MEDALLION FINANCIAL CORP. OBJECTIVE
The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes thereto for the three and six months endedJune 30, 2021 and the year endedDecember 31, 2020 . This section is intended to provide management's perspective of our financial condition and results of operations. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors in the Company's Annual Report on Form 10-K.
GENERAL
We are a finance company whose strategic focus and growth in recent years has been through Medallion Bank (a wholly-owned subsidiary), which originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, home improvements, and provides loan origination and other services to fintech partners. Historically we have had a leading position in originating, acquiring, and servicing loans that finance taxi medallions and various types of commercial businesses. Since Medallion Bank, or the Bank, acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17%. We have transitioned away from medallion lending and have placed our strategic focus on our growing consumer finance portfolio. As a result of our change in strategy, as ofJune 30, 2021 , our consumer loans represented 94% of our loan portfolio, with commercial loans representing 5% and medallion loans representing 1%. Total assets under management, which includes assets serviced for third-party investors, were$1.8 billion as ofJune 30, 2021 andDecember 31, 2020 and$1.6 billion as ofJune 30, 2020 , and have grown at a compound annual growth rate of 9% from$215,000,000 at the end of 1996. Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as bank certificates of deposit, debentures issued to and guaranteed by the SBA, privately placed notes, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities. We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Our investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.
In 2019, the Bank started building-out a strategic partnership program to provide lending and other services to financial technology, or fintech, companies. The Bank entered into an initial partnership in 2020 and began issuing its first loans and entered into another strategic partnership in 2021, and continues to explore opportunities with additional fintech companies.
In recent years, we have focused on growing our consumer lending segments and maintaining the profitability of our commercial lending segment. Since the beginning of 2020, we have taken various steps to pursue this strategy, including:
• carrying-out cost-cutting measures, such as reducing our employee
headcount by 21% at our parent company Medallion Financial Corp. and
closing satellite offices in Long Island City , Chicago , and Boston ;
• exiting non-core investments, such as selling the assets of
LLC on
in Upgrade, Inc. in the 2021 second quarter, resulting in net cash
proceeds of $3,816,000 , and a gain of $3,179,000 , as well as exitingother non-core investments when practicable to maximize our proceeds,
like our remaining art investments at Medallion Fine Art, Inc. , which
have been written down to a net realizable value of $0 in the 2021
second quarter; and
• growing the Bank by partnering with two fintech companies in our
strategic partnership program.
Page 43 of 70
-------------------------------------------------------------------------------- Our wholly-owned subsidiary, Medallion Bank, or the Bank, is a bank regulated by 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 ongoing coronavirus, or COVID-19, pandemic, its broad impact and preventive measures taken to contain or mitigate the outbreak have had, and may to continue to have, significant negative effects on the US and global economy, employment levels, employee productivity, and financial market conditions. This has had, and may continue to have increasingly negative effects on the ability of our borrowers to repay outstanding loans, the value of collateral securing loans, the demand for loans and other financial services products and consumer discretionary spending. As a result of these or other consequences, the outbreak has adversely and materially affected our business, results of operations and financial condition. Although we continue to see signs of recovery, it remains uncertain, and the effects of the outbreak on us could be exacerbated given that our business model is largely consumer and small business directed, which are more severely affected by COVID-19 and the preventative measures taken to contain or mitigate the outbreak, including its significant negative effects on consumer discretionary spending. The full extent to which the outbreak will continue to impact our operations will depend on future developments, including the impact of the Delta variant, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the continued outbreak, the actions taken to contain or mitigate the outbreak and how long, and to what extent the economic recovery from its effects will take. We have taken steps to operate through this crisis, including having our workforce work remotely on a part-time basis inNew York , though our employees outside ofNew York largely continue to work remotely. Despite elevated risks associated with a remote workforce, we implemented additional mitigating controls to help reduce such risks. In addition, we implemented a number of cost-cutting measures, such as reducing employee headcount by 21% at our parent company,Medallion Financial Corp. , and closing satellite offices inLong Island City ,Chicago andBoston . InMarch 2020 , we adjusted the payment policies and procedures with our consumer and medallion businesses, and allowed borrowers to defer payments up to 180 days. As ofJune 30, 2021 , minimal consumer loans remained on deferral and no medallion loans remained on deferral. For our consumer loan portfolios, although we believe that our deferral programs have been effective to date in mitigating the effect of COVID-19, the ultimate effects of COVID-19 on these portfolios remains to be seen. For our medallion portfolio, we determined that anticipated payment activity on our medallion portfolio was impossible to quantify upon exit of the deferral moratorium, and therefore all medallion loans were deemed impaired, placed on nonaccrual status, and written down to each market's net collateral value atDecember 31, 2020 , with additional write-offs taken during 2021. We will continue to monitor our medallion portfolio and related assets, which may result in additional write-downs, charge-offs or impairments, the impact of which could be material to our results of operations and financial condition. Substantially all our medallion loans and related assets are concentrated inNew York City . As a result of the COVID-19 pandemic, economic activity and taxi ridership decreased dramatically inNew York City and despite the reopening ofNew York City , there has not been a substantial increase in ridership and gross meter fares. The extent to which the COVID-19 pandemic will continue to adversely affect taxi medallion owners and, by extension, our medallion loans and related assets, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, actions taken by governmental authorities, and the direct and indirect impact of the pandemic on taxi medallion owners and the behaviors of people who have historically taken taxis. In regards to our commercial business, many of our mezzanine portfolio companies were able to access the Paycheck Protection Program, providing needed liquidity during a period of depressed market demands. MCI drew on its remaining unfunded commitments and received a commitment from the SBA for$25,000,000 in debenture financing with a ten-year term, upon a capital infusion fromMedallion Financial Corp. For the commercial portfolio, performance is slowly recovering although lingering impacts of COVID-19 continue to weigh on performance. RPAC received$747,000 under the Paycheck Protection Program in the 2020 second quarter, all of which has been forgiven and accordingly recorded as Other income in the 2021 second quarter. Page 44 of 70
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Average Balances and Rates
The following table shows the Company's consolidated average balance sheet, interest income and expense, and the average interest earning/bearing assets and liabilities, and which reflects the average yield on assets and average costs on liabilities for the three and six months endedJune 30, 2021 and 2020. Three Months Ended June 30, 2021 2020 Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost Interest-earning assets Interest-earning cash and cash equivalents$ 2,993 $ 14 1.88 %$ 98,627 $ 11 0.04 % Federal funds sold 48,557 4 0.03 - - - Investment securities 44,119 225 2.05 47,072 251 2.14 Loans Recreation 825,695 28,877 14.03 734,387 27,229 14.91 Home improvement 348,066 8,228 9.48 263,379 6,326 9.66 Commercial 63,855 1,516 9.52 70,658 1,778 10.12 Medallion 8,480 (1,495 ) (70.71 ) 93,013 (7 ) (0.03 ) Strategic partnership 60 6 40.11 6 - - Total loans 1,246,156 37,132 11.95 1,161,443 35,326 12.23 Total interest-earning assets 1,341,825 37,375 11.17 1,307,142 35,588 10.95 Non-interest-earning assets Cash 45,257 15,247 Equity investments 9,714 10,377 Income tax receivable 270 130 Loan collateral in process of foreclosure(1) 50,678 47,308 Goodwill and intangible assets 201,354 202,799 Other assets 45,576 51,976 Total non-interest-earning assets 352,849 327,837 Total assets$ 1,694,674 $ 1,634,979 Interest-bearing liabilities Deposits$ 1,104,935 $ 4,465 1.62 %$ 1,074,961 $ 5,920 2.21 % Retail and privately placed notes 125,744 2,592 8.27 69,625 1,684 9.73 SBA debentures and borrowings 60,763 509 3.36 72,490 656 3.64 Preferred securities 33,000 191 2.32 33,000 247 3.01 Notes payable to banks 9,570 94 3.94 32,206 288 3.60 Other borrowings 8,558 33 1.55 8,036 40 2.00 Total interest-bearing liabilities 1,342,570 7,884 2.36 1,290,318 8,835 2.75 Non-interest-bearing liabilities Deferred tax liability 5,835 5,829 Other liabilities(2) 26,982 16,961 Total non-interest-bearing liabilities 32,817 22,790 Total liabilities 1,375,387 1,313,108 Non-controlling interest 72,489 70,838 Total stockholders' equity 246,798 251,033 Total liabilities and stockholders' equity$ 1,694,674 $ 1,634,979 Net interest income$ 29,491 $ 26,753 Net interest margin 8.84 % 8.23 %
(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
and 2020.
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Six Months Ended June 30,
2021 2020
Average Average Average Average
(Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost
Interest-earning assets
Interest-earning cash and cash
equivalents $ 3,198 $ 32 2.02 % $ 74,348 $ 119 0.32 %
Federal funds sold 43,274 9 4.19 - - -
Investment securities 43,797 427 1.97 47,183 582 2.48
Loans
Recreation 801,074 56,319 14.18 719,170 53,563 14.98
Home improvement 340,655 16,146 9.56 256,363 12,213 9.58
Commercial 63,078 3,076 9.83 69,484 3,658 10.59
Medallion 10,075 (1,564 ) (31.30 ) 98,023 995 2.04
Strategic partnership 41 10 49.18 8 - -
Total loans 1,214,923 73,987 12.28 1,143,048 70,429 12.39
Total interest-earning assets 1,305,192 74,455 11.50 1,264,579 71,130 11.31
Non-interest-earning assets
Cash 51,219 16,492
Equity investments 9,666 10,559
Loan collateral in process of
foreclosure(1) 52,307 49,539
Goodwill and intangible assets 201,534 202,979
Deferred tax asset 328 199
Other assets 45,314 48,716
Total non-interest-earning assets 360,368 328,484
Total assets $ 1,665,560 $ 1,593,063
Interest-bearing liabilities
Deposits $ 1,077,260 $ 9,176 1.72 % $ 1,012,111 $ 11,861 2.36 %
SBA debentures and borrowings 62,654 1,081 3.48 72,008 1,343 3.75
Retail and privately placed notes 120,450 5,224 8.75 69,625 3,366 9.72
Notes payable to banks 18,378 356 3.91 32,732 624 3.83
Preferred securities 33,000 380 2.32 33,000 561 3.42
Other borrowings 8,619 75 1.75 7,937 80 2.03
Total interest-bearing liabilities 1,320,361 16,292 2.49 1,227,413 17,835 2.92
Non-interest-bearing liabilities
Deferred tax liability 3,575 7,162
Other liabilities(2) 27,521 31,023
Total non-interest-bearing
liabilities 31,096 38,185
Total liabilities 1,351,457 1,265,598
Non-controlling interest 72,833 70,903
Total stockholders' equity 241,270 256,562
Total liabilities and stockholders'
equity $ 1,665,560 $ 1,593,063
Net interest income $ 58,163 $ 53,295
Net interest margin 9.01 % 8.48 %
(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
and 2020.
Page 46 of 70
-------------------------------------------------------------------------------- During the quarter, our net loans receivable had a yield of 11.95% (compared to 12.23% in the prior year's second quarter), mainly driven by the growth in the home improvement portfolio which has a lower yield than our recreation portfolio, offset by the new strategic partnership loans and other interest earning cash and cash equivalents. The debt, mainly certificates of deposit, helps fund our growing consumer loan business and as market rates have decreased, so has the average cost of borrowings. In addition, we issued new privately placed notes sinceDecember 31, 2020 , which were at lower rates compared to the prior issuances.
Rate/Volume Analysis
The following table presents the change in interest income and expense due to
changes in the average balances (volume) and average rates, calculated for the
period indicated.
Three Months Ended June 30,
2021 2020
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 $ (447 ) $ 450 $ 3 $ 291 $ (433 ) $ (142 )
Federal funds sold 4 - 4 - - -
Investment securities (15 ) (11 ) (26 ) 23 (176 ) (153 )
Loans
Recreation 3,264 (1,616 ) 1,648 4,066 (1,206 ) 2,860
Home improvement 2,019 (117 ) 1,902 1,534 114 1,648
Commercial (157 ) (105 ) (262 ) 319 (285 ) 34
Medallion 14,903 (16,391 ) (1,488 ) (204 ) (470 ) (674 )
Strategic partnerships 5 1 6 - - -
Total loans 20,034 (18,228 ) 1,806 5,715 (1,847 ) 3,868
Total interest-earning assets 19,576 (17,789 ) 1,787 6,029 (2,456 ) 3,573
Interest-bearing liabilities
Deposits $ 124 $ (1,579 ) $
(1,455 )
(96 ) (51 ) (147 ) 146 (14 ) 132
Notes payable to banks (221 ) 27 (194 ) (52 ) (48 ) (100 )
Retail and privately placed notes 1,162 (254 ) 908 (159 ) (154 ) (313 )
Preferred securities 1 (57 ) (56 ) - (145 ) (145 )
Other borrowings 3 (10 ) (7 ) 2 2 4
Total interest-bearing liabilities 973 (1,924 ) (951 ) 1,038 (1,024 ) 14
Net $ 18,603 $ (15,865 ) $ 2,738 $ 4,991 $ (1,432 ) $ 3,559
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Six Months Ended June 30,
2021 2020
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 $ 32 $ - $ 32 $ 325 $ (505 ) $ (180 )
Investment securities (6 ) (104 ) (110 ) - - -
Investment securities 46 (201 ) (155 ) 43 (151 ) (108 )
Loans
Recreation 5,898 (3,142 ) 2,756 8,533 (1,819 ) 6,714
Home improvement 3,903 30 3,933 3,045 165 3,210
Commercial (149 ) (433 ) (582 ) 629 (682 ) (53 )
Medallion 15,363 (17,922 ) (2,559 ) (625 ) 114 (511 )
Strategic partnerships 10 - 10 - - -
Total loans 25,025 (21,467 ) 3,558 11,582 (2,222 ) 9,360
Total interest-earning assets 25,097 (21,772 ) 3,325 11,950 (2,878 ) 9,072
Interest-bearing liabilities
Deposits $ 1,328 $ (4,013 ) $
(2,685 )
(127 ) (135 ) (262 ) (126 ) (52 ) (178 )
Notes payable to banks (243 ) (25 ) (268 ) 950 (71 ) 879
Retail and privately placed notes 2,195 (337 ) 1,858 (414 ) (227 ) (641 )
Preferred securities 65 (246 ) (181 ) - (229 ) (229 )
Other borrowings 7 (12 ) (5 ) 2 5 7
Total interest-bearing liabilities 3,225 (4,768 ) (1,543 ) 2,169 (877 ) 1,292
Net $ 21,872 $ (17,004 ) $ 4,868 $ 9,781 $ (2,001 ) $ 7,780
During the three and six months ended June 30, 2021 , the increase in the
interest earning assets was mainly driven by the increase in volume of consumer
loans, even as the rates declined. The debt change similarly was driven by the
increase in the borrowings, mainly driven by the deposits, which are used to
fund the consumer loans, along with new privately placed notes, offset by the
repayment of retail notes.
Our interest expense is driven by the interest rates payable on our bank
certificates of deposit, short-term credit facilities with banks, fixed-rate,
long-term debentures issued to the SBA, and other short-term notes payable. The
Bank issues brokered time certificates of deposit, which are our lowest
borrowing costs. The Bank is able to bid on these deposits at a wide variety of
maturity levels, which allows for improved interest rate management strategies.
Our cost of funds is primarily driven by the rates paid on our various debt
instruments and their relative mix, and changes in the levels of average
borrowings outstanding. See Note 5 to the consolidated financial statements for
details on the terms of our outstanding debt. Our debentures issued to the SBA
typically have terms of ten years.
We measure our borrowing costs as our aggregate interest expense for all of our
interest-bearing liabilities divided by the average amount of such liabilities
outstanding during the period. The tables above show the average borrowings and
related borrowing costs for the three and six months ended June 30, 2021 and
2020.
We continue to seek SBA funding through Medallion Capital, Inc. , or Medallion
Capital , to the extent it offers attractive rates. SBA financing subjects its
recipients to limits on the amount of secured bank debt they may incur. We use
SBA funding to fund loans that qualify under the Small Business Investment Act
of 1985, as amended, or the SBIA, and SBA regulations. In July 2020 , we obtained
a $25,000,000 commitment from the SBA. We believe that financing operations
primarily with short-term floating rate secured bank debt has generally
decreased our interest expense, but has also increased our exposure to the risk
of increases in market interest rates, which we mitigate with certain interest
rate strategies. At June 30, 2021 and 2020, short-term adjustable rate debt
constituted 2% and 4% of total debt.
Page 48 of 70
--------------------------------------------------------------------------------Loans
Gross loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which are amortized to interest income over the life of the loan. During the three and six months endedJune 30, 2021 , there was continued growth in the consumer lending segments along with recoveries on the medallion segment, which was partly offset by consumer and medallion charge-offs during the period, the continuing of loans aged over 120 days transferred to loan collateral in process of foreclosure and payments received from borrowers. Three Months Ended June 30, 2021 Home Strategic (Dollars in thousands) Recreation Improvement
Commercial Medallion Partnership Total
Gross loans -
58,854 $ 35,250 $ 58 $ 1,259,215
Loan originations 134,467 62,992 11,059 - 2,426 210,944
Principal payments, sales, and
maturities (70,672 ) (36,729 ) (564 ) (2,389 ) (2,414 ) (112,768 )
Charge-offs, net 916 (228 ) - (10,869 ) - (10,181 )
Transfer to loan collateral in
process
of foreclosure, net (2,980 ) - - (3,933 ) - (6,913 )
Amortization of origination costs (2,477 ) 410 - - - (2,067 )
Amortization of loan premium (60 ) (90 ) - (1,545 ) - (1,695 )
FASB origination costs 4,080 (219 ) 1 - - 3,862
Paid-in-kind interest - - 170 - - 170
Gross loans - June 30, 2021 $ 886,206 $ 368,257 $ 69,520 $ 16,514 $ 70 $ 1,340,567
Six Months Ended June 30, 2021 Home Strategic
(Dollars in thousands) Recreation Improvement
Commercial Medallion Partnership Total
Gross loans -
65,327 $ 37,768 $ 24 $ 1,229,838
Loan originations 228,317 111,051 15,216 - 4,370 358,954
Principal payments, sales, and
maturities (129,100 ) (76,797 ) (11,541 ) (4,214 ) (4,324 ) (225,976 )
Charge-offs, net (1,668 ) (477 ) - (10,793 ) - (12,938 )
Transfer to loan collateral in
process of foreclosure, net (6,033 ) - - (4,630 ) - (10,663 )
Amortization of origination costs (4,639 ) 907 11 (2 ) - (3,723 )
Amortization of loan premium (101 ) (166 ) - (1,615 ) - (1,882 )
FASB origination costs 6,744 (294 ) 12 - - 6,462
Paid-in-kind interest - - 495 - - 495
Gross loans - June 30, 2021 $ 886,206 $ 368,257 $ 69,520 $ 16,514 $ 70 $ 1,340,567
Three Months Ended June 30, 2020 Home Strategic
(Dollars in thousands) Recreation Improvement
Commercial Medallion Partnership Total
Gross loans -
68,257 $ 124,448 $ - $ 1,183,779
Loan originations 106,206 44,713 3,000 - 153 154,072
Principal payments, sales, and
maturities (49,457 ) (18,496 ) (132 ) (1,687 ) (145 ) (69,917 )
Charge-offs, net (3,565 ) (196 ) - (260 ) - (4,021 )
Transfer to loan collateral in
process of foreclosure, net (3,003 ) - - (2,185 ) - (5,188 )
Amortization of origination costs (2,031 ) 455 2 (13 ) - (1,587 )
Amortization of loan premium (51 ) (82 ) - (46 ) - (179 )
FASB origination costs 3,511 (221 ) 8 (4 ) - 3,294
Paid-in-kind interest - - 341 - - 341
Gross loans - June 30, 2020 $ 786,785 $ 282,072 $ 71,476 $ 120,253 $ 8 $ 1,260,594
Page 49 of 70
-------------------------------------------------------------------------------- Six Months Ended June 30, 2020 Home Strategic (Dollars in thousands) Recreation Improvement
Commercial Medallion Partnership Total
Gross loans -
69,767 $ 130,432 $ - $ 1,160,855
Loan originations 175,850 78,178 5,175 - 153 259,356
Principal payments, sales, and
maturities (86,529 ) (42,720 ) (4,112 ) (3,780 ) (145 ) (137,286 )
Charge-offs, net (9,946 ) (832 ) - (1,820 ) - (12,598 )
Transfer to loan collateral in
process of foreclosure, net (7,781 ) - - (4,344 ) - (12,125 )
Amortization of origination costs (3,760 ) 896 4 (31 ) - (2,891 )
Amortization of loan premium (103 ) (168 ) - (237 ) - (508 )
FASB origination costs 5,722 (606 ) 8 33 - 5,157
Paid-in-kind interest - - 634 - - 634
Gross loans - June 30, 2020 $ 786,785 $ 282,072 $ 71,476 $ 120,253 $ 8 $ 1,260,594 The following table presents the approximate maturities and sensitivity to
changes in interest rates for our loans as of
Loan Maturity
Within 1 After 1 to After 5 to After 15
(Dollars in thousands) year 5 years 15 years years Total
Fixed-rate $ 34,492 $ 160,312 $ 1,047,744 $ 61,843 $ 1,304,391
Recreation 2,584 80,186 763,704 4,225 850,699
Home improvement 17,918 20,097 275,030 57,618 370,663
Commercial 8,687 50,036 9,010 - 67,733
Medallion 5,303 9,993 - - 15,296
Adjustable-rate $ 7,527 $ 3,671 $ - $ - $ 11,198
Recreation 4,520 3,671 - - 8,191
Home improvement - - - - -
Commercial 1,787 - - - 1,787
Medallion 1,220 - - - 1,220
Total(1)(2)(3) $ 42,019 $ 163,983 $ 1,047,744 $ 61,843 $ 1,315,589
(1) Excludes strategic partnership loans.
(2) As of June 30, 2021 , there were no floating rate loans.
(3) Excludes loan premiums and capitalized loan origination costs.
Provision and Allowance for Loan Loss
During the three months endedJune 30, 2021 ,New York City taxi medallion values remained constant at a net realizable value of$79,500 , even as other markets slightly declined, whereas for the three months endedJune 30, 2020 as a result of the initial impact of COVID-19, theNew York City taxi medallion values had decreased from$124,500 to$119,500 . In addition, the consumer and recreation loan allowance percentages had remained relatively in line for the three months endedJune 30, 2021 , whereas for the three months endedJune 30, 2020 , due to the change in economic factors due to COVID-19, the Company increased the reserve percentages for the consumer loan portfolio between 25 to 50 basis points. During the six months endedJune 30, 2021 , theNew York City taxi medallion values remained constant at a net realizable value of$79,500 , even as other markets slightly decreased, whereas for the six months endedJune 30, 2020 the NYC taxi medallion decreased to a net realizable value of$119,500 compared to$167,000 atDecember 31, 2019 . In addition, the consumer and recreation loan allowance percentages had remained relatively in line for the six months endedJune 30, 2021 , whereas for the six months endedJune 30, 2020 , due to the potential impact of COVID-19, the Company increased the reserve percentage for the consumer loan portfolio between 25 to 100 basis points. Page 50 of 70 --------------------------------------------------------------------------------
The following table sets forth the activity in the allowance for loan losses for
the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2021 2020 2021 2020
Allowance for loan losses - beginning
balance $ 57,809 $ 54,057 $ 57,548 $ 46,093
Charge-offs
Recreation (2,672 ) (5,708 ) (7,725 ) (13,951 )
Home improvement (786 ) (548 ) (1,467 ) (1,558 )
Commercial - - - -
Medallion (12,791 ) (1,771 ) (13,905 ) (3,696 )
Total charge-offs (16,249 ) (8,027 ) (23,097 ) (19,205 )
Recoveries
Recreation 3,588 2,143 6,057 4,005
Home improvement 558 352 990 726
Commercial - - - -
Medallion 1,922 1,511 3,112 1,876
Total recoveries 6,068 4,006 10,159 6,607
Net charge-offs(1) (10,181 ) (4,021 ) (12,938 ) (12,598 )
Provision for loan losses (682 ) 16,941 2,336 33,482
Allowance for loan losses - ending
balance(2) $ 46,946 $ 66,977 $ 46,946 $ 66,977 (1) As of
in process of foreclosure in the medallion portfolio were
which may represent collection opportunities for the Company.
(2) As of
related to the strategic partnership loans.
The following tables set forth the allowance for loan losses by type as of
Allowance as Allowance as
June 30, 2021 Percentage a Percent of a Percent of
(Dollars in thousands) Amount of Allowance Loan Category Nonaccrual
Recreation $ 30,306 64 % 3.42 % 633.25 %
Home improvement 5,890 13 1.60 NM
Commercial - - - -
Medallion 10,750 23 65.11 65.11
Total $ 46,946 100 % 3.50 % 116.26 %
Allowance as Allowance as
December 31, 2020 Percentage a Percent of a Percent of
(Dollars in thousands) Amount of Allowance Loan Category Nonaccrual
Recreation $ 27,348 48 % 3.45 % 378.20 %
Home improvement 5,157 9 1.54 NM
Commercial - - - -
Medallion 25,043 43 66.31 68.01
Total $ 57,548 100 % 4.68 % 93.17 %
As of June 30, 2021 , the allowance for loan losses had remained relatively in
line with December 31, 2020 , mainly driven by the New York City medallion
collateral value remaining consistent due to the economy slowly re-opening and
recovering from the COVID-19 pandemic as well as the consumer rates remaining
consistent.
We generally follow a practice of discontinuing the accrual of interest income
on our loans that are in arrears as to payments for a period of 90 days or more.
We deliver a default notice and begin foreclosure and liquidation proceedings
when management determines that pursuit of these remedies is the most
appropriate course of action under the circumstances. A loan is considered to be
delinquent if the borrower fails to make a payment on time; however, during the
course of discussion on delinquent status, we may agree to modify the payment
terms of the loan with a borrower that cannot make payments in accordance with
the original loan
Page 51 of 70
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agreement. For loan modifications, the loan will only be returned to accrual
status if all past due interest and principal payments are brought fully
current. For credit that is collateral based, we evaluate the anticipated net
residual value we would receive upon foreclosure of such collateral, if
necessary. There can be no assurance, however, that the collateral securing
these loans will be adequate in the event of foreclosure. For credit that is
cash flow-based, we assess our collateral position, and evaluate most of these
relationships as ongoing businesses, expecting to locate and install a new
operator to run the business and reduce the debt. We cannot predict the ultimate
impact that the ongoing COVID-19 pandemic will have on the loan portfolios due
to the greater than typical uncertainty surrounding COVID-19 and its related
significant negative effects on the economy and financial markets.
For the consumer loan portfolio, the process to repossess the collateral is
started at 60 days past due. If the collateral is not located and the account
reaches 120 days delinquent, the account is charged-off to realized losses. If
the collateral is repossessed, a realized loss is recorded to write the
collateral down to its net realizable value, and the collateral is sent to
auction. When the collateral is sold, the net auction proceeds are applied to
the account, and any remaining balance is written off as a realized loss, and
any excess proceeds are recorded as a recovery. Proceeds collected on charged
off accounts are recorded as recoveries. All collection, repossession, and
recovery efforts are handled on behalf of the Bank by the contracted servicer.
The following table shows the trend in loans 90 days or more past due as of the
dates indicated.
June 30, 2021 March 31, 2021 December 31, 2020 June 30, 2020
(Dollars in
thousands) Amount %(1) Amount %(1) Amount %(1) Amount %(1)
Recreation $ 2,769 0.2 % $ 3,152 0.2 % $ 5,343 0.5 % $ 3,365 0.3 %
Home improvement 68 0.0 149 0.0 170 0.0 137 0.0
Commercial 74 0.0 75 0.0 75 0.0 107 0.0
Medallion - 0.0 742 0.1 1,290 0.1 11,967 1.0
Total loans 90 days
or more
past due $ 2,911 0.2 % $ 4,118 0.3 % $ 6,878 0.6 % $ 15,576 1.3 %
(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 321%, 327%, and 254% as ofJune 30, 2021 ,December 31, 2020 , andJune 30, 2020 . Recreation and medallion loans that reach 120 days past due are charged down to collateral value and reclassified to loan collateral in process of foreclosure. The following tables show the activity of loan collateral in process of foreclosure for the three months endedJune 30, 2021 and 2020. Three Months EndedJune 30, 2021 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - March 31, 2021$ 970 $ 49,763 $ 50,733 Transfer from loans, net 2,980 3,933 6,913 Sales (1,989 ) (164 ) (2,153 ) Cash payments received - (3,214 ) (3,214 ) Collateral valuation adjustments (1,079 ) (2,161 ) (3,240 ) Loan collateral in process of foreclosure - June 30, 2021$ 882 $ 48,157 $ 49,039 Six Months EndedJune 30, 2021 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - December 31, 2020$ 1,432 $ 53,128 $ 54,560 Transfer from loans, net 6,033 4,630 10,663 Sales (4,288 ) (164 ) (4,452 ) Cash payments received - (4,489 ) (4,489 ) Collateral valuation adjustments (2,295 ) (4,948 ) (7,243 ) Loan collateral in process of foreclosure - June 30, 2021$ 882 $ 48,157 $ 49,039 Page 52 of 70
-------------------------------------------------------------------------------- Three Months EndedJune 30, 2020 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - March 31, 2020$ 1,717 $ 45,100 $ 46,817 Transfer from loans, net 3,003 2,185 5,188 Sales (1,988 ) - (1,988 ) Cash payments received - (185 ) (185 ) Collateral valuation adjustments (1,474 ) (983 ) (2,457 ) Loan collateral in process of foreclosure - June 30, 2020$ 1,258 $ 46,117 $ 47,375 Six Months EndedJune 30, 2020 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - December 31, 2019$ 1,476 $ 51,235 $ 52,711 Transfer from loans, net 7,781 4,344 12,125 Sales (3,986 ) (300 ) (4,286 ) Cash payments received - (1,893 ) (1,893 ) Collateral valuation adjustments (4,013 ) (7,269 ) (11,282 ) Loan collateral in process of foreclosure - June 30, 2020$ 1,258 $ 46,117 $ 47,375 SEGMENT RESULTS We manage our business under four operating segments: recreation lending, home improvement lending, commercial lending, and medallion lending. We also show results for two non-operating segments; RPAC and corporate and other investments. All results are for the three and six months endedJune 30, 2021 and 2020. Recreation Lending The recreation lending segment is a high-growth prime and non-prime consumer finance business which is a significant source of income for us, accounting for 77% and 77% of our interest income for the three months endedJune 30, 2021 and 2020, and accounted for 76% and 75% for the six months endedJune 30, 2021 and 2020. The loans are secured primarily by RVs, boats, and trailers, with RV loans making up 60% of the portfolio, boat loans making up 20% of the portfolio, and trailer loans 10% as ofJune 30, 2021 , compared to 60%, 19% and 13% as ofJune 30, 2020 . Recreation loans are made to borrowers residing in all fifty states, with the highest concentrations inTexas ,California , andFlorida , at 16%, 10%, and 9% of loans outstanding, compared to 18%, 10%, and 10% as ofJune 30, 2020 , and with no other states over 10%. During the three and six months endedJune 30, 2021 , the recreation portfolio continued its growth compared to the three and six months endedJune 30, 2020 . Additionally, reserves were strengthened while the delinquencies and charge-offs improved. Also, the allowance percentages remained in line whereas in the prior period there had been an increase due to the uncertainty regarding the COVID-19 pandemic. Page 53 of 70
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The following table presents certain financial data and ratios as of and for the
three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2021 2020 2021 2020
Selected Earnings Data
Total interest income $ 28,886 $ 27,229 $ 56,328 $ 53,563
Total interest expense 2,863 3,226 5,657 6,792
Net interest income 26,023 24,003 50,671 46,771
Provision for loan losses 1,017 8,292 4,630 18,893
Net interest income after loss provision 25,006 15,711 46,041 27,878
Other income (expense), net (7,455 ) (6,497 ) (12,918 ) (13,869 )
Net income before taxes 17,551 9,214 33,123 14,009
Income tax provision (4,519 ) (2,356 ) (8,529 ) (3,582 )
Net income after taxes $ 13,032 $ 6,858 $ 24,594 $ 10,427
Balance Sheet Data
Total loans, gross $ 886,206 $ 786,785
Total loan allowance 30,306 27,021
Total loans, net 855,900 759,764
Total assets 868,709 775,151
Total borrowings 712,777 617,066
Selected Financial Ratios
Return on average assets 6.24 % 3.68 % 6.06 % 2.85 %
Return on average equity 31.19 18.38 30.32 14.25
Interest yield 14.03 14.91 14.18 14.98
Net interest margin 12.64 13.15 12.76 13.08
Reserve coverage 3.42 3.43 3.42 3.43
Delinquency status(1) 0.32 0.44 0.32 0.44
Charge-off % (0.44 ) 1.95 0.12 2.78
(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 roofs, swimming pools, and windows at 29%, 27%, and 12% of total loans outstanding as ofJune 30, 2021 , as compared to 22%, 22%, and 14% as ofJune 30, 2020 , with no other collateral types over 10%. Home improvement loans are made to borrowers residing in all fifty states, with the highest concentrations inFlorida ,Texas , andOhio at 11%, 10%, and 8% of loans outstandingJune 30, 2021 , compared to 10%, 11%, and 11% as ofJune 30, 2020 , and with no other states over 6%.
For the three and six months ended
Page 54 of 70
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The following table presents certain financial data and ratios as of and for the
three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2021 2020 2021 2020
Selected Earnings Data
Total interest income $ 8,228 $ 6,326 $ 16,146 $ 12,213
Total interest expense 1,143 1,236 2,351 2,523
Net interest income 7,085 5,090 13,795 9,690
Provision for loan losses 756 760 1,206 2,296
Net interest income after loss provision 6,329 4,330 12,589 7,394
Other income (expense), net (2,638 ) (1,962 ) (4,552 ) (4,302 )
Net income before taxes 3,691 2,368 8,037 3,092
Income tax provision (951 ) (606 ) (2,070 ) (791 )
Net income after taxes $ 2,740 $ 1,762 $ 5,967 $ 2,301
Balance Sheet Data
Total loans, gross $ 368,257 $ 282,072
Total loan allowance 5,890 4,072
Total loans, net 362,367 278,000
Total assets 375,189 288,501
Total borrowings 295,887 229,237
Selected Financial Ratios
Return on average assets 3.04 % 2.58 % 3.39 % 1.72 %
Return on average equity 15.19 12.88 16.96 8.62
Interest yield 9.48 9.66 9.56 9.58
Net interest margin 8.16 7.77 8.17 7.58
Reserve coverage 1.60 1.44 1.60 1.44
Delinquency status(1) 0.02 0.05 0.02 0.01
Charge-off % 0.26 0.30 0.99 0.65
(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 68% of which are located in the Midwest region, with the rest scattered across the country. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally range in amount from$2,000,000 to$5,000,000 at origination, and typically include an equity component as part of the financing. The commercial lending business has concentrations in manufacturing and administrative and support services, making up 47% and 15% of the loans outstanding as ofJune 30, 2021 , compared to 56% and 13% as ofJune 30, 2020 . The following table presents certain financial data and ratios as of and for the three and six months endedJune 30, 2021 and 2020. The commercial segment encompasses the mezzanine lending business, and the other legacy commercial loans (immaterial to total) have been allocated to corporate and other investments. The commercial segment decreased as early payoffs exceeded new loans recorded during the quarter. Net income improved as expenses decreased and credit quality remained solid. Page 55 of 70 --------------------------------------------------------------------------------
Three Months Ended June 30 , Six Months Ended June 30 ,(Dollars in thousands) 2021 2020 2021 2020 Selected Earnings Data Total interest income$ 1,383 $ 1,726 $ 2,865 $ 3,484 Total interest expense 716 617 1,288 1,274 Net interest income 667 1,109 1,577 2,210 Provision for loan losses - - - - Net interest income after loss provision 667 1,109 1,577 2,210 Other income (expense), net (69 ) (584 ) (529 ) (1,479 ) Net income before taxes 598 525 1,048 731 Income tax provision (150 ) (131 ) (263 ) (182 ) Net income after taxes $ 448 $ 394 $ 785 $ 549 Balance Sheet Data Total loans, gross$ 66,236 $ 68,140 Total loan allowance - - Total loans, net 66,236 68,140 Total assets 90,563 86,831 Total borrowings 72,450 70,567 Selected Financial Ratios Return on average assets 2.36 % 1.86 % 1.95 % 1.30 % Return on average equity 11.78 9.28 9.77 6.48 Interest yield 9.16 10.67 9.66 10.97 Net interest margin 4.42 6.86 5.32 6.96 Reserve coverage(1) 0.00 0.00 0.00 0.00 Delinquency status(1) (2) 0.11 0.15 0.11 0.15 Charge-off %(3) 0.00 0.00 0.00 0.00
(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.
June 30, 2021 June 30, 2020
Geographic Concentrations (Dollars in Total Gross Total Gross
thousands) Loans % of Market Loans % of Market
Illinois $ 16,689 25 % $ 9,353 14 %
Michigan 10,794 16 10,383 15
Minnesota 8,086 12 5,732 8
North Carolina 5,847 9 5,348 8
Texas 5,569 8 5,556 8
New Jersey 4,164 6 5,041 7
California 5,008 8 4,988 7
Kansas 4,107 6 4,107 6
Other(1) 5,972 10 17,632 27
Total $ 66,236 100 % $ 68,140 100 %
(1) Includes four other states, which were all under 6% as of
seven other states, all under 6% 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 six months endedJune 30, 2021 , taxi medallion values remained consistent in theNew York City market even as other markets saw declines. We continue to experience a decline in interest income due to all loans being placed on nonaccrual as ofSeptember 30, 2020 , and by Page 56 of 70
-------------------------------------------------------------------------------- removing underperforming loans from the portfolio by transferring them to loan collateral in process of foreclosure with charge-offs to collateral value. All the loans are secured by taxi medallions and enhanced by personal guarantees of the shareholders and owners.
The following table presents certain financial data and ratios as of and for the
three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2021 2020 2021 2020
Selected Earnings Data
Total interest income $ (1,475 ) $ (7 ) $ (1,544 ) $ 995
Total interest expense 2,524 988 3,894 2,837
Net interest loss (3,999 ) (995 ) (5,438 ) (1,842 )
Provision (benefit) for loan losses (2,943 ) 7,889 (3,987 ) 12,293
Net interest loss after loss provision (1,056 ) (8,884 ) (1,451 ) (14,135 )
Other income (expense), net (1,157 ) (2,292 ) (3,301 ) (10,865 )
Net loss before taxes (2,213 ) (11,176 ) (4,752 ) (25,000 )
Income tax benefit 556 2,785 1,193 6,230
Net loss after taxes $ (1,657 ) $ (8,391 ) $ (3,559 ) $ (18,770 )
Balance Sheet Data
Total loans, gross $ 16,514 $ 120,253
Total loan allowance 10,750 35,884
Total loans, net 5,764 84,369
Total assets 101,205 190,657
Total borrowings 80,959 151,614
Selected Financial Ratios
Return on average assets (6.10 )% (17.19 )% (6.29 )% (18.56 )%
Return on average equity (30.51 ) (85.96) (31.44 ) (92.14 )
Interest yield (70.71 ) (0.03) (30.90 ) 2.04
Net interest margin (189.15 ) (4.08) (108.84 ) (3.78 )
Reserve coverage 65.11 29.84 65.11 29.84
Delinquency status(1) 0.00 10.29 0.00 10.29
Charge-off % 513.86 (1.12 ) 216.01 3.73
(1) Loans 90 days or more past due.
June 30, 2021 June 30, 2020
Geographic Concentration (Dollars in Total Gross Total Gross
thousands) Loans % of Market Loans % of Market
New York City $ 14,056 85 % $ 107,729 90 %
Newark 2,393 15 11,795 10
Chicago - - 445 -
All Other 65 - 284 -
Total $ 16,514 100 % $ 120,253 100 %
June 30, 2021 June 30, 2020
Total Loan Total Loan
Collateral in Collateral in
Process of Process of
Geographic Concentration (Dollars in Foreclosure Foreclosure
thousands) Loans % of Market Loans % of Market
New York City $ 32,411 67 % $ 25,117 54 %
Newark 6,009 12 3,374 7
Chicago 2,689 6 6,356 14
All Other 7,048 15 11,270 24
Total $ 48,157 100 % $ 46,117 100 %
Page 57 of 70
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RPAC
We are the majority owner and managing member ofRPAC Racing, LLC , a performance and marketing company forNASCAR . Revenues are mainly earned through sponsorships and race winning activity over the ten month race season (February through November) during the year. As a result of COVID-19, the prior year race season had been suspended fromMarch 15, 2020 throughMay 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
three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2021 2020 2021 2020
Selected Earnings Data
Sponsorship, race winnings, and other income $ 4,345 $ 3,626 $ 6,818 $ 6,199
Race team and other expenses 4,536 3,196 8,419 7,171
Interest expense 34 40 75 80
Total expenses 4,570 3,236 8,494 7,251
Net income (loss) before taxes (225 ) 390 (1,676 ) (1,052 )
Income tax (provision) 57 (97 ) 421 262
Net income (loss) after taxes $ (168 ) $ 293 $ (1,255 ) $ (790 )
Balance Sheet Data
Total assets $ 31,877 $ 30,542
Total borrowings 8,016 8,615
Selected Financial Ratios
Return on average assets (1.05 )% 3.88 % (7.72 )% (5.17 )%
Return on average equity (39.70 ) (53.94) (244.87 ) 81.74
Corporate and Other Investments
This non-operating segment relates to our equity and investment securities as well as our legacy commercial business, and other assets, liabilities, revenues, and expenses not allocated to the operating segments. Commencing with the 2020 second quarter, the Bank began issuing loans related to the new strategic partnership business, which is currently included within this segment, for a total of$70,000 in net loans as ofJune 30, 2021 . This segment also reflects the elimination of all intercompany activity among the consolidated entities. Page 58 of 70
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The following table presents certain financial data and ratios as of and for the
three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2021 2020 2021 2020
Selected Earnings Data
Total interest income $ 353 $ 314 $ 660 $ 875
Total interest expense 604 2,728 3,027 4,329
Net interest loss (251 ) (2,414 ) (2,367 ) (3,454 )
Provision for loan losses 488 - 487 -
Net interest loss after loss provision (739 ) (2,414 ) (2,854 ) (3,454 )
Other income (expense), net (543 ) (2,025 ) (1,858 ) (7,694 )
Net loss before taxes (1,282 ) (4,439 ) (4,712 ) (11,148 )
Income tax benefit (1,521 ) 1,258 (1,158 ) 2,165
Net loss after taxes $ (2,803 ) $ (3,181 ) $ (5,870 ) $ (8,983 )
Balance Sheet Data
Total loans, gross $ 3,351 $ 3,344
Total loan allowance - -
Total loans, net 3,351 3,344
Total assets 272,204 280,061
Total borrowings 212,020 218,695
Selected Financial Ratios
Return on average assets (3.85 )% (8.96 )% (4.08 )% (7.14 )%
Return on average equity (1.95 ) (38.05) (30.46 ) (26.03 )
Summary Consolidated Financial Data
The table below presents selected financial data for the Company for the three
and six months ended
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands, except per share
data) 2021 2020 2021 2020
Selected financial ratios
Return on average assets (ROA) 2.43 % (0.98 )% 2.26 % (2.23 )%
Return on average equity (ROE) 12.90 (4.97 ) 12.00 (10.82 )
Dividend payout ratio - - - -
Net interest margin 8.84 8.23 9.01 8.48
Other income ratio(3) 2.32 1.00 1.50 0.59
Total expense ratio(4) 10.23 7.44 9.45 7.82
Equity to assets(2) 18.56 19.27 18.56 19.27
Debt to equity (1) 4.17 4.10 4.17 4.10
Loans receivable to assets 74 % 72 % 74 % 72 %
Net charge-offs (10,181 ) $ (4,021 ) (12,938 ) $ (12,598 )
Net charge-offs as a % of average loans
receivable 3.36 % 1.39 % 2.15 % 2.21 %
Allowance coverage ratio 3.50 5.31 3.50 5.31
(1) Excludes the
30, 2021 and 2020.
(2) Includes
consolidated subsidiaries as of
(3) Other income ratio represents other income divided by average interest
earning assets.
(4) Total expense ratio represents total expenses (interest expense, operating
expenses, and income taxes) divided by average interest earning assets.
Page 59 of 70
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Consolidated Results of Operations
Three and Six Months Ended
Net income attributable to shareholders was$10,267,000 , or$0.41 per share, and$18,698,000 , or$0.75 per share, for the three and six months endedJune 30, 2021 , compared to net loss attributable to shareholders of$3,977,000 , or$0.16 per share, and$17,620,000 , or$0.72 per share, for the three and six months endedJune 30, 2020 . Total interest income was$37,375,000 for the three months endedJune 30, 2021 , compared to$35,588,000 for the three months endedJune 30, 2020 . The increase in interest income reflected the continued growth in the consumer lending segments, which was offset by contraction in the medallion lending segment, driven by all medallion loans being on nonaccrual status, and higher premium amortization in the current period as well as an overall lower yield due to growth in the home improvement lending segment. For the six months endedJune 30, 2021 , total interest income was$74,455,000 , compared to$71,130,000 for the six months endedJune 30, 2020 similarly reflective of growth in the consumer lending segments, and offset by contraction in the medallion lending segment and higher amortization. The yield on interest earning assets was 11.17% and 11.50% for the three and six months endedJune 30, 2021 , compared to 10.95% and 11.31% for the three and six months endedJune 30, 2020 . Average interest earning assets were$1,341,825,000 for the three months endedJune 30, 2021 , an increase from$1,307,142,000 for the three months endedJune 30, 2020 . For the six months endedJune 30, 2021 , average interest earning assets were$1,305,192,000 , an increase from$1,264,579,000 for the six months endedJune 30, 2020 . Loans before allowance for loan losses were$1,340,567,000 as ofJune 30, 2021 , comprised of recreation ($886,206,000 ), home improvement ($368,257,000 ), commercial ($69,520,000 ), medallion ($16,514,000 ), and strategic partnership ($70,000 ) loans. The Company had an allowance for loan losses as ofJune 30, 2021 of$46,946,000 , which was attributable to the recreation (64%), medallion (23%), and home improvement (13%) loan portfolios. As ofDecember 31, 2020 , loans before allowance for loan losses were$1,229,838,000 , comprised of recreation ($792,686 ), home improvement ($334,033,000 ), commercial ($65,327,000 ), medallion ($37,768,000 ), and strategic partnership ($24,000 ) loans. The Company had an allowance for loan losses as ofDecember 31, 2020 of$57,548,000 , which was attributable to recreation (48%), medallion (43%), and home improvement (9%) loans. Loans increased$110,729,000 , or 9%, fromDecember 31, 2020 as a result of$358,954,000 of loan originations, offset by principal payments, transfers to loan collateral in process of foreclosure and net charge-offs. The provision for loan losses was a benefit of$682,000 for three months endedJune 30, 2021 , compared to a loss of$16,941,000 for the three months endedJune 30, 2020 . The improvement over the prior year is a function of a 50 basis point increase in the prior year period of reserve percentages on the recreation subprime loan businesses and in the medallion loans general reserve inputs related to the uncertainty which existed about the potential impact on the business of COVID-19, as well as lower charge-offs and higher recoveries in recreation loans. The provision for loan loss was$2,336,000 for six months endedJune 30, 2021 , compared to$33,482,000 for the six months endedJune 30 , 20120. The improvement over the prior year is reflective of an increase of reserve percentages ranging from 25 to 100 basis points on the recreation subprime loan business and an increase in the medallion loans general reserve inputs in the prior year related to the uncertainty about the potential impact on the businesses as a result of COVID-19. The charge-off ratios on the loan portfolios was 3.28% for the three months endedJune 30, 2021 compared to 1.39% for the three months endedJune 30, 2020 , and was 2.15% for the six months endedJune 30, 2021 compared to 2.21% for the six months endedJune 30, 2020 , both driven by the medallion segment as a result of deferrals granted and the temporary suspension of delinquencies and nonperforming treatment under the CARES Act. See Note 4 for additional information on loans and allowance for loan losses. Interest expense was$7,884,000 and$16,292,000 for the three and six months endedJune 30, 2021 , compared to$8,835,000 and$17,835,000 for the three and six months endedJune 30, 2020 . The average cost of borrowed funds was 2.36% and 2.49% for the three and six months endedJune 30, 2021 , compared to 2.75% and 2.92% for the three and six months endedJune 30, 2020 , both mainly driven by the decline in market rates for deposits, offset to a lesser extent with the replacement of notes payable to banks with higher fixed rate private notes. Average debt outstanding was$1,342,570,000 and$1,320,361,000 for the three and six months endedJune 30, 2021 , up from$1,290,318,000 and$1,227,413,000 for the three and six months endedJune 30, 2020 , as we issued additional certificates of deposits to increase our liquidity, along with the new issuance of privately placed notes and the repayment of publicly traded retail notes. See page 44-45 for tables that show average balances and cost of funds for our funding sources. Net interest income was$29,491,000 and$58,163,000 for the three and six months endedJune 30, 2021 , compared to$26,753,000 and$53,295,000 for the three and six months endedJune 30, 2020 . The net interest margin was 8.84% for the three months endedJune 30, 2021 , compared to 8.23%, for the three months endedJune 30, 2020 , and was 9.01%, for the six months endedJune 30, 2021 , compared to 8.48% for the six months endedJune 30, 2020 , reflecting the above. Net other income (loss), which is comprised of sponsorship and race winnings, prepayment fees, servicing fee income, late charges, write-downs of loan collateral, impairment of equity investments, and other miscellaneous income was income of$7,767,000 for the three months endedJune 30, 2021 , compared to income of$3,256,000 for the three months endedJune 30, 2020 . The improvement was due to gains recorded on the extinguishment of debt, gains on the disposal of equity investments, as well as higher race team related income, partially offset by an increase in write-downs due to a reduction in collateral values forChicago medallions. For the six months endedJune 30, 2021 , there was income of$9,703,000 , compared to a loss of$3,724,000 for the six months ended Page 60 of 70 --------------------------------------------------------------------------------June 30, 2020 . The improvement was mainly due to gains recorded on the extinguishment of debt and gains on the disposal of equity investments in the current year, offset by lower write-downs of the loan collateral in process of foreclosure and losses of equity investing recorded in the prior year period. Operating expenses were$19,820,000 for the three months endedJune 30, 2021 , compared to$16,186,000 for the three months endedJune 30, 2020 . Salaries and benefits were$7,901,000 for the three months endedJune 30, 2021 , compared to$6,702,000 for the three months endedJune 30, 2020 , with the increase mainly attributable to bonus accruals in connection with current year performance as well as higher race team related salaries due to a normalized race season. Professional fees were$2,224,000 for the three months endedJune 30, 2021 , compared$1,319,000 for the three months endedJune 30, 2020 , primarily reflecting higher legal costs for a variety of corporate matters. Race team costs were$2,674,000 for the three months endedJune 30, 2021 , compared to$1,818,000 for the three months endedJune 30, 2020 , reflecting the postponement of the race season in the prior year along with less travel required due to the COVID-19 pandemic and the adjusted race schedule. Loan servicing costs were$1,731,000 for the three months endedJune 30, 2021 , in line with$1,729,000 for three months endedJune 30, 2020 . Occupancy and other operating expenses were$5,290,000 for the three months endedJune 30, 2021 , increasing from$4,618,000 for the three months endedJune 30, 2020 , due to lower overall costs in the prior year as a result of the shut-downs related to COVID-19. For the six months endedJune 30, 2021 , operating expenses were$34,462,000 compared to$35,457,000 for the six months endedJune 30, 2020 . Salaries and benefits were$13,586,000 for the six months endedJune 30, 2021 , in line with$13,635,000 for the six months endedJune 30, 2020 . Professional fees were$2,730,000 for the six months endedJune 30, 2021 , compared$4,908,000 for the six months endedJune 30, 2020 , primarily reflecting lower legal costs for a variety of corporate matters. Race team costs were$4,796,000 for the six months endedJune 30, 2021 , compared to$3,948,000 for the six months endedJune 30, 2020 . Loan servicing costs were$3,378,000 for the six months endedJune 30, 2021 , up slightly from the prior year six months. Occupancy and other operating expenses were$9,972,000 for the six months endedJune 30, 2021 compared to$9,625,000 for the six months endedJune 30, 2020 . Total income tax expense was$6,528,000 for the three months endedJune 30, 2021 , compared to a benefit of$853,000 for the three months endedJune 30, 2020 . Total income tax expense was$10,406,000 for the six months endedJune 30, 2021 , compared to a benefit of$4,102,000 for the six months endedJune 30, 2020 . The 2021 three and six months included$1,833,000 of tax expense related to a valuation allowance with respect to certain tax assets which the Company believes it will not be able to realize. See Note 7 for more information. Loan collateral in process of foreclosure was$49,039,000 atJune 30, 2021 , a decline from$54,560,000 atDecember 31, 2020 . The decrease was primarily reflective of cash payments received and sales as well as the decline in collateral values offset by the additional loans having reached 120 days past due being charged-down to their collateral value and reclassified to loan collateral in process of foreclosure. See page 51 for a table that shows the changes during the quarter. ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of consumer, commercial, and medallion loans, and investment securities) reprice on a different basis over time in comparison to our interest-bearing liabilities (consisting primarily of bank certificates of deposit, credit facilities and borrowings from banks and other lenders, and SBA debentures and borrowings). Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Abrupt increases in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at the higher prevailing interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning assets and interest-bearing liabilities results in interest rate risk. The effect of changes in interest rates is mitigated by regular turnover of the portfolio. We believe that the average life of our loan portfolio varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the interest rate payable on the borrower's loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment. However, borrowers may prepay for a variety of other reasons, such as to monetize increases in the underlying collateral values. In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years. A relative measure of interest rate risk can be derived from our interest rate sensitivity gap. The interest rate sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified Page 61 of 70 -------------------------------------------------------------------------------- intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities, and negative when repriceable liabilities exceed repriceable assets. A relative measure of interest rate sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets. The following table presents our interest rate sensitivity gap atJune 30, 2021 . The principal amounts of interest earning assets are assigned to the time frames in which such principal amounts are contractually obligated to be repriced. We have not reflected an assumed annual prepayment rate for such assets in this table. June 30, 2021 Cumulative Rate Gap(1) More Than More Than More Than More Than More Than 1 and Less 2 and Less 3 and Less 4 and Less 5 and Less Less Than 1 Than 2 Than 3 Than 4 Than 5 Than 6 (Dollars in thousands) Year Years Years Years Years Years Thereafter Total Earning assets Floating-rate $ - $ - $ - $ - $ - $ - $ - $ - Adjustable rate 7,528 1,932 1,703 11 24 - - 11,198 Fixed-rate 34,493 20,866 30,530
53,987 54,928 58,812 1,050,775 1,304,391 Cash, cash equivalents, and
federal funds sold 90,303 - - 500 500 250 - 91,553 Investment securities 2,358 4,778 6,771 4,294 1,848 7,946 20,312 48,307 Total earning assets$ 134,682 $ 27,576 $ 39,004 $ 58,792 $ 57,300 $ 67,008 $ 1,071,087 $ 1,455,449 Interest bearing liabilities Deposits$ 469,737 $ 182,911 $ 226,592 $ 143,797 $ 131,077 $ - $ -$ 1,154,114 Retail and privately placed notes - - 36,000 - 31,250 - 53,750 121,000 SBA debentures and borrowings - 5,000 13,029 12,500 15,500 - 18,500 64,529
Preferred securities - - - - - - 33,000 33,000 Notes payable to banks 280 280 140 - - - - 700 Other borrowings 8,016 - - - - - - 8,016
Total liabilities
$ (343,351 ) $ (503,966 ) $ (740,723 )
(1) The ratio of the cumulative one year gap to total interest rate sensitive
assets was (24%) as of
and was (21%) as of
(2) Excludes federal funds sold and investment securities.
Our interest rate sensitive assets were$1,455,449,000 and interest rate sensitive liabilities were$1,381,359,000 atJune 30, 2021 . The one-year cumulative interest rate gap was a negative$343,351,000 or 24% of interest rate sensitive assets. We seek to manage interest rate risk by originating adjustable-rate loans, by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, and by other options consistent with managing interest rate risk. With the cessation of LIBOR at the end of 2021, we are currently reviewing the impact on our loans and borrowings. We do not have lendings tied to LIBOR and do not expect a significant impact on our loans. We expect to rely on our lenders to adjust and communicate rate adjustments; however, we do not expect a material impact on our borrowings.
Liquidity and Capital Resources
Our sources of liquidity are with a variety of local and regional banking institutions, unfunded commitments to sell debentures to the SBA, loan amortization and prepayments, private issuances of debt securities, participations or sales of loans to third parties, the disposition of other assets of the Company, and dividends fromMedallion Capital and the Bank, and are subject to compliance with regulatory ratios. As ofJune 30, 2021 , we had unfunded commitments from the SBA of$16,500,000 , drawable upon the infusion of$8,250,000 of capital from either the capitalization of retained earnings or capital infusion from the Company. Additionally, the Bank has access to independent sources of funds for our business originated there, primarily through brokered certificates of deposit. The Bank has up to$45,000,000 available under Fed Funds lines with several commercial banks. In addition, the Bank can retain earnings in its business to fund future growth. Page 62 of 70
-------------------------------------------------------------------------------- InFebruary 2021 , we completed a private placement to certain institutional investors of$25,000,000 aggregate principal amount of 7.25% unsecured senior notes dueFebruary 2026 , with interest payable semiannually. Follow-on offerings of these notes in March andApril 2021 raised an additional$3,250,000 and$3,000,000 . InDecember 2020 , we completed a private placement to certain institutional investors of$33,600,000 aggregate principal amount of 7.50% unsecured senior notes dueDecember 2027 , with interest payable semiannually. Follow-on offerings of these notes in February andMarch 2021 raised an additional$8,500,000 . An additional follow-on offering of these notes inApril 2021 raised an additional$11,650,000 . The net proceeds from theDecember 2020 ,February 2021 ,March 2021 andApril 2021 private placements have been used for general corporate purposes, including repayment of outstanding debt such as the repayment of our 9.00% retail notes at maturity inApril 2021 and to pay down other borrowings, including some borrowings at a discount. InDecember 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 excludingApril 1, 2025 , at a rate of 8% per annum, and from and includingApril 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. InMarch 2019 , we completed a private placement to certain institutional investors of$30,000,000 aggregate principal amount of 8.25% unsecured notes due 2024, with interest payable semiannually. A follow-on offering of these notes in the 2019 third quarter raised an additional$6,000,000 .
The table below presents the components of our debt at
(Dollars in thousands) Balance Percentage Rate (1) Deposits(2)$ 1,154,864 84 % 1.38 % Retail and privately placed notes 121,000 9 7.66 SBA debentures and borrowings 64,529 5 2.74 Preferred securities 33,000 2 2.26 Notes payable to banks 700 0 4.00 Other borrowings 8,016 1 2.00 Total outstanding debt$ 1,382,109 100 % 2.04 %
(1) Weighted average contractual rate as of
(2) Balance includes
2021.
Our contractual obligations expire on or mature at various dates through
Payments due by period
Less than More than
(Dollars in thousands) 1 year 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years 5 years Total(1)
Deposits(2) $ 469,737 $ 182,911 $ 226,592 $ 143,797 $ 131,077 $ - $ 1,154,114
Privately placed notes - - 36,000 - 31,250 53,750 121,000
SBA debentures and borrowings - 5,000 13,029 12,500 15,500 18,500 64,529
Preferred securities 33,000 33,000
Notes payable to banks 280 280 140 - - - 700
Other borrowings 8,016 - - - - - 8,016
Operating lease obligations - - - - - - -
Total $ 478,033 $ 188,191 $ 275,761 $ 156,297 $ 177,827 $ 105,250 $ 1,381,359 (1) Total debt is exclusive of deferred financing costs of
(2) Balance excludes
2021.
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-------------------------------------------------------------------------------- Approximately$666,000,000 of our borrowing relationships have maturity dates during the next two years, including almost$653,000,000 of brokered CDs. Additionally, onApril 15, 2021 , we paid off the$33,625,000 aggregate principal amount of our retail notes, and repaid substantially all notes payable to banks which had maturities in less than one year. We have arranged for changes to the terms of the notes, and payment and borrowing base calculations which we anticipate will facilitate our operations for the foreseeable future. In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of them at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of our portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net interest income. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity a hypothetical immediate 1% increase in interest rates would result in an increase to net income as ofJune 30, 2021 by$951,000 on an annualized basis, and the impact of such an immediate increase of 1% over an one year period would have been ($1,279,000 ) atJune 30, 2021 . Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net income from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates. We continue to work with investment banking firms and other financial intermediaries to investigate the viability of a number of other financing options which include, among others, the sale or spinoff of certain assets or divisions, the development of a securitization conduit program, and other independent financing for certain subsidiaries or asset classes. These financing options would also provide additional sources of funds for both external expansion and continuation of internal growth. Page 64 of 70 -------------------------------------------------------------------------------- The following table illustrates sources of available funds for us and each of our subsidiaries, and amounts outstanding under credit facilities and their respective end of period weighted average interest rates atJune 30, 2021 . See Note 5 to the consolidated financial statements for additional information about each credit facility. Medallion Financial RPAC and June 30, December 31, (Dollars in thousands) Corp. MB MFC MCI FSVC Other 2021(1) 2020(1) Cash and cash (2) equivalents$ 15,750 $ 61,463 $ 1,729 $ 9,689 $ 396 $ 2,526 $ 91,553 $ 112,040 Brokered CDs & other funds borrowed 1,154,864 1,154,864 1,068,072 Average interest rate 1.38 % 1.38 % 1.71 % Maturity 7/21-6/26 7/21-6/26 1/21-12/25 Retail and privately placed notes 121,000 121,000 103,225 Average interest rate 7.66 % 7.66 % 8.25 % Maturity 3/24-12/27 3/24-12/27 4/21-12/27 SBA debentures and borrowings 79,000 10,529 89,529 93,008 Amounts undisbursed 25,000 25,000 25,000 Amounts outstanding 54,000 10,529 64,529 68,008 Average interest rate 2.64 % 3.25 % 2.74 % 3.36 % Maturity 3/23- 9/31 4/30/2024 3/23- 9/31 3/21-9/30 Bank loans 700 700 31,261 Average interest rate 4.00 % 4.00 % 3.67 % Maturity 12/29/23 12/23 2/21-12/23 Preferred securities 33,000 33,000 33,000 Average interest rate 2.26 % 2.26 % 2.35 % Maturity 9/37 9/37 9/37 Other borrowings 8,016 8,016 8,689 Average interest rate 2.00 % 2.00 % 1.91 % Maturity 12/31/21 12/31/21 12/21-6/25 Total cash$ 15,750 $ 61,463 $ 1,729
(1) Total debt is exclusive of deferred financing costs of
of
(2) Includes
placement, which can be used for no other purpose for three years.
Loan amortization, prepayments, and sales also provide a source of funding for
us. Prepayments on loans are influenced significantly by general interest rates,
medallion loan market values, economic conditions, and competition.
We also generate liquidity through deposits generated at the Bank, borrowing
arrangements with other banks, and through the issuance of SBA debentures, as
well as from cash flow from operations. In addition, we may choose to
participate a greater portion of our loan portfolio to third parties. We are
actively seeking additional sources of liquidity; however, given current market
conditions, there can be no assurance that we will be able to secure additional
liquidity on terms favorable to us or at all. If that occurs, we may decline to
underwrite lower yielding loans in order to conserve capital until credit
conditions in the market become more favorable; or we may be required to dispose
of assets when we would not otherwise do so, and at prices which may be below
the net book value of such assets in order for us to repay indebtedness on a
timely basis.
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Recently Issued Accounting Standards
InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, or Topic 326: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. Under the new standard, the concepts used by entities to account for credit losses on financial instruments will fundamentally change. The existing "probable" and "incurred" loss recognition threshold is removed. Loss estimates are based upon lifetime "expected" credit losses. The use of past and current events must now be supplemented with "reasonable and supportable" expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning afterDecember 15, 2019 for public entities, with early adoption permitted. InNovember 2019 , the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such as us, to fiscal years beginning afterDecember 15, 2022 . We are assessing the impact the update will have on our financial statements, and expect the update to have a material impact on our accounting for estimated credit losses on our loans.
Dividends
We have not paid dividends on our common stock since 2016 and do not currently anticipate paying dividends. We may, however, re-evaluate paying dividends in the future depending on market conditions.
Control Statutes
Because the Bank is an "insured depository institution" within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a "financial institution holding company" within the meaning of theUtah Financial Institutions Act, federal andUtah 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 theFDIC or the Commissioner ofUtah 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 theFDIC , 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 theFDIC under the Change in Bank Control Act to acquire or maintain 10% or more of that series. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval. In addition to the regulations detailed above, our operations are subject to supervision and regulation by other federal, state, and local laws and regulations. Additionally, our operations may be subject to various laws and judicial and administrative decisions. This oversight may serve to:
• regulate credit granting activities, including establishing licensing
requirements, if any, in various jurisdictions;
• establish maximum interest rates, finance charges and other charges;
• require disclosures to customers;
• govern secured transactions;
• set collection, foreclosure, repossession, and claims handling procedures
and other trade practices;
• prohibit discrimination in the extension of credit and administration of
loans; and
• regulate the use and reporting of information related to a borrower's
credit experience and other data collection.
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Changes to laws of states in which we do business could affect the operating environment in substantial and unpredictable ways. We cannot predict whether such changes will occur or, if they occur, the ultimate effect they would have upon our financial condition or results of operations.
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