(33,770) $
(681) $
(10,254)
Year Ended
December 31, 2020 December 31, 2019
Nine Months Ended
December 31, 2018
$
(34,783) $
(1,762) $
(10,172)
6,622
5,127
5,357
(3,317)
4,940
3,493
2,031
2,299
(1,233)
(3,552)
2,336
(10,680)
(14)
1,193
(2,304)
1,276
7,597
7,748
33,600
(1,402)
32,198
(22,696)
6,377
5,484
(2,225)
906
1,786
1,221
988
(1,297)
(8,448)
(1,759)
(21,425)
(3,312)
2,313
(1,125)
2,403
6,248
6,527
36,000
(17,735)
18,265
29,266
4,477
33,743 $
3,367
1,110
4,477 $
$
(28,041)
19,190
5,451
4,512
678
—
425
4,073
—
(3,368)
4,237
(3,015)
(309)
10,900
—
487
5,200
16,278
—
(17,208)
(17,208)
(3,945)
5,055
1,110
(20) 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
F-48
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 6 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 December 31, 2020 and 2019. In addition, MFC remains the servicer of the assets of Trust III for a fee.
In December 2008, Trust III entered into the DZ loan agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper
conduit to acquire medallion loans from MFC, or the DZ loan. The loan, which has an outstanding balance of $86,825,000, currently terminates on May 15, 2021.
Borrowings under the DZ loan are collateralized by Trust III’s assets.
(21) SUBSEQUENT EVENTS
The Company evaluated the effects of events that have occurred subsequent to the year ended December 31, 2020, through the date of financial
statement issuance.
On March 11, 2021, one of the notes payable to banks with a maturity of September 1, 2021 was paid off.
On March 12, 2021, one of the notes payable to banks with a maturity of April 15, 2021 was paid off.
A lender for one of the notes payable to banks with a maturity date of February 1, 2021 has agreed to extend such note until December 31, 2021.
A lender for nine of the notes payable to banks with maturity dates of February 9, 2021 has agreed to extend such notes until December 31, 2021.
Fourteen of the notes payable to banks with maturity dates of February 1, 2021 were extended until April 1, 2021.
F-49
LIST OF SUBSIDIARIES OF MEDALLION FINANCIAL CORP.
Name
Medallion Funding LLC
Medallion Capital, Inc.
Freshstart Venture Capital Corp.
Medallion Bank
Jurisdiction of Incorporation or Formation
New York
Minnesota
New York
Utah
EXHIBIT 21.1
Consent Of Independent Registered Public Accounting Firm
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-226130, 333-211788, 333-186533, 333-136316,
and 333-239476) and Form S-3 (File No. 333-231705) of our reports dated March 15, 2021 on (i) the consolidated financial statements of Medallion Financial
Corp. and subsidiaries as of December 31, 2020 and 2019 and for each of the three years in the three-year period ended December 31, 2020 and on the selected
financial ratios and other data for the year ended December 31, 2018; and (ii) the effectiveness of internal control over financial reporting as of December 31,
2020; all of which appear in the Annual Report on Form 10-K of Medallion Financial Corp. for the year ended December 31, 2020.
/s/ Mazars USA LLP
Edison, New Jersey
March 15, 2021
CERTIFICATIONS
Certification of Alvin Murstein
Exhibit 31.1
I, Alvin Murstein, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Medallion Financial Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 15, 2021
By:
/s/ Alvin Murstein
Alvin Murstein
Chairman and Chief Executive Officer
Certification of Larry D. Hall
Exhibit 31.2
I, Larry D. Hall, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Medallion Financial Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 15, 2021
By:
/s/ Larry D. Hall
Larry D. Hall
Senior Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 USC SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Medallion Financial Corp. (the “Company”) for the year ended December 31, 2020 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 USC Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By:
/s/ Alvin Murstein
Chairman and
Chief Executive Officer
Date: March 15, 2021
CERTIFICATION PURSUANT TO
18 USC SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Medallion Financial Corp. (the “Company”) for the year ended December 31, 2020 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 USC Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By:
/s/ Larry D. Hall
Senior Vice President and
Chief Financial Officer
Date: March 15, 2021
D I R E C T O R S A N D O F F I C E R S
C O R P O R A T E I N F O R M A T I O N
BOARD OF DIRECTORS
Alvin Murstein
Chairman and
Chief Executive Officer
Elected 1995
Andrew M. Murstein
President and
Chief Operating Officer
Elected 1997
John Everets
Partner at
Arcturus Capital Boston
Elected 2017
Cynthia A. Hallenbeck
Chief Executive Officer
Alercyn, Inc.
Elected 2020
Frederick A. Menowitz
Private Real Estate Investor
Elected 2003
David L. Rudnick
Chief Executive Officer
Century Associates Group
Real Estate
Elected 1996
Allan J. Tanenbaum
Of Counsel
at Taylor English
Elected 2017
STOCK TRANSFER AGENT
AND REGISTRAR
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
800.937.5449
The Transfer Agent is
responsible for handling
shareholder questions
regarding lost stock certificates,
address changes and changes
of ownership or name in which
shares are held.
INDEPENDENT AUDITORS
Mazars USA LLP
135 West 50th Street
New York, NY 10020
DIVIDEND POLICY
Shareholders can enroll
at no charge in Medallion
Financial’s Dividend
Reinvestment Plan.
EXECUTIVE OFFICERS AND
SENIOR MANAGEMENT
Alvin Murstein
Chairman and
Chief Executive Officer
Andrew M. Murstein
President and
Chief Operating Officer
Larry D. Hall
Senior Vice President
and Chief Financial Officer
Justin Haley
Chief Financial Officer
Medallion Bank
Steven Hannay
Chief Lending Officer
Medallion Bank
Stephen A. Lewis
Senior Vice President
Medallion Capital, Inc.
Thomas J. Munson
Executive Vice President
and Chief Credit Officer
Donald S. Poulton
Chief Executive Officer
Medallion Bank
Marisa T. Silverman
Chief Compliance Officer,
General Counsel
and Secretary
John Taylor
Senior Vice President
Strategic Partnership
Medallion Bank
Alex Travis
President
Medallion Capital, Inc.
CORPORATE HEADQUARTERS
437 Madison Avenue
38th floor
New York, NY 10022
212.328.2100
Toll Free: 877 MEDALLION
www.medallion.com
INVESTOR RELATIONS
212.328.2176
InvestorRelations@medallion.
com
ADDITIONAL OFFICE
LOCATIONS
Bothell, WA
Minneapolis, MN
Newark, NJ
Salt Lake City, UT
STOCK MARKET INFORMATION
The Common Stock of
Medallion Financial Corp.
began trading publicly on the
Nasdaq Global Select Market
on May 23, 1996. It currently
trades under the symbol
“MFIN”.
The Fixed-to-Floating Rate
Non-Cumulative Perpetual
Preferred Stock, Series F, of
Medallion Bank began trading
publicly on the Nasdaq Capital
Market on December 17, 2019.
It currently trades under the
symbol “MBNKP”.
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MEDALLION FINANCIAL CORP.
C O R P O R AT E H E A D Q UA R T E R S
437 Madison Avenue
38th floor
New York, NY 10022
212.328.2100
Toll Free: 877 MEDALLION
www.medallion.com