MEDALLION FINANCIAL CORP. GENERAL
We are a finance company whose strategic focus and growth in recent years has been through Medallion Bank (a wholly-owned subsidiary), which originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers, and to finance home improvements. Historically we have had a leading position in originating, acquiring, and servicing loans that finance taxi medallions and various types of commercial businesses. Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17% (19% if there had been no loan sales during 2016, 2017, and 2018). We have transitioned away from medallion lending and have placed our strategic focus on our growing consumer finance portfolio. As a result of our change in strategy, as ofSeptember 30, 2020 , our consumer loans represented 91% of our net loan portfolio, with commercial loans representing 6% and medallion loans representing 3%. Total assets under management, which includes assets serviced for third-party investors, were$1,717,000,000 as ofSeptember 30, 2020 , and were$1,660,000,000 and$1,649,000,000 as ofDecember 31, 2019 andSeptember 30, 2019 , and have grown at a compound annual growth rate of 9% from$215,000,000 at the end of 1996. Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, privately placed notes, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities. We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Our investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments. Beginning in 2019, Medallion Bank began the process to build-out a strategic partnership program with financial technology, or fintech, companies. Medallion Bank entered into an initial partnership in 2020 and began issuing its first loans, while continuing to explore opportunities with additional fintech companies. Our wholly-owned subsidiary, Medallion Bank, or the Bank, is a bank regulated by theFDIC and theUtah Department of Financial Institutions that originates consumer loans, raises deposits, and conducts other banking activities. The Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we have referred a portion of our medallion and commercial loans to the Bank, which originated these loans, and have been serviced byMedallion Servicing Corp. , or MSC. However, at this time the Bank is not originating any new medallion loans and is working with MSC to service its existing portfolio. MSC earns referral and servicing fees for these activities.
COVID-19
The current and ongoing coronavirus, or COVID-19, pandemic, its broad impact and
preventive measures taken to contain or mitigate the outbreak have had, and are
likely to continue to have, significant negative effects on the US and global
economy, employment levels, employee productivity, and financial market
conditions. This has had, and may continue to have increasingly negative effects
on the ability of our borrowers to repay outstanding loans, the value of
collateral securing loans, the demand for loans and other financial services
products and consumer discretionary spending. As a result of these or other
consequences, the outbreak has adversely and 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.
Page 43 of 71
--------------------------------------------------------------------------------
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. We continue to negotiate with borrowers,
lenders and vendors alike as to payment terms and have allowed all borrowers to
defer payments up to 180 days. In addition, effective May 11, 2020 , we had
furloughed approximately 28% of the employees at Medallion Financial Corp. (not
including any employees of our consolidated subsidiaries). As of September 30,
2020 , 20% of employees at Medallion Financial Corp. (not including any employees
of our consolidated subsidiaries) remain on furlough. 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. 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. We continue to explore programs offered by
the federal government for potential relief as a result of COVID-19.
At March 31, 2020 and then again at June 30, 2020 , we increased our allowance
for loan losses on consumer loans, and continue to monitor our loan portfolios
as market conditions change. In addition, 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 written down to collateral value of $90,300 for
New York City medallions along with write downs in most other markets, leading
to an increased provision for loans losses of $24,749,000 during the 2020 third
quarter. In addition, 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 September 30, 2020 , there were no medallion
loans on deferral and only minimal consumer loans still on deferral. The level
of potential loans 90 days or more past due would have likely resulted in
increased charge-offs on the medallion loan portfolio had they not been granted.
The ultimate outcome of the deferral program continues to remain to be seen. If
the program is not effective in mitigating the effect of COVID-19 on our
borrowers' ability to fulfill their loan obligations, it will adversely affect
our business, results of operations, financial condition and cash flows more
substantially over a longer period of time. 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.
Lastly, substantially all our medallion loans 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. Accordingly, as described
above, we have impaired all of our medallion loans, and established loan loss
reserves at the collateral value, net of liquidation costs, which for the New
York City market declined from $119,500 as of June 30, 2020 to $90,300 as of
September 30, 2020 . We will continue to monitor our medallion loan portfolio,
which may result in additional write-downs, charge-offs or impairments, the
impact of which could be material to our results of operations and financial
condition. Refer to "Item 1A. Risk Factors" for more details.
Page 44 of 71
--------------------------------------------------------------------------------Average Balances and Rates
The following table shows the Company's consolidated average balance sheet, interest income and expense and the average interest earning/bearing assets and liabilities, and which reflect the average yield on assets and average costs on liabilities for the three and nine months endedSeptember 30, 2020 and 2019. Three Months Ended September 30, 2020 2019 Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost Interest-earning assets Interest-earning cash and cash equivalents$ 75,877 $ 32 0.17 %$ 36,070 $ 145 1.59 % Investment securities 46,712 206 1.75 44,896 303 2.68 Loans Recreation 769,463 28,962 14.97 675,973 26,147 15.35 Home improvement 295,040 7,218 9.73 217,510 5,184 9.46 Commercial 71,143 1,931 10.80 65,896 1,886 11.36 Medallion 67,730 (909 ) (5.34 ) 117,160 975 3.30 Strategic partnership 5 - - - - - Total loans 1,203,381 37,202 12.30 1,076,539 34,192 12.60 Total interest-earning assets 1,325,970 37,440 11.23 1,157,505 34,640 11.87 Non-interest-earning assets Cash 15,843 27,380 Equity investments 10,363 9,960 Loan collateral in process of foreclosure(1) 49,586 52,962 Goodwill and intangible assets 202,437 203,882 Income tax receivable 226 - Other assets 52,536 50,026 Total non-interest-earning assets 330,991 344,210 Total assets$ 1,656,961 $ 1,501,715 Interest-bearing liabilities Deposits$ 1,092,647 $ 5,454 1.99 %$ 947,521 $ 6,003 2.51 % SBA debentures and borrowings 73,947 674 3.63 75,073 741 3.92 Retail and privately placed notes 69,625 1,683 9.62 66,592 1,618 9.64 Notes payable to banks 31,935 327 4.07 38,259 436 4.52 Preferred securities 33,000 205 2.47 33,000 380 4.57 Other borrowings 8,633 41 1.89 8,737 47 2.13 Total interest-bearing liabilities 1,309,787 8,384 2.55 1,169,182 9,225 3.13 Non-interest-bearing liabilities Deferred tax liability 3,803 6,114 Other liabilities(2) 27,599 36,760 Total non-interest-bearing liabilities 31,402 42,874 Total liabilities 1,341,189 1,212,056 Non-controlling interest 71,887 28,423 Total stockholders' equity 243,885 261,236 Total liabilities and stockholders' equity$ 1,656,961 $ 1,501,715 Net interest income$ 29,056 $ 25,415 Net interest margin 8.72 % 8.71 %
(1) Includes financed sales of this collateral to third parties reported
separately from the loan portfolio, and that are conducted by Medallion Bank
of
(2) Includes deferred financing costs of
Page 45 of 71
--------------------------------------------------------------------------------
Nine Months Ended September 30,
2020 2019
Average Average Average Average
(Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost
Interest-earning assets
Interest-earning cash and cash
equivalents $ 73,620 $ 151 0.27 % $ 34,464 $ 443 1.72 %
Investment securities 46,963 788 2.24 44,630 993 2.97
Loans
Recreation 735,228 82,525 14.99 631,754 72,996 15.45
Home improvement 269,671 19,431 9.62 201,024 14,187 9.44
Commercial 69,948 5,589 10.67 61,818 5,597 12.11
Medallion 87,271 86 0.13 132,799 2,482 2.50
Strategic partnership 7 - - - - -
Total loans 1,162,125 107,631 12.37 1,027,395 95,262 12.40
Total interest-earning assets 1,282,708 108,570 11.31 1,106,489 96,698 11.68
Non-interest-earning assets
Cash 16,268 33,453
Equity investments 10,498 9,460
Loan collateral in process of
foreclosure(1) 49,774 51,587
Goodwill and intangible assets 202,799 204,244
Deferred tax asset 132 -
Other assets 49,511 46,162
Total non-interest-earning assets 328,982 344,906
Total assets $ 1,611,690 $ 1,451,395
Interest-bearing liabilities
Deposits $ 1,039,153 $ 17,315 2.23 % $ 898,188 $ 16,409 2.44 %
SBA debentures and borrowings 72,659 2,016 3.71 77,647 2,261 3.89
Retail and privately placed notes 69,625 5,049 9.69 55,757 4,106 9.85
Notes payable to banks 32,468 951 3.91 48,999 1,703 4.65
Preferred securities 33,000 766 3.10 33,000 1,170 4.74
Other borrowings 8,148 122 2.00 8,102 119 1.96
Total interest-bearing liabilities 1,255,053 26,219 2.79 1,121,693 25,768 3.07
Non-interest-bearing liabilities
Deferred tax liability 5,978 6,721
Other liabilities(2) 26,955 32,678
Total non-interest-bearing
liabilities 32,933 39,399
Total liabilities 1,287,986 1,161,092
Non-controlling interest 71,321 27,800
Total stockholders' equity 252,383 262,503
Total liabilities and stockholders'
equity $ 1,611,690 $ 1,451,395
Net interest income $ 82,351 $ 70,930
Net interest margin 8.58 % 8.57 %
(1) Includes financed sales of this collateral to third parties reported
separately from the loan portfolio, and that are conducted by Medallion Bank
of
(2) Includes deferred financing costs of
Page 46 of 71
--------------------------------------------------------------------------------
During the quarter, our net loans receivable had a yield of 12.30% (compared to
12.60% in the prior year's third quarter), mainly driven by the decline in the
average yield on recreation loans, 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. In addition, there had been decline in yield in both the commercial
(also due to interest deferrals) and the medallion portfolios (due to the
deferrals and all loans being deemed impaired as of September 30, 2020 and
placed on non-accrual) which was slightly offset by the increased yield in the
home improvement portfolio that also continued to grow. The debt, mainly
certificates of deposit, helps fund the growing consumer loan business and as
the market rates have decreased, so has the average cost of borrowings. For the
nine months ended September 30, 2020 , our net loans receivable had an interest
yield of 12.37% (largely consistent with the 12.40% for the nine months ended
September 30, 2019 ) due to the slight declines in most of our loan portfolios
offset by the increase in home improvement loans. The debt yield decreased
between the nine months ended September 30, 2020 and 2019 driven by the
certificates of deposit that help fund the growing consumer loan business and
the overall declines seen in the market.
Rate/Volume Analysis
The following table presents the change in interest income and expense due to
changes in the average balances (volume) and average rates, calculated for the
period indicated.
Three Months Ended September 30,
2020 2019
Increase Increase Increase Increase
(Decrease) (Decrease) Net (Decrease) (Decrease) Net
(Dollars in thousands) In Volume in Rate Change In Volume in Rate Change
Interest-earning assets
Interest-earning cash and cash
equivalents $ 160 $ (273 ) $ (113 ) $ (44 ) $ 60 $ 16
Investment securities 12 (109 ) (97 ) (6 ) 17 11
Loans
Recreation 3,616 (801 ) 2,815 2,933 (786 ) 2,147
Home improvement 1,848 186 2,034 549 667 1,216
Commercial 150 (106 ) 44 (441 ) (310 ) (751 )
Medallion (182 ) (1,701 ) (1,883 ) (1,084 ) (67 ) (1,151 )
Strategic partnerships - - - - - -
Total loans 5,432 (2,422 ) 3,010 1,957 (496 ) 1,461
Total interest-earning assets 5,604 (2,804 ) 2,800 1,907 (419 ) 1,488
Interest-bearing liabilities
Deposits $ 919 $ (1,468 ) $
(549 ) $ 58
- - - (501 ) (500 ) (1,001 )
SBA debentures and borrowings (12 ) (55 ) (67 ) (36 ) 9 (27 )
Retail and privately placed notes 74 (9 ) 65 801 (58 ) 743
Notes payable to banks (66 ) (43 ) (109 ) (357 ) 31 (326 )
Preferred securities - (175 ) (175 ) - 5 5
Other borrowings (1 ) (5 ) (6 ) 6 - 6
Total interest-bearing liabilities 914 (1,755 ) (841 ) (29 ) 368 339
Net $ 4,690 $ (1,049 ) $ 3,641 $ 1,936 $ (787 ) $ 1,149
Page 47 of 71
--------------------------------------------------------------------------------
Nine
Months Ended
2020 2019
Increase Increase Increase Increase
(Decrease) (Decrease) Net (Decrease) (Decrease) Net
(Dollars in thousands) In Volume In Rate Change In Volume In Rate Change
Interest-earning assets
Interest-earning cash and cash
equivalents $ 485 $ (778 ) $ (293 ) $ (189 ) $ 124 $ (65 )
Investment securities 56 (260 ) (204 ) (10 ) 138 128
Loans
Recreation 12,149 (2,620 ) 9,529 6,096 (2,051 ) 4,045
Home improvement 4,892 351 5,243 1,065 418 1,483
Commercial 779 (787 ) (8 ) (1,690 ) (628 ) (2,318 )
Medallion (807 ) (1,588 ) (2,395 ) (2,406 ) (972 ) (3,378 )
Strategic partnerships - - - - - -
Total loans 17,013 (4,644 ) 12,369 3,065 (3,233 ) (168 )
Total interest-earning assets 17,554 (5,682 ) 11,872 2,866 (2,971 ) (105 )
Interest-bearing liabilities
Deposits $ 2,677 $ (1,771 ) $
906
- - - (1,106 ) (1,020 ) (2,126 )
SBA debentures and borrowings (138 ) (107 ) (245 ) (59 ) 19 (40 )
Retail and privately placed notes 1,024 (80 ) 944 1,593 (111 ) 1,482
Notes payable to banks (480 ) (271 ) (751 ) (695 ) 98 (597 )
Preferred securities - (404 ) (404 ) - 57 57
Other borrowings 2 - 2 (4 ) 3 (1 )
Total interest-bearing liabilities 3,085 (2,633 ) 452 (382 ) 1,336 954
Net $ 14,469 $ (3,049 ) $ 11,420 $ 3,248 $ (4,307 ) $ (1,059 )
During the three months ended September 30, 2020 , the increase in the interest
earnings assets was mainly driven by the increase in volume in consumer loans
even as the rates declined. The debt change similarly was driven by the increase
in the borrowings even as the borrowing rates declined. For the nine months
ended September 30, 2020 , the change in the interest earnings assets was also
driven by the continued volume increase for the consumer loans even as the rates
declined. As a result of the increase in consumer loans, total borrowings
similarly increased, mainly driven by the deposits, which are used to help fund
consumer loans, along with privately placed notes.
Our interest expense is driven by the interest rates payable on our bank
certificates of deposit, short-term credit facilities with banks, fixed-rate,
long-term debentures issued to the SBA, and other short-term notes payable. The
Bank issues brokered 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 5 to the consolidated financial statements for
details on the terms of our outstanding debt. Our debentures issued to the SBA
typically have terms of ten years.
We measure our borrowing costs as our aggregate interest expense for all of our
interest-bearing liabilities divided by the average amount of such liabilities
outstanding during the period. The tables above shows the average borrowings and
related borrowing costs for the three and nine months ended September 30, 2020
and 2019.
We continue to seek SBA funding through Medallion Capital, Inc. , or Medallion
Capital , to the extent it offers attractive rates. SBA financing subjects its
recipients to limits on the amount of secured bank debt they may incur. We use
SBA funding to fund loans that qualify under the Small Business Investment Act
of 1985, as amended, or the SBIA, and SBA regulations. In July 2020 , we obtained
a $25,000,000 commitment from the SBA. We believe that financing operations
primarily with short-term floating rate secured bank debt has generally
decreased our interest expense, but has also increased our exposure to the risk
of increases in market interest rates, which we mitigate with certain interest
rate strategies. At September 30, 2020 and 2019, short-term adjustable rate debt
constituted 4% and 5% of total debt.
Page 48 of 71
--------------------------------------------------------------------------------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 three and nine months endedSeptember 30, 2020 , there was continued growth in the consumer lending segments, which was partly offset by the charge-offs during the periods, the continuing of loans aged over 120 days transferred to loan collateral in process of foreclosure and payments received from borrowers. In addition, there was a continued increase in charge-offs and loans transferred for the medallion segment as a result of the COVID-19 pandemic. Three Months Ended September 30, 2020 Home Strategic (Dollars in thousands) Recreation Improvement
Commercial Medallion Partnership Total
Gross loans -
$ 786,785 $ 282,072 $ 71,476 $ 120,253 $ 8$ 1,260,594 Loan originations 73,534 62,515 900 - 142 137,091 Principal payments, sales, and maturities (54,161 ) (29,312 ) (1,318 ) (401 ) (143 ) (85,335 ) Charge-offs, net (850 ) (65 ) 3 (15,304 ) - (16,216 ) Transfer to loan collateral in process of foreclosure, net (2,833 ) - - (10,590 ) - (13,423 ) Amortization of origination costs (2,093 ) 509 2 (99 ) - (1,681 ) Amortization of loan premium (49 ) (81 ) - (763 ) - (893 ) FASB origination costs 2,605 (196 ) - 2 - 2,411 Paid-in-kind interest - - 306 - - 306 Transfer to other foreclosed property - - - (1,800 ) - (1,800 )
Gross loans -
71,369$ 91,298 $ 7$ 1,281,054 Nine Months Ended September 30, 2020 Home Strategic (Dollars in thousands) Recreation Improvement
Commercial Medallion Partnership Total
Gross loans -
69,767 $ 130,432 $ - $ 1,160,855
Loan originations 249,383 140,693 6,075 - 295 396,446
Principal payments, sales, and
maturities (140,688 ) (72,034 ) (5,422 ) (4,180 ) (288 ) (222,612 )
Charge-offs, net (10,796 ) (897 ) 3 (17,124 ) - (28,814 )
Transfer to loan collateral in
process of foreclosure, net (10,615 ) - - (14,934 ) - (25,549 )
Amortization of origination costs (5,853 ) 1,406 6 (131 ) - (4,572 )
Amortization of loan premium (152 ) (248 ) - (1,001 ) - (1,401 )
FASB origination costs 8,327 (802 ) - 36 - 7,561
Paid-in-kind interest - - 940 - - 940
Transfer to other foreclosed
property - - - (1,800 ) - (1,800 )
Gross loans -
71,369$ 91,298 $ 7$ 1,281,054 Three Months Ended September 30, 2019 Home (Dollars in thousands) Recreation Improvement Commercial Medallion Total Gross loans - June 30, 2019$ 668,540 $ 209,549 $ 64,442 $ 145,944 $ 1,088,475 Loan originations 82,662 42,641 4,750 - 130,053 Principal payments, sales, and maturities (39,068 ) (21,096 ) (375 ) (4,013 ) (64,552 ) Charge-offs, net (3,489 ) (51 ) (819 ) (1,535 ) (5,894 ) Transfer to loan collateral in process of foreclosure, net (3,429 ) - - (3,005 ) (6,434 ) Amortization of origination costs (1,723 ) 367 2 (10 ) (1,364 ) Amortization of loan premium (59 ) (107 ) - (547 ) (713 ) FASB origination costs 2,959 (577 ) (3 ) 120 2,499 Paid-in-kind interest - - 212 - 212
Gross loans -
68,209$ 136,954 $ 1,142,282 Page 49 of 71
-------------------------------------------------------------------------------- Nine Months Ended September 30, 2019 Home (Dollars in thousands) Recreation Improvement Commercial Medallion Total Gross loans - December 31, 2018$ 587,038 $ 183,155 $ 64,083 $ 183,606 $ 1,017,882 Loan originations 248,989 102,821 14,520 - 366,330 Principal payments, sales, and maturities (112,208 ) (54,168 ) (10,180 ) (10,612 ) (187,168 ) Charge-offs, net (10,853 ) (295 ) (819 ) (18,166 ) (30,133 ) Transfer to loan collateral in process of foreclosure, net (10,311 ) - - (15,573 ) (25,884 ) Amortization of origination costs (4,743 ) 1,060 32 (102 ) (3,753 ) Amortization of loan premium (195 ) (327 ) - (2,364 ) (2,886 ) FASB origination costs 8,676 (1,520 ) (64 ) 165 7,257 Paid-in-kind interest - - 637 - 637
Gross loans -
68,209
Provision and Allowance for Loan Loss
During the three months endedSeptember 30, 2020 ,New York City taxi medallion values decreased to a net realizable value of$90,300 , compared to$119,500 atJune 30, 2020 , along with a decline in taxi medallion values in a majority of the other markets as a result of the decrease in the median transfer price and also all loans being deemed impaired in the quarter mainly due to the current COVID-19 pandemic, whereas theNew York City taxi medallion values and the other markets remained constant for the three months endedSeptember 30, 2019 . In addition, during the three months endedSeptember 30, 2020 , almost all loans previously deferred for the consumer and medallion portfolios were no longer on deferral, leading to an increase in loans continuing to age 90 days or 120 days or more, which are reserved and charged-down to their collateral value. During the nine months endedSeptember 30, 2020 , theNew York City taxi medallion values decreased to a net realizable value of$90,300 , compared to$167,000 atDecember 31, 2019 and all medallion loans were deemed impaired, leading to a net increase in reserves of$24,749 . In addition, due to the potential impact of COVID-19, during the nine months endedSeptember 30, 2020 , the consumer loan reserve percentages increased 25-100 basis points. For the nine months endedSeptember 30, 2019 , theNew York City medallion values declined to a net realizable value of$169,500 from$181,000 atDecember 31, 2018 . Nine Months Ended Three Months Ended September 30, September 30, (Dollars in thousands) 2020 2019 2020 2019
Allowance for loan losses - beginning
balance$ 66,977 $ 40,670 $ 46,093 $ 36,395 Charge-offs Recreation (3,595 ) (5,444 ) (17,546 ) (16,366 ) Home improvement (643 ) (568 ) (2,202 ) (1,655 ) Commercial - (819 ) - (819 ) Medallion (15,448 ) (2,378 ) (19,146 ) (20,408 ) Total charge-offs (19,686 ) (9,209 ) (38,894 ) (39,248 ) Recoveries Recreation 2,745 1,955 6,750 5,513 Home improvement 578 517 1,304 1,360 Commercial 3 - 3 - Medallion 144 843 2,023 2,242 Total recoveries 3,470 3,315 10,080 9,115 Net charge-offs(1) (16,216 ) (5,894 ) (28,814 ) (30,133 ) Provision for loan losses 39,749 8,337 73,231 36,851 Allowance for loan losses - ending balance(2) (3)$ 90,510 $ 43,113 $ 90,510 $ 43,113
(1) As of
collateral in process of foreclosure in the medallion portfolio were
(2) As of
Company's medallion loan portfolio had been reversed as all loans had been
deemed impaired and written down to collateral value.
(3) As of
charge-offs related to the strategic partnership loans.
Page 50 of 71
--------------------------------------------------------------------------------
The following tables set forth the allowance for loan losses by type as of
Allowance as
September 30, 2020 Percentage a Percent of
(Dollars in thousands) Amount of Allowance Loan Category
Recreation $ 27,982 31 % 3.48 %
Home Improvement 4,751 5 1.51
Commercial - - -
Medallion 57,777 64 63.28
Total $ 90,510 100 % 7.07 %
Allowance as
December 31, 2019 Percentage a Percent of
(Dollars in thousands) Amount of Allowance Loan Category
Recreation $ 18,075 39 % 2.53 %
Home Improvement 2,608 6 1.05
Commercial - - -
Medallion 25,410 55 19.48
Total $ 46,093 100 % 3.97 %
As of September 30, 2020 , there was an increase in the allowance for loan losses
related to the recreation and home improvement loan portfolios as compared to
December 31, 2019 . This change was due to the increase in the reserve ratios due
to the current economic conditions as a result of COVID-19, along with the
increase in loans originated during the quarter. In addition, the medallion
reserves increased due to the decline in the New York City taxi market and other
markets, along with all medallion loans being deemed impaired.
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.
September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019
(Dollars in
thousands) Amount %(1) Amount %(1) Amount %(1) Amount %(1) Amount %(1) Recreation$ 4,074 0.3 %$ 3,365 0.3 %$ 5,225 0.5 %$ 5,800 0.5 %$ 4,431 0.4 % Home improvement 102 0.0 137 0.0 220 0.0 184 0.0 228 0.0 Commercial 1,902 0.2 107 0.0 107 0.0 107 0.0 276 0.0 Medallion 7,325 0.6 11,967 1.0 1,462 0.1 2,572 0.2 3,188 0.3 Total loans 90 days or more past due$ 13,403 1.1 %$ 15,576 1.3 %$ 7,014 0.6 %$ 8,663 0.7 %$ 8,123 0.7 % Page 51 of 71
--------------------------------------------------------------------------------
(1) Percentages are calculated against the total loan portfolio.
We estimate that the weighted average loan-to-value ratio of our medallion loans was approximately 316%, 190%, and 202% as ofSeptember 30, 2020 ,December 31, 2019 , andSeptember 30, 2019 . Recreation and medallion loans that reach 120 days past due are charged down to collateral value and reclassified to loan collateral in process of foreclosure. The following tables show the activity of loan collateral in process of foreclosure for the three and nine months endedSeptember 30, 2020 and 2019. Three Months EndedSeptember 30, 2020 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - June 30, 2020$ 1,258 $ 46,117 $ 47,375 Transfer from loans, net 2,833 10,611 13,444 Sales (1,697 ) - (1,697 ) Cash payments received - (428 ) (428 ) Collateral valuation adjustments (1,395 ) (8,557 ) (9,952 ) Loan collateral in process of foreclosure - September 30, 2020$ 999 $ 47,743 $ 48,742 Nine Months EndedSeptember 30, 2020 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - December 31, 2019$ 1,476 $ 51,235 $ 52,711 Transfer from loans, net 10,615 14,954 25,569 Sales (5,684 ) (300 ) (5,984 ) Cash payments received - (2,319 ) (2,319 ) Collateral valuation adjustments (5,408 ) (15,827 ) (21,235 ) Loan collateral in process of foreclosure - September 30, 2020$ 999 $ 47,743 $ 48,742 Three Months EndedSeptember 30, 2019 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - June 30, 2019$ 955 $ 51,413 $ 52,368 Transfer from loans, net 3,429 3,005 6,434 Sales (1,604 ) (387 ) (1,991 ) Cash payments received - (1,556 ) (1,556 ) Collateral valuation adjustments (1,603 ) (113 ) (1,716 ) Loan collateral in process of foreclosure - September 30, 2019$ 1,177 $ 52,362 $ 53,539 Nine Months EndedSeptember 30, 2019 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - December 31, 2018$ 1,503 $ 47,992 $ 49,495 Transfer from loans, net 10,311 15,573 25,884 Sales (5,715 ) (899 ) (6,614 ) Cash payments received - (6,100 ) (6,100 ) Collateral valuation adjustments (4,922 ) (4,204 ) (9,126 ) Loan collateral in process of foreclosure - September 30, 2019$ 1,177 $ 52,362 $ 53,539 Page 52 of 71
--------------------------------------------------------------------------------
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 three and nine months endedSeptember 30, 2020 and 2019. Recreation Lending The recreation lending segment is a high-growth prime and non-prime consumer finance business which is a significant source of income for us, accounting for 77% and 75% of our interest income for the three months endedSeptember 30, 2020 and 2019, and accounted for 76% and 75% of our interest income for the nine months endedSeptember 30, 2020 and 2019. The loans are secured primarily by RVs, boats, and trailers, with RV loans making up 61% of the portfolio, boat loans making up 20% of the portfolio, and trailer loans 12% as ofSeptember 30, 2020 , compared to 62%, 18% and 12% as ofSeptember 30, 2019 . Recreation loans are made to borrowers residing in all fifty states, with the highest concentrations inTexas ,California , andFlorida , at 17%, 10%, and 9% of loans outstanding, compared to 17%, 10%, and 10% as ofSeptember 30, 2019 , and with no other states over 9%.
The following table presents certain financial data and ratios as of and for the
three and nine months ended
Nine Months Ended
Three Months Ended September 30 , September 30 ,(Dollars in thousands) 2020 2019 2020 2019 Selected Earnings Data Total interest income$ 28,962 $ 26,147 $ 82,525 $ 72,996 Total interest expense 3,476 3,578 10,268 9,541 Net interest income 25,486 22,569 72,257 63,455 Provision for loan losses 1,812 6,744 20,705 19,925 Net interest income after loss provision 23,674 15,825 51,552 43,530 Other income (expense), net (7,246 ) (6,181 ) (21,115 ) (17,501 ) Net income before taxes 16,428 9,644 30,437 26,029 Income tax provision (4,201 ) (2,497 ) (7,783 ) (6,741 ) Net income after taxes$ 12,227 $ 7,147$ 22,654 $ 19,288 Balance Sheet Data Total loans, gross$ 802,938 $ 706,393 Total loan allowance 27,982 15,927 Total loans, net 774,956 690,466 Total assets 788,459 702,541 Total borrowings 628,528 559,995 Selected Financial Ratios Return on average assets 6.22 % 4.14 % 4.04 % 4.01 % Return on average equity 31.11 20.69 20.20 17.42 Interest yield 14.97 15.35 14.99 15.45 Net interest margin 13.18 13.25 13.13 13.43 Reserve coverage 3.48 2.25 3.48 2.25 Delinquency status(1) 0.52 0.69 0.52 0.69 Charge-off % 0.44 2.05 1.96 2.30
(1) Loans 90 days or more past due.
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 28%, 24%, 12%, and 9% of total loans outstanding as ofSeptember 30, 2020 , as compared to 25%, 20%, 13%, and 13% as ofSeptember 30, 2019 , with no other collateral types over 10%. Home improvement loans are made to borrowers residing in all fifty states, with the highest concentrations inTexas ,Florida , andOhio at 11%, 11%, and 10% of loans outstandingSeptember 30, 2020 , compared to 12%, 10%, and 11% as ofSeptember 30, 2019 , and with no other states over 10%. Page 53 of 71 --------------------------------------------------------------------------------
The following table presents certain financial data and ratios as of and for the
three and nine months ended
Nine Months Ended
Three Months Ended September 30 , September 30 ,(Dollars in thousands) 2020 2019 2020 2019 Selected Earnings Data Total interest income $ 7,218 $ 5,184$ 19,431 $ 14,187 Total interest expense 1,655 1,309 4,178 3,252 Net interest income 5,563 3,875 15,253 10,935 Provision for loan losses 745 (629 ) 3,041 733 Net interest income after loss provision 4,818 4,504 12,212 10,202 Other income (expense), net (2,700 ) (2,000 ) (7,002 ) (5,356 ) Net income before taxes 2,118 2,504 5,210 4,846 Income tax provision (541 ) (648 ) (1,332 ) (1,255 ) Net income after taxes $ 1,577 $ 1,856$ 3,878 $ 3,591 Balance Sheet Data Total loans, gross$ 315,442 $ 230,726 Total loan allowance 4,751 2,235 Total loans, net 310,691 228,491 Total assets 321,084 239,991 Total borrowings 255,778 190,871 Selected Financial Ratios Return on average assets 2.06 % 3.22 % 1.84 % 2.50 % Return on average equity 10.29 16.09 9.19 11.34 Interest yield 9.73 9.46 9.62 9.44 Net interest margin 7.50 7.07 7.53 7.27 Reserve coverage 1.51 0.97 1.51 0.97 Delinquency status(1) 0.03 0.11 0.03 0.11 Charge-off % 0.09 0.09 0.44 0.20
(1) Loans 90 days or more past due.
Commercial Lending
We originate both senior and subordinated loans nationwide to businesses in a variety of industries, more than 54% 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 included an equity component as part of the financing. The commercial lending business has concentrations in manufacturing and professional, scientific, and technical services, making up 56% and 13% of the loans outstanding as ofSeptember 30, 2020 , compared to 58% and 14% as ofSeptember 30, 2019 . Page 54 of 71 -------------------------------------------------------------------------------- The following table presents certain financial data and ratios as of and for the three and nine months endedSeptember 30, 2020 and 2019. 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. Three Months EndedSeptember 30 , Nine Months EndedSeptember 30 ,
(Dollars in thousands) 2020 2019 2020 2019 Selected Earnings Data Total interest income $ 1,791 $ 1,842 $ 5,275 $ 5,359 Total interest expense 663 741 1,937 2,108 Net interest income 1,128 1,101 3,338 3,251 Provision for loan losses - 364 - 364 Net interest income after loss provision 1,128 737 3,338 2,887 Other income (expense), net (712 ) 563 (2,191 ) (532 ) Net income before taxes 416 1,300 1,147 2,355 Income tax provision (104 ) (314 ) (286 ) (568 ) Net income after taxes $ 312 $ 986 $ 861 $ 1,787 Balance Sheet Data Total loans, gross$ 68,042 $ 64,646 Total loan allowance - - Total loans, net 68,042 64,646 Total assets 80,247 87,486 Total borrowings 65,906 69,658 Selected Financial Ratios Return on average assets 1.49 % 4.49 % 1.37 % 2.69 % Return on average equity 6.82 22.45 6.56 13.43 Interest yield 10.51 11.09 10.58 11.59 Net interest margin 6.62 6.63 6.69 7.03 Reserve coverage(1) 0.00 0.00 0.00 0.00 Delinquency status(1) (2) 2.67 0.40 2.67 0.40 Charge-off %(3) (0.02 ) 4.93 (0.01 ) 1.77
(1) Ratio is based off of total commercial balances, and relates solely to the
legacy commercial loan balances.
(2) Loans 90 days or more past due.
(3) Ratio is based on total commercial lending balances, and relates to the total
loan business.
September 30, 2020 September 30, 2019
Geographic Concentrations (Dollars in Total Gross Total Gross
thousands) Loans % of Market Loans % of Market
Michigan $ 10,419 15 % $ 10,304 16 %
Illinois 9,454 14 5,349 8
Minnesota 5,713 8 9,445 15
Texas 5,557 8 3,258 5
North Carolina 5,348 8 5,250 8
California 4,989 7 4,985 8
Other(1) 26,562 40 26,055 40
Total $ 68,042 100 % $ 64,646 100 %
(1) Includes nine other states, which were all under 6% as of
and nine other states, all under 8% as of
Medallion Lending
The medallion lending segment operates mainly in theNew York City ,Newark , andChicago markets. We have a long history of owning, managing, and financing taxi fleets, taxi medallions, and corporate car services. During the three and nine months endedSeptember 30, 2020 , taxi medallion values declined in theNew York City market as well as other markets. We continued to Page 55 of 71 -------------------------------------------------------------------------------- experience a decline in interest income due to all loans being placed on nonaccrual as ofSeptember 30, 2020 , and by removing underperforming loans from the portfolio by transferring them to loan collateral in process of foreclosure with charge-offs to collateral value. In addition, as a result of these changes, mainly due to the current COVID-19 pandemic, during the three months endedSeptember 30, 2020 , we recognized an additional net loss of$33,307,000 due to reserves and write-down of collateral related to the loans in process of foreclosure. 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
three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2020 2019 2020 2019
Selected Earnings Data
Total interest income $ (909 ) $ 975 $ 86 $ 2,482
Total interest expense (56 ) 1,935 2,781 5,435
Net interest loss (853 ) (960 ) (2,695 ) (2,953 )
Provision for loan losses 37,196 1,858 49,489 15,374
Net interest loss after loss provision (38,049 ) (2,818 ) (52,184 ) (18,327 )
Other income (expense), net (9,738 ) (2,762 ) (20,603 ) (8,106 )
Net loss before taxes (47,787 ) (5,580 ) (72,787 ) (26,433 )
Income tax benefit 11,908 1,345 18,138 6,375
Net loss after taxes $ (35,879 ) $ (4,235 ) $ (54,649 ) $ (20,058 )
Balance Sheet Data
Total loans, gross $ 91,298 $ 136,954
Total loan allowance 57,777 24,951
Total loans, net 33,521 112,003
Total assets 142,450 226,868
Total borrowings 113,009 180,040
Selected Financial Ratios
Return on average assets (85.70 )% (7.26 )% (38.80 )% (10.82 )%
Return on average equity NM (36.30 ) (192.88 ) (54.12 )
Interest yield (5.34 ) 3.30 0.13 2.50
Net interest margin (3.89 ) (3.25 ) (4.12 ) (2.97 )
Reserve coverage 63.28 18.22 63.28 18.22
Delinquency status(1) 8.31 2.41 8.31 2.41
Charge-off % 89.89 5.20 26.21 18.29
(1) Loans 90 days or more past due.
September 30, 2020 September 30, 2019
Geographic Concentration (dollars in Total Gross Total Gross
thousands) Loans % of Market Loans % of Market
New York City $ 82,014 90 % $ 120,656 88 %
Newark 8,561 9 15,293 11
Chicago 450 1 514 1
All Other 273 - 491 -
Total $ 91,298 100 % $ 136,954 100 %
RPAC
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 current year
race season had been suspended from March 15, 2020 through May 17, 2020 . As
states began to reopen, NASCAR began racing and intends to complete all races on
a revised schedule.
Page 56 of 71
--------------------------------------------------------------------------------
The following table presents certain financial data and ratios as of and for the
three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2020 2019 2020 2019
Selected Earnings Data
Sponsorship, race winnings, and other income $ 8,962 $
7,940
5,139 4,447 12,310 12,509
Interest expense 42 47 122 119
Total expenses 5,181 4,494 12,432 12,628
Net income (loss) before taxes 3,781 3,446 2,729 3,380
Income tax (provision) (942 ) (831 ) (680 ) (815 )
Net income (loss) after taxes $ 2,839 $ 2,615 $ 2,049 $ 2,565
Balance Sheet Data
Total assets $ 40,112 $ 33,134
Total borrowings 8,652 7,758
Selected Financial Ratios
Return on average assets 31.97 % 31.13 % 8.27 % 10.76 %
Return on average equity NM NM NM NM
Corporate and Other Investments
This non-operating segment relates to our equity and investment securities, our legacy commercial business, and other assets, liabilities, revenues, and expenses not allocated to the operating segments. Commencing with the 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$7,000 in net loans as ofSeptember 30, 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
three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2020 2019 2020 2019
Selected Earnings Data
Total interest income $ 378 $ 492 $ 1,253 $ 1,674
Total interest expense 2,604 1,615 6,933 5,313
Net interest loss (2,226 ) (1,123 ) (5,680 ) (3,639 )
Provision for loan losses (4 ) - (4 ) 455
Net interest loss after loss provision (2,222 ) (1,123 ) (5,676 ) (4,094 )
Other income (expense), net (1,148 ) (2,591 ) (8,842 ) (5,822 )
Net loss before taxes (3,370 ) (3,714 ) (14,518 ) (9,916 )
Income tax benefit 2,261 2,780 4,426 4,930
Net loss after taxes $ (1,109 ) $ (934 ) $ (10,092 ) $ (4,986 )
Balance Sheet Data
Total loans, gross $ 3,334 $ 3,563
Total loan allowance - -
Total loans, net 3,334 3,563
Total assets 231,923 229,734
Total borrowings 199,312 178,793
Selected Financial Ratios
Return on average assets (8.78 )% (1.54 )% (5.45 )% (2.90 )%
Return on average equity (54.58 ) (7.81 ) (22.64 ) (11.52 )
Page 57 of 71
--------------------------------------------------------------------------------
© Edgar Online, source
