10-Q 1 d887131d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended June 30, 2018

OR

 

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

For the transition period from                  to                 

Commission file number 001-37747

 

 

MEDALLION FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   04-3291176
(State of Incorporation)  

(IRS Employer

Identification No.)

437 MADISON AVENUE, 38th Floor,

NEW YORK, NEW YORK 10022

(Address of principal executive offices) (Zip Code)

(212) 328-2100

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files).    YES  ☒    NO  ☐

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

 

Large Accelerated Filer      Accelerated Filer  
Non-Accelerated Filer      Smaller Reporting Company  

Emerging growth company  ☐

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

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

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of August 10, 2018 was 24,438,823.

 

 

 


Table of Contents

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

     3  

ITEM 1. FINANCIAL STATEMENTS

     3  

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

     54  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     81  

ITEM 4. CONTROLS AND PROCEDURES

     82  

PART II—OTHER INFORMATION

     82  

ITEM 1. LEGAL PROCEEDINGS

     82  

ITEM 1A. RISK FACTORS

     83  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     97  

ITEM 6. EXHIBITS

     97  

SIGNATURES

  

CERTIFICATIONS

  

 

Page 2 of 97


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASIS OF PREPARATION

We, Medallion Financial Corp. or the Company, are a commercial finance company, organized as a Delaware corporation, that includes Medallion Bank, our primary operating subsidiary. Effective April 2, 2018, following authorization by our shareholders, we withdrew our previous election to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. Prior to such time, we were a closed-end, non-diversified management investment company that had elected to be treated as a BDC under the 1940 Act.

As a result of this change in status, commencing with the three months ended June 30, 2018:

 

   

we consolidate the results of Medallion Bank and our other subsidiaries in our financial statements, which, as an investment company, we were previously precluded from doing; and

 

   

with the consolidation of Medallion Bank, given its significance to our overall financial results, we now report as a bank holding company for accounting purposes under Article 9 and Guide 3 of Regulation S-X (but we are not a bank holding company for regulatory purposes).

In accordance with FASB Accounting Standards Codification (ASC) Topic 946 – Financial Services – Investment Company, we are making this change to our financial reporting prospectively, and not restating or revising periods prior to our change in status to a non-investment company effective April 2, 2018. Accordingly, in this report we refer to both accounting in accordance with US generally accepted accounting principles (GAAP) applicable to bank holding companies (Bank Holding Company Accounting), which applies commencing April 2, 2018, and to that applicable to investment companies under the 1940 Act (Investment Company Accounting), which applies to prior periods.

In order to maintain its status as a non-investment company, the Company operates so as to fall outside the definition of an “investment company” or within an applicable exception. The Company expects to continue to fall within the exception from the definition of an “investment company” provided under Section 3(c)(6) of the 1940 Act as a company primarily engaged, directly or through majority-owned subsidiaries, in the business of, among other things, (i) banking, (ii) purchasing and otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance and services, and (iii) making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services. The Company is required to monitor its continued compliance with this exception, which it met for the second quarter of 2018.

We are a commercial finance company that historically has had a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. Recently, our strategic growth has been through Medallion Bank, a wholly-owned subsidiary of ours, which originates consumer loans for the purchase of recreational vehicles, boats, and trailers and to finance small-scale home improvements. 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% (20% if there had been no loan sales during 2016 and 2017). In January 2017, we announced our plans to transform our overall strategy. We are transitioning away from medallion lending and placing our strategic focus on our growing consumer finance portfolio. Total assets under management were $1,561,000,000 as of June 30, 2018, and were $1,593,000,000 and $1,606,000,000 as of December 31, 2017 and June 30, 2017, and have grown at a compound annual growth rate of 10% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid/declared distributions in excess of $263,060,000 or $14.66 per share.

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

 

   

Medallion Bank, or the Bank, an FDIC-insured industrial bank that originates consumer loans, raises deposits and conducts other banking activity;

 

   

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

 

   

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

 

   

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

 

   

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

 

Page 3 of 97


Table of Contents

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

The financial information is divided into two sections. The first section, Item 1, includes our unaudited consolidated financial statements including related footnotes. The second section, Item 2, consists of Management’s Discussion and Analysis of Financial Condition and Results of Operations for the quarter ended June 30, 2018.

Our consolidated balance sheet as of June 30, 2018, and the related consolidated statements of operations, consolidated statements of other comprehensive loss, consolidated statement of stockholders equity, and cash flows for the quarter then ended included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the US have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the quarter ended June 30, 2018 may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Page 4 of 97


Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

     Bank Holding
Company
Accounting
    Investment
Company
Accounting
 

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

   UNAUDITED
June 30, 2018
    December 31, 2017  

Assets

    

Cash

   $ 10,344     $ 12,690  

Federal funds sold

     25,237       —    

Equity investments

     10,773       —    

Equity investments, at fair value

     —         5,213  

Equity investments in affiliated entities, at fair value

     —         4,308  

Investment securities

     44,717       —    

Investments in Medallion Bank and other controlled subsidiaries, at fair value

     —         302,147  

Loans

     1,150,123       —    

Medallion loans, at fair value

     —         208,279  

Commercial loans, at fair value

     —         53,737  

Commercial loans to affiliated entities, at fair value

     —         999  

Commercial loans to controlled subsidiaries, at fair value

     —         35,452  

Allowance for losses

     (21,425     —    
  

 

 

   

 

 

 

Net loans receivable

     1,128,698       —    
  

 

 

   

 

 

 

Net investments

     —         610,135  
  

 

 

   

 

 

 

Accrued interest receivable

     7,360       547  

Property and equipment, net

     1,128       235  

Loan collateral in process of foreclosure

     60,052       —    

Goodwill and intangible assets

     211,123       —    

Deferred tax assets and other tax receivables, net

     3,460       —    

Investments other than securities

     —         7,450  

Other assets

     31,637       4,465  
  

 

 

   

 

 

 

Total assets

   $ 1,534,529     $ 635,522  
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued expenses

   $ —       $ 4,373  

Accrued interest payable

     4,246       3,831  

Deposits

     896,402       —    

Short-term borrowings

     179,692       —    

Deferred tax liabilities and other tax payables

     —         12,536  

Other liabilities

     19,025       —    

Long-term debt

     150,248       —    

Funds borrowed

     —         327,623  
  

 

 

   

 

 

 

Total liabilities

     1,249,613       348,363  
  

 

 

   

 

 

 

Commitments and contingencies

     —         —    

Stockholders’ equity

    

Preferred stock (1,000,000 shares of $0.01 par value stock authorized-none outstanding)

     —         —    

Common stock (50,000,000 shares of $0.01 par value stock authorized- 27,390,066 shares at June 30, 2018 and 27,294,327 shares at December 31, 2017 issued)

     274       273  

Additional paid in capital

     274,012       273,716  

Treasury stock (2,951,243 shares at June 30, 2018 and December 31, 2017)

     (24,919     (24,919

Accumulated undistributed net investment loss

     —         (65,592

Net unrealized appreciation on investments, net of tax

     —         103,681  

Accumulated other comprehensive loss

     (255     —    

Retained earnings

     8,568       —    
  

 

 

   

 

 

 

Total stockholders’ equity

     257,680       287,159  
  

 

 

   

 

 

 

 

Page 5 of 97


Table of Contents
     Bank Holding
Company
Accounting
     Investment
Company
Accounting
 

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

   UNAUDITED
June 30, 2018
     December 31, 2017  

Non-controlling interest in consolidated subsidiaries

     27,236        —    
  

 

 

    

 

 

 

Total equity

     284,916        287,159  
  

 

 

    

 

 

 

Total liabilities and equity

   $ 1,534,529      $ 635,522  
  

 

 

    

 

 

 

Number of shares outstanding

     24,438,823        24,438,084  

Book value per share/net asset value per share

   $ 10.54      $ 11.80  
  

 

 

    

 

 

 

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

 

Page 6 of 97


Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Bank Holding
Company
Accounting
    Investment
Company
Accounting
    Combined     Investment Company Accounting  

(Dollars in thousands, except per share data)

   For the Three
Months Ended
June 30, 2018
    For the Three
Months Ended
March 31, 2018
    For the Six
Months Ended
June 30, 2018
    For the Three
Months Ended
June 30, 2017
    For the Six
Months Ended
June 30, 2017
 

Interest and fees on loans

   $ 32,026     $ —       $ 32,026     $ —       $ —    

Interest income on investments

     —         3,287       3,287       2,915       6,385  

Dividend income from controlled subsidiaries

     —         28       28       —         —    

Interest income from affiliated investments

     —         654       654       765       1,392  

Interest income from controlled subsidiaries

     —         10       10       44       126  

Medallion lease income

     30       40       70       52       119  

Interest and dividends on investment securities

     588       14       602       —         —    

Dividends and interest income on short-term investments

     —         —         —         11       15  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income(1)/total investment income(1)

     32,644       4,033       36,677       3,787       8,037  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on deposits

     4,200       —         4,200       —         —    

Interest on short-term borrowings

     1,859       —         1,859       —         —    

Interest on long-term debt

     1,866       —         1,866       —         —    

Interest expense

     —         3,551       3,551       3,408       6,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense(2)

     7,925       3,551       11,476       3,408       6,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income/net investment income

     24,719       482       25,201       379       1,295  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

     30,576       —         30,576       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest loss after provision for loan losses

     (5,857     482       (5,375     379       1,295  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (loss)

          

Sponsorship and race winnings

     5,228       —         5,228       —         —    

Impairment of equity investments

     (474     —         (474     —         —    

Writedown of loan collateral in process of foreclosure

     (96     —         (96     —         —    

Other income

     220       60       280       12       14  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     4,878       60       4,938       12       14  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses

          

Salaries and employee benefits

     5,639       2,349       7,988       2,097       2,861  

Race team related expenses

     2,540       —         2,540       —         —    

Professional fees

     2,246       723       2,969       616       1,308  

Loan servicing fees

     1,128       —         1,128       —         —    

Collection costs

     837       —         837       —         —    

Travel, meals and entertainment

     603       206       809       220       415  

Rent expense

     591       243       834       262       527  

Regulatory fees

     582       —         582       —         —    

Amortization of intangible assets

     361       —         361       —         —    

Other expenses(3)

     2,399       587       2,986       487       796  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     16,926       4,108       21,034       3,682       5,907  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes/net investment loss before taxes(4)

     (17,905     (3,566     (21,471     (3,291     (4,598
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit

     4,021       336       4,357       1,998       2,870  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss after taxes/net investment loss after taxes

     (13,884     (3,230     (17,114     (1,293     (1,728
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments(5)

     —         (34,745     (34,745     1,996       2,841  

 

Page 7 of 97


Table of Contents
     Bank Holding
Company
Accounting
    Investment
Company
Accounting
    Combined     Investment Company Accounting  

(Dollars in thousands, except per share data)

   For the Three
Months Ended
June 30, 2018
    For the Three
Months Ended
March 31, 2018
    For the Six
Months Ended
June 30, 2018
    For the Three
Months Ended
June 30, 2017
    For the Six
Months Ended
June 30, 2017
 

Income tax benefit

     —         8,426       8,426       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gains (losses) on investments

     —         (26,319     (26,319     1,996       2,841  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation on Medallion bank and other controlled subsidiaries

     —         29,115       29,115       930       9,054  

Net change in unrealized depreciation on investments other than securities

     —         (1,915     (1,915     —         —    

Net change in unrealized depreciation on investments

     —         (4,403     (4,403     (11,450     (19,973

Income tax (provision) benefit

     —         (8,122     (8,122     5,020       6,120  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on investments

     —         14,675       14,675       (5,500     (4,799
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized/unrealized losses on investments

     —         (11,644     (11,644     (3,504     (1,958
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss after taxes/net decrease on net assets resulting from operations

     (13,884     (14,874     (28,758     (4,797     (3,686
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: income attributable to the noncontrolling interest

     763       —         763       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net income (loss) attributable to Medallion Financial Corp./net decrease on net assets resulting from operations

   $ (14,647   $ (14,874   $ (29,521   $ (4,797   $ (3,686
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.60   $ (0.62   $ (1.22   $ (0.20   $ (0.15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per share

   $ —       $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

          

Basic and diluted

     24,230,815       24,154,879       24,193,057       23,925,567       23,909,344  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Included in interest and investment income is $487 and $978 of paid in kind interest for the three and six months ended June 30, 2018 and $502 and $990 for the comparable 2017 periods.

(2)

Average borrowings outstanding were $1,197,450 and $1,201,386, and the related average borrowing costs were 2.65% and 1.93% for the three and six months ended June 30, 2018, and were $335,010 and $338,459 and 4.08% and 4.02% for the comparable 2017 periods.

(3)

See Note 11 for the components of other operating expenses.

(4)

Includes $256 of net revenues received from Medallion Bank for the three months ended March 31, 2018 and $230 and $457 for the three and six months ended June 30, 2017, primarily for expense reimbursements. See Notes 6 and 13 for additional information.

(5)

There were no net losses on investment securities of affiliated issuers for the three months ended March 31, 2018 and June 30, 2017 and for the six months ended June 30, 2017.

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

 

Page 8 of 97


Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS

(UNAUDITED)

 

     Bank Holding
Company
Accounting
    Investment
Company
Accounting
    Combined     Investment Company Accounting  

(Dollars in thousands)

   For the Three
Months Ended
June 30, 2018
    For the Three
Months Ended
March 31, 2018
    For the Six
Months Ended
June 30, 2018
    For the Three
Months Ended
June 30, 2017
    For the Six
Months Ended
June 30, 2017
 

Net loss after taxes/net decrease on net assets resulting from operations

   $ (13,884   $ (14,874   $ (28,758   $ (4,797   $ (3,686

Other comprehensive loss, net of tax

     (255     —         (255     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

     (14,139     (14,874     (29,013     (4,797     (3,686
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: comprehensive income attributable to the noncontrolling interest

     763       —         763       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss attributable to Medallion Financial Corp.

   ($ 14,902     (14,874   ($ 29,776   ($ 4,797   ($ 3,686
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 9 of 97


Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND CHANGES IN NET ASSETS

(UNAUDITED)

 

     Bank Holding & Investment Company Accounting     Investment Company Accounting     Bank Holding Company Accounting     Bank Holding &
Investment Company
Accounting
 

(Dollars in
thousands)

   Common
Stock Shares
     Common
Stock
     Preferred
Stock
     Capital in
Excess of Par
     Treasury
Stock Shares
    Treasury
Stock
    Accumulated
undistributed
net
investment
loss
    Accumulated
undistributed
net realized
gains on
investments
     Net
unrealized
appreciation
on
investments,
net of tax
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Balance at December 31, 2017

     27,294,327      $ 273      $ —        $ 273,716        (2,951,243   ( $ 24,919   ( $ 65,592     —        $ 103,681       —       $ —       $ 287,159     $ —       $ 287,159  

Net decrease in net assets resulting from operations

     —          —          —          —          —         —         ( 38,299     —          23,425       —         —         (14,874     —         (14,874

Stock based compensation expense

     —          1        —          151        —         —         —         —          —         —         —         152       —         152  

Issuance of restricted stock, net

     95,726      —          —          —          —         —         —            —         —         —         —         —      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     27,390,053        274        —          273,867        (2,951,243     (24,919   ($ 103,891     —          127,106     $ —         —         272,437       —         272,437  

Adoption of Bank Holding Company Accounting

     —          —          —          —          —         —         103,891       —          (127,106     23,215       —         —         —         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 2, 2018

     27,390,053        274        —          273,867        (2,951,243     ( 24,919     —         —          —         23,215       —         272,437       27,065       299,502  

Net loss

     —          —          —          —          —         —         —         —          —         (14,647     —         (14,647     763     (13,884

Distributions on noncontrolling interest

     —          —          —          —          —         —         —         —          —         —         —         —         (592     (592

Stock based compensation

     —             —          145        —         —         —         —          —         —         —         145     —         145  

Issuance of restricted stock, net

     13      —          —          —          —         —         —            —         —         —         —         —      

Net change in unrealized losses on investments, net of tax

     —          —          —          —          —         —         —         —          —         —         (255     (255     —         (255
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     27,390,066      $ 274        —        $ 274,012        (2,951,243   ($ 24,919     —        
—  
 
 
     —       $ 8,568     ($ 255   $ 257,680     $ 27,236     $ 284,916  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Page 10 of 97


Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(UNAUDITED)

 

     Investment Company Accounting  

(Dollars in thousands, except per share data)

   Three Months
Ended June 30,

2017
    Six Months Ended
June 30, 2017
 

Net investment loss after income taxes

   $ (1,293   $ (1,728

Net realized gains on investments, net of tax

     1,996       2,841  

Net unrealized depreciation on investments, net of tax

     (5,500     (4,799
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

     (4,797     (3,686
  

 

 

   

 

 

 

Investment income, net

     —         —    

Return of capital

     —         —    

Realized gains from investment transactions, net

     —         —    
  

 

 

   

 

 

 

Distributions to shareholders (1)

     —         —    
  

 

 

   

 

 

 

Stock-based compensation expense

     201       329  

Exercise of stock options

     —         —    
  

 

 

   

 

 

 

Capital share transactions

     201       329  
  

 

 

   

 

 

 

Total decrease in net assets

     (4,596     (3,357

Net assets at the beginning of the period

     287,335       286,096  
  

 

 

   

 

 

 

Net assets at the end of the period(2)

   $ 282,739     $ 282,739  
  

 

 

   

 

 

 

Capital share activity

    

Common stock issued, beginning of period

     27,076,016       26,976,064  

Exercise of stock options

     —         —    

Issuance of restricted stock, net

     151,275       251,227  
  

 

 

   

 

 

 

Common stock issued, end of period

     27,227,291       27,227,291  
  

 

 

   

 

 

 

Treasury stock, beginning of period

     (2,951,243     (2,951,243

Treasury stock acquired

     —         —    
  

 

 

   

 

 

 

Treasury stock, end of period

     (2,951,243     (2,951,243
  

 

 

   

 

 

 

Common stock outstanding

     24,276,048       24,276,048  
  

 

 

   

 

 

 

 

(1)

Distributions declared were $0.00 and $0.00 per share for the three and six months ended June 30, 2017.

(2)

Includes $0 of undistributed net investment income, $0 of undistributed net realized gains on investments, and $375 of capital loss carryforwards at June 30, 2017.

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

 

Page 11 of 97


Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Bank Holding
Company
Accounting
    Investment
Company
Accounting
    Combined     Investment
Company
Accounting
 

(Dollars in thousands)

   For the Three
Months Ended
June 30, 2018
    For the Three
Months
Ended March
31, 2018
    For the Six
Months
Ended June
30, 2018
    For the Six
Months
Ended June
30, 2017
 

CASH FLOWS FROM OPERATING ACTIVITIES

        

Net loss

   $ (13,884   $ (14,874   $ (28,758   $ (3,686

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Provision for loan losses

     30,576       —         30,576       —    

Loans originated

     —         (8,193     (8,193     (8,993

Proceeds from principal receipts, sales, and maturities of loans

     —         13,279       13,279       28,918  

Paid-in-kind interest

     (487     (491     (978     —    

Depreciation and amortization

     1,037       246       1,283       276  

(Increase) decrease/ increase (decrease) in deferred and other tax asset/ liabilities, net

     (654     3,858       3,204       (7,645

Amortization of origination fees, net

     1,032       13       1,045       38  

Net change in loan collateral in process of foreclosure

     2,967       —         2,967       —    

Capital returned by Medallion Bank and other controlled subsidiaries, net

     —         93       93       595  

Net realized losses on sale of investments

     96       —         96       —    

Net change in unrealized depreciation on investments

     592       4,403       4,995       19,973  

Net change in unrealized depreciation on investment other than securities

     —         1,915       1,915       —    

Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries

     —         (29,115     (29,115     (9,054

Net realized (gains) losses on investments

     —         34,745       34,745       (2,841

Stock-based compensation expense

     145       152       297       329  

Decrease in accrued interest receivable

     —         130       130       14  

Increase in other liabilities

     2,779       —         2,779       —    

(Increase) decrease in other assets

     (4,899     54       (4,845     263  

Decrease in accounts payable and accrued expenses

     —         (675     (675     (1,211

Increase (decrease) in accrued interest payable

     —         (249     (249     284  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     19,300       5,291       24,591       17,260  

CASH FLOWS FROM INVESTING ACTIVITIES

        

Loans originated

     (135,205     —         (135,205     —    

Proceeds from principal receipts, sales, and maturities of loans

     64,631       —         64,631       —    

Purchases of investments

     (4,940     —         (4,940     —    

Proceeds from principal receipts, sales, and maturities of investments

     732       —         732       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used for) investing activities

     (74,782     —         (74,782     —    

CASH FLOWS FROM FINANCING ACTIVITIES

        

Proceeds from time deposits and funds borrowed

     173,737       —         173,737       —    

Repayments of time deposits and funds borrowed

     (130,861     (6,961     (137,822     (15,957

Purchase of federal funds

     8,000       —         8,000       —    

Repayments of federal funds

     —         —         —         —    

Distributions to noncontrolling interests

     (592     —         (592     —    

Payments of declared distributions

     —         (64     (64     (139
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     50,284       (7,025     43,259       (16,096
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 12 of 97


Table of Contents

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1)

     (5,198     (1,734     (6,932     1,164  

Cash and cash equivalents, beginning of period(1)

     40,779       12,690       42,513       20,962  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period (2)

   $ 35,581     $ 10,956     $ 35,581     $ 22,126  
  

 

 

   

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION

        

Cash paid during the period for interest

   $ 6,461     $ 3,577     $ 10,038     $ 6,231  

Cash paid during the period for income taxes

     42       —         42       48  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Included in the beginning balance for the three and six months ended June 30, 2018 was $29,923 of cash, cash equivalents, and federal funds sold as a result of the consolidation of previously unconsolidated subsidiaries and excludes $100 of cash held by the Company on deposit with Medallion Bank.

(2)

Includes federal funds sold for the three months ended June 30, 2018.

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

 

Page 13 of 97


Table of Contents

MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

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

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

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

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

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

MFC established a wholly-owned subsidiary, Taxi Medallion Loan Trust III (Trust III), for the purpose of owning medallion loans originated by MFC or others. Trust III is a separate legal and corporate entity with its own creditors who, in any liquidation of Trust III, will be entitled to be satisfied out of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders. The assets of Trust III, aggregating $72,462,000 at June 30, 2018, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC. As of June 30, 2018, Trust III had a deficit of $26,590,000, as a result of losses taken on the medallion loans in Trust III. This amount exceeded our maximum exposure to Trust III, which is solely due to a limited guarantee by MFC of $6,065,000, by $20,525,000. Due to technical consolidation accounting rules, we are required to record these losses, even though we are under no obligation to cover them financially. The Company is exploring alternative approaches to this investment to allow for full or partial recovery of these amounts as well as to not incur additional losses in this entity going forward. There can be no assurance that the Company will be able to do so.

The Company established a wholly-owned subsidiary, Medallion Financing Trust I (Fin Trust) for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,143,000 at June 30, 2018, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.

MFC, through several wholly-owned subsidiaries (together, Medallion Chicago), purchased $8,689,000 of City of Chicago taxicab medallions out of foreclosure, which are leased to fleet operators while being held for sale. The 159 medallions are carried at a net realizable value of $5,535,000 on the Company’s consolidated balance sheet at June 30, 2018 compared to fair value of $7,450,000 and $9,510,000 at December 31, 2017 and June 30, 2017.

 

Page 14 of 97


Table of Contents

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Change to Bank Holding Company Accounting

As described above, effective April 2, 2018, the Company withdrew its previous election to be regulated as a BDC under the 1940 Act. Prior to such time, the Company was a closed-end, non-diversified management investment company that had elected to be treated as a BDC under the 1940 Act. Accordingly, commencing with the three months ended June 30, 2018, the Company (which now consolidates the results of Medallion Bank and its other subsidiaries) reports in accordance with Bank Holding Company Accounting; periods prior to such change in status are reported in accordance with Investment Company Accounting. Significant accounting policies that differ between such periods are described in more detail below.

Use of Estimates

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its wholly-owned and controlled subsidiaries commencing with the three months ended June 30, 2018. All significant intercompany transactions, balances, and profits (losses) have been eliminated in consolidation. Prior to the Company’s election to withdraw from being regulated as a BDC under the 1940 Act effective April 2, 2018, Medallion Bank and various other Company subsidiaries were not consolidated with the Company prior to the three months ended June 30, 2018, and as such see Note 6 for the presentation of financial information for Medallion Bank and other controlled subsidiaries for such prior periods.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that exceed the federally insured limits.

Fair Value of Assets and Liabilities

The Company follows FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, (FASB ASC 820), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e. a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entity’s own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 14 and 15 to the consolidated financial statements.

Equity Investments

Equity investments of $10,773,000 at June 30, 2018, comprised mainly of nonmarketable stock and stock warrants, are recorded at cost and are evaluated for impairment periodically. Prior to April 2, 2018, equity investments were recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of investments that had no ready market were determined in good faith by the Board of Directors, based upon the financial condition and operating performance of the underlying investee companies as well as general market trends for businesses in the same industry. Included in the equity investments were non-marketable securities of $9,521,000 at December 31, 2017.

Investment Securities (Bank Holding Company Accounting)

The Company follows FASB ASC Topic 320, Investments–Debt and Equity Securities (ASC 320), which requires that all applicable investments in equity securities with readily determinable fair values, and debt securities be classified as trading securities, available-for-sale securities, or held-to-maturity securities. Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. The net premium on investment securities

 

Page 15 of 97


Table of Contents

totaled $212,000, and $21,000 was amortized to interest income for the three months ended June 30, 2018. Medallion Bank, a previously unconsolidated subsidiary under Investment Company Accounting for the period, had net premium on investment securities of $265,000, and $20,000 and $40,000 was amortized to interest income for the three and six months ended June 30, 2017. Refer to Note 3 for more details. ASC 320 further requires that held-to-maturity securities be reported at amortized cost and available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the financial statements, and reported in accumulated other comprehensive income (loss) as a separate component of shareholder’s equity, net of the effect of income taxes, until they are sold. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in shareholder’s equity, which were recorded net of the income tax effect, will be reversed.

Other Investment Valuation (Investment Company Accounting)

Prior to April 2, 2018, under the 1940 Act, the Company’s investment in Medallion Bank, as a wholly owned portfolio investment, was subject to quarterly assessments of fair value. The Company conducted a thorough valuation analysis, and also received an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank on at least an annual basis. The Company’s analysis included factors such as various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013 and the lack of any new charter issuances since the moratorium’s expiration. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the 2015 second quarter, the Company first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the 2016 third quarter there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016, $7,849,000 was recorded in 2017, and $39,826,000 was recorded in the first quarter of 2018. Refer to Note 6 for additional details.

At December 31, 2017, there were non-marketable securities of $302,147,000 related to portfolio investments in controlled subsidiaries that were not consolidated with the Company. Because of the inherent uncertainty of valuations, the Board of Directors’ estimates of the values of the investments may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.

Loans

The Company’s loans are currently reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan. Effective April 2, 2018, the existing loan balances were recharged at fair value in connection with the change in reporting, and balances, net of reserves, became the fair value opening balances.

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At June 30, 2018 and December 31, 2017, net loan origination costs were $13,696,000 and $90,000 ($11,187,000 when combined with Medallion Bank). Net amortization to income for the three months ended June 30, 2018 and 2017 was $1,040,000 and $18,000 ($852,000 when combined with Medallion Bank), and was $1,053,000 ($1,918,000 when combined with Medallion Bank) and $38,000 ($1,701,000 when combined with Medallion Bank) for the comparable six month periods.

Interest income is recorded on the accrual basis. Taxicab medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. The consumer portfolio has different characteristics, typified by a larger number of lower dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is likely the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Management considers loans that are in bankruptcy status, but have not been charged-off, to be impaired. These loans are placed on nonaccrual, when they become 90 days past due, or earlier if they enter bankruptcy, and are charged off in their entirety when deemed

 

Page 16 of 97


Table of Contents

uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. For the recreational 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. If the collateral is repossessed, a loss is recorded to write the collateral down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off. Proceeds collected on charged off accounts are recorded as a recovery. Total loans more than 90 days past due were $15,161,000 at June 30, 2018, or 1.32% of the total loan portfolio, compared to $60,450,000, or 18.9% at December 31, 2017.

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

The Company had $126,052,000 and $183,529,000 of net loans pledged as collateral under borrowing arrangements at June 30, 2018 and December 31, 2017.

The Company accounted for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing (FASB ASC 860) which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, the Company had elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $26,583,000 at June 30, 2018 and $338,867,000 at December 31, 2017, which included $311,988,000 of loans serviced for Medallion Bank. The Company had evaluated the servicing aspect of its business in accordance with FASB ASC 860, most of which relates to servicing assets held by Medallion Bank, and determined that no material servicing asset or liability existed as of June 30, 2018 and December 31, 2017. The Company assigned its servicing rights to the Medallion Bank portfolio to MSC. The costs of servicing were allocated to MSC by the Company, and the servicing fee income was billed to and collected from Medallion Bank by MSC.

Allowance for Loan Losses (Bank Holding Company Accounting)

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. In analyzing the adequacy of the allowance for loan losses, the Company uses historical delinquency and actual loss rates with a one year lookback period for consumer loans. For commercial loans deemed nonperforming, the historical loss experience and other projections are looked at, and for medallion loans, non performing loans are valued at the median sales price over the most recent quarter. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. As a result, reserves are recorded above the calculated amounts as an additional buffer against future losses. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.

Unrealized Appreciation (Depreciation) and Realized Gains (Losses) on Investments (Investment Company Accounting)

Prior to April 2, 2018, under Investment Company Accounting, the Company’s loans, net of participations and any unearned discount, were considered investment securities under the 1940 Act and recorded at fair value. As part of the fair value methodology, loans were valued at cost adjusted for any unrealized appreciation (depreciation). Since no ready market existed for these loans, the fair value was determined in good faith by the Board of Directors. In determining the fair value, the Board of Directors considered factors such as the financial condition of the borrower, the adequacy of the collateral, individual credit risks, cash flows of the borrower, market conditions for loans (e.g. values used by other lenders and any active bid/ask market), historical loss experience, and the relationships between current and projected market rates and portfolio rates of interest and maturities. Investments other than securities, which represent collateral received from defaulted borrowers, were valued similarly.

Under Investment Company Accounting, the Company recognized unrealized appreciation (depreciation) on investments as the amount by which the fair value estimated by the Company is greater (less) than the cost basis of the investment portfolio. Realized gains or losses on investments are generated through sales of investments, foreclosure on specific collateral, and writeoffs of loans or assets acquired in satisfaction of loans, net of recoveries. Unrealized appreciation on investments was $139,700,000, and $110,374,000 as of December 31, 2017 and June 30, 2017. Refer to Note 5 for additional details.

 

Page 17 of 97


Table of Contents

Goodwill and Intangible Assets

The Company’s goodwill and intangible assets arose as a result of the excess of fair value over book value for several of the Company’s previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under the Company’s new Bank Holding Company reporting, and was subject to a purchase price accounting allocation process conducted by an independent third party expert to arrive at the current categories and amounts. Goodwill is not amortized, but is subject to impairment testing on an annual basis. Intangible assets are amortized over their useful life of approximately 20 years. See below for detailed information on the fair value allocation as of April 2, 2018.

 

(in thousands)    Fair Value as of
March 31, 2018
     Allocation as
of April 2,
2018
 

Medallion Bank

     

Assets

     

Net loans (1)

   $        $ 890,000  

Other assets

        130,393  

Liabilities

     

Funds borrowed and other liabilities

        (853,650
  

 

 

    

 

 

 

Total fair value excluding goodwill and intangibles

        166,743  

Goodwill

        150,803  

Intangibles

        28,900
  

 

 

    

 

 

 

Total fair value (2)

   $ 346,446      $ 346,446  
  

 

 

    

 

 

 

 

(1)

Includes $12,387 of premiums associated with the loan portfolio.

(2)

Includes $26,303 of preferred stock held by the US Treasury. See Note 17 for details.

 

(in thousands)

   Fair Value as
of March 31,
2018
     Allocation as
of April 2,
2018
 

RPAC Racing LLC

     

Assets

     

Cash

   $        $ 1,647  

Net fixed assets

        774  

Race cars and parts, net

        203  

Race cars held for sale

        916  

Other assets

        1,902  

Liabilities

     

Deferred revenue

        (6,531

Notes payable (1)

        (27,220

Other liabilities

        (2,275
  

 

 

    

 

 

 

Total fair value excluding goodwill and intangibles

        (30,584

Intangibles

        31,779  
  

 

 

    

 

 

 

Total fair value(2)

   $ 1,195      $ 1,195  
  

 

 

    

 

 

 

 

(1)

Includes $20,177 due to the Company and its affiliates as of March 31, 2018.

(2)

Fair value as of March 31, 2018 represents the Company’s investment in RPAC Racing LLC series D units.

 

Page 18 of 97


Table of Contents

Fixed Assets

Fixed assets are carried at cost less accumulated depreciation and amortization, and are depreciated on a straight-line basis over their estimated useful lives of 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated economic useful life of the improvement. Depreciation and amortization expense was $135,000 and $24,000 for the quarters ended June 30, 2018 and 2017, and was $158,000 and $49,000 for the comparable six months.

Deferred Costs

Deferred financing costs, included in other assets, represents costs associated with obtaining the Company’s borrowing facilities, and are amortized on a straight line basis over the lives of the related financing agreements and life of the respective pool. Amortization expense was $541,000 and $240,000 ($591,000 had Medallion Bank been consolidated) for the quarters ended June 30, 2018 and 2017, and was $764,000 and $468,000 ($1,164,000 had Medallion Bank been consolidated) for the comparable six months, recorded as interest expense. In addition, the Company capitalizes certain costs for transactions in the process of completion (other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon completion or termination of the transaction, any accumulated amounts are amortized against income over an appropriate period, or written off. The amount on the Company’s balance sheet for these purposes was $5,012,000, $3,070,000 ($5,011,000 had Medallion Bank been consolidated), and $3,567,000 ($5,623,000 had Medallion Bank been consolidated) as of June 30, 2018, December 31, 2017 and June 30, 2017.

Income Taxes

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

Earnings (Loss) Per Share (EPS)

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

The table below shows the calculation of basic and diluted EPS.

 

     Three Months Ended June 30,      Six Months Ended June 30,  

(Dollars in thousands, except per share data)

   2018      2017      2018      2017  

Net loss/ net decrease in net assets resulting from operations available to common shareholders

   ($ 14,647    ($ 4,797    ($ 29,521    ($ 3,686
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding applicable to basic EPS

     24,230,815        23,925,567        24,193,057        23,909,344  

Effect of dilutive stock options

     —          —          —          —    

Effect of restricted stock grants

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted EPS

     24,230,815        23,925,567        24,193,057        23,909,344  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic loss per share

   ($ 0.60    ($ 0.20    ($ 1.22    ($ 0.15

Diluted loss per share

     (0.60      (0.20      (1.22      (0.15
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 19 of 97


Table of Contents

Potentially dilutive common shares excluded from the above calculations aggregated 100,000 and 682,000 shares as of June 30, 2018 and 2017.

Stock Compensation

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

During the six months ended June 30, 2018 and 2017, the Company issued 98,164 and 258,232 of restricted shares of stock-based compensation awards, and 24,000 and 12,000 shares of other stock-based compensation awards, and recognized $145,000 and $296,000, or $0.01 per share for the 2018 second quarter and six months, and $200,000 and $329,000, or $0.01 and $0.01 per share in the comparable 2017 periods, of non-cash stock-based compensation expense related to the grants. As of June 30, 2018, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $533,000, which is expected to be recognized over the next 12 quarters (see Note 9).

Derivatives

The Company manages its exposure to increases in market rates of interest by periodically purchasing interest rate caps to lock in the cost of funds of its variable-rate debt in the event of a rapid run up in interest rates. The Company entered into contracts to purchase interest rate caps on $30,000,000 of notional value of principal from various multinational banks, with termination dates ranging to December 2018. The caps provide for payments to the Company if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases were generally fully expensed when paid, including $0 for the three and six months ended June 30, 2018 and $19,000 and $19,000 for the comparable 2017 periods, and all are carried at $0 on the balance sheet at June 30, 2018.

Regulatory Capital

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

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for federal deposit insurance, the FDIC ordered that the Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%, and that an adequate allowance for loan losses be maintained. As of June 30, 2018, the Bank’s Tier 1 leverage capital ratio was 14.95%. The Bank’s actual capital amounts and ratios, and the regulatory minimum ratios are presented in the following table.

 

Page 20 of 97


Table of Contents
     Regulatory              

(Dollars in  thousands)

   Minimum     Well-capitalized     June 30, 2018     December 31, 2017  

Common equity tier 1 capital

     —         —       $ 127,258     $ 137,494  

Tier 1 capital

     —         —         153,561       163,797  

Total capital

     —         —         167,344       176,876  

Average assets

     —         —         1,027,419       1,127,087  

Risk-weighted assets

     —         —         1,045,884       995,145  

Leverage ratio (1)

     4.0     5.0     14.9     14.5

Common equity tier 1 capital ratio (2)

     4.5       6.5       12.2       13.8  

Tier 1 capital ratio (3)

     6.0       8.0       14.7       16.5  

Total capital ratio (3)

     8.0       10.0       16.0       17.8  

 

(1)

Calculated by dividing Tier 1 capital by average assets.

(2)

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

(3)

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

In addition, the Bank is subject to a Common Equity Tier 1 capital conservation buffer on top of the minimum risk-based capital ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase by 0.625% each subsequent January 1 until January 1, 2019. Including the buffer, by January 1, 2019, the Bank will be required to maintain the following minimum capital ratios: a Common Equity Tier 1 risk-based capital ratio of greater than 7.0%, a Tier 1 risk-based capital ratio of greater than 8.5% and a total risk-based capital ratio of greater than 10.5%

Recently Issued Accounting Standards

In January 2017, the FASB issued ASU 2017-04 Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of this update is to simplify the subsequent measurement of goodwill, by eliminating step 2 from the goodwill impairment test. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe this update will have a material impact on its financial condition.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. The aftermath of the global economic crisis and the delayed recognition of credit losses associated with loans (and other financial instruments) was identified as a weakness in the application of existing accounting standards. Specifically, because the existing “incurred” loss model delays recognition until it is probable a credit loss was incurred, the FASB explored alternatives that would use more forward-looking information. Under the FASB’s new standard, the concepts used by entities to account for credit losses on financial instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is removed. Loss estimates are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 2019 for public entities and is effective for fiscal years beginning after December 15, 2020 for all other entities, with early adoption permitted. The Company is assessing the impact the update will have on its financial statement, but expects the update to have a significant impact on how the Company expects to account for estimated credit losses on its loans.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for leases classified as operating under GAAP. ASU 2016-02 applies to all entities and is effective for fiscal years beginning after December 15, 2018 for public entities. The Company has assessed the impact the update will have on its financial condition and does not believe this update will have a material impact on its financial condition.

 

Page 21 of 97


Table of Contents

(3) INVESTMENT SECURITIES (Bank Holding Company Accounting)

Fixed maturity securities available for sale at June 30, 2018 consisted of the following:

 

(Dollars in thousands)

   Amortized Cost      Gross
Unrealized
Gains
     Gross Unrealized
Losses
     Fair Value  

Mortgage-backed securities, principally obligations of US federal agencies

   $ 35,924      $ 14      $ (1,025    $ 34,913  

State and municipalities

     10,128        3        (327      9,804  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,052      $ 17      $ (1,352    $ 44,717  
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated market value of investment securities as of June 30, 2018 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)

   Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 3    $ 3

Due after one year through five years

     7,802        7,597  

Due after five years through ten years

     14,272        13,830  

Due after ten years

     23,975        23,287  
  

 

 

    

 

 

 

Total

   $ 46,052      $ 44,717  
  

 

 

    

 

 

 

Information pertaining to securities with gross unrealized losses at June 30, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows.

 

     Less than Twelve Months      Twelve Months and Over  

(Dollars in thousands)

   Gross Unrealized
Losses
     Fair Value      Gross Unrealized
Losses
     Fair Value  

Mortgage-backed securities, principally obligations of US federal agencies

   $ (523    $ 20,798      $ (502    $ 11,975  

State and municipalities

     (164      6,121        (163      3,506  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (687    $ 26,919      $ (665    $ 15,481  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

As of December 31, 2017, under Investment Company Accounting, investment securities made up 0% of the net investments.

 

Page 22 of 97


Table of Contents

(4) LOANS AND ALLOWANCE FOR LOAN LOSSES (Bank Holding Company Accounting)

The following table shows the major classification of loans, inclusive of capitalized loan origination costs, at June 30, 2018 under Bank Holding Company Accounting.

 

(Dollars in thousands)

      

Recreation

   $ 597,348  

Home improvement

     195,876  

Commercial

     80,105  

Medallion

     276,794  
  

 

 

 

Total gross loans

     1,150,123  

Allowance for loan losses

     (21,425
  

 

 

 

Total net loans

   $ 1,128,698  
  

 

 

 

The following table sets forth the activity in the allowance for loan losses for the three months ended June 30, 2018 under Bank Holding Company Accounting.

 

(Dollars in thousands)

      

Allowance for loan losses—beginning balance (1)

   $

Charge-offs:

  

Recreation

     (4,646

Home improvement

     (561

Commercial

      

Medallion

     (6,280
  

 

 

 

Total charge-offs

     (11,487
  

 

 

 

Recoveries

  

Recreation

     1,899  

Home improvement

     239  

Commercial

     4  

Medallion

     194  
  

 

 

 

Total recoveries

     2,336  
  

 

 

 

Net charge-offs

     (9,151

Provision for loan losses (2)

     30,576  
  

 

 

 

Allowance for loan losses—ending balance

   $ 21,425  
  

 

 

 

 

(1)

Beginning balance reflects the transition to Bank Holding Company Accounting by netting previously established unrealized depreciation against the gross loan balances resulting in a starting point of zero for this table.

(2)

Includes $6,663 of unallocated allowance for current and performing medallion loans under 90 days past due, as an additional buffer against future losses, and to conform our methodology to that of Medallion Bank.

The following table sets forth the composition of the allowance for loan losses by type as of June 30, 2018:

 

     Amount      Percentage
of
Allowance
    Allowance as a
Percent of Loan
Category
 

Recreation

   $ 1,963        9     0.33

Home Improvement

     555        3       0.28  

Commercial

     175        1       0.22  

Medallion

     18,732        87       6.77  
  

 

 

    

 

 

   

 

 

 

Total

   $ 21,425        100     1.86
  

 

 

    

 

 

   

 

Page 23 of 97


Table of Contents

The following table presents total nonaccrual loans and foregone interest, substantially all of which is in the medallion portfolio. The decline reflects the chargeoffs of certain loans and their movement to loan collateral in process of foreclosure. The fluctuation in nonaccrual interest foregone is due to past due loans and market conditions.

 

     Bank Holding
Company Accounting
    Investment Company Accounting  

(Dollars in thousands)

   June 30, 2018     December 31, 2017 (1)     June 30, 2017 (2)  

Total nonaccrual loans

   $ 47,904     $ 98,494     $ 122,042  

Interest foregone quarter to date

     770       823       2,248  

Amount of foregone interest applied to principal in the quarter

     400       52       679  

Interest foregone life to date

     8,281       12,485       14,934  

Amount of foregone interest applied to principal life to date

     3,748       3,495       9,711  

Percentage of nonaccrual loans to gross loan portfolio

     4     31     34

 

(1)

Does not include Medallion Bank: nonaccrual loans of $32,668, $1,487 of interest income foregone and $1,221 of foregone interest paid and applied to principal.

(2)

Does not include Medallion Bank: nonaccrual loans of $43,246, $1,379 of interest income foregone and $1,065 of foregone interest paid and applied to principal.

The following presents our performance status of loans as of June 30, 2018 under Bank Holding Company Accounting.

 

(Dollars in  thousands)

   Performing      Non- Performing      Total  

Recreation

   $ 593,177      $ 4,171      $ 597,348  

Home improvement

     195,759        117        195,876  

Commercial

     72,664        7,441        80,105  

Medallion

     238,965        37,829        276,794  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,100,565      $ 49,558      $ 1,150,123  
  

 

 

    

 

 

    

 

 

 

For those loans aged 31-90 days, there is a possibility that their delinquency status will continue to deteriorate and they will subsequently be placed on nonaccrual status and be reserved for, and as such, deemed nonperforming.

The following table provides additional information on attributes of the nonperforming loan portfolio as of June 30, 2018 under Bank Holding Company Accounting.

 

     June 30, 2018      Three Months Ended June 30, 2018  

(Dollars in  thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average Investment
Recorded
     Interest Income
Recognized
 

With no allowance recorded

              

Recreation

   $ —        $ —        $ —        $ —        $ —    

Home improvement

     —          —          —          —          —    

Commercial

     —          —          —          —          —    

Medallion

     —          —             —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with no allowance

   $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 24 of 97


Table of Contents
     June 30, 2018      Three Months Ended June 30, 2018  

(Dollars in  thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average Investment
Recorded
     Interest Income
Recognized
 

With an allowance recorded

 

        

Recreation

   $ 4,171      $ 4,171      $ 145      $ 5,577      $ 125  

Home improvement

     117        117        2        116        —    

Commercial

     7,441        7,441        175        8,256        70  

Medallion

     37,829        37,829        12,069        55,213        114  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with allowance

   $ 49,558      $ 49,558      $ 12,391      $ 69,162      $ 309  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming loans

   $ 49,558      $ 49,558      $ 12,391      $ 69,162      $ 309  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides additional information on attributes of the nonperforming loan portfolio as of December 31, 2017 and June 30, 2017.

 

(Dollars in  thousands)

   Recorded
Investment (1) (2)
     Unpaid Principal
Balance
     Average Recorded
Investment
 

December 31, 2017

        

Medallion(3)

   $ 79,871      $ 82,612      $ 128,671  

Commercial (3)

     18,623        20,491        18,792  

June 30, 2017

        

Medallion(3)

   $ 112,327      $ 114,351      $ 124,084  

Commercial(3)

     9,714        17,403        9,904  

 

(1)

As of December 31, 2017 and June 30, 2017, $20,851, and $43,486 of unrealized depreciation was recorded as a valuation allowance on these loans.

(2)

Interest income of $608 and $1,283 was recognized on loans for the three and six months ended June 30, 2017.

(3)

Included in the unpaid principal balance is unearned paid-in-kind interest on nonaccrual loans of $4,609 and $9,712 as of December 31, 2017 and June 30, 2017, which is included in the nonaccrual disclosures on page 24.

The following tables show the aging of all loans as of June 30, 2018 and December 31, 2017:

 

Bank Holding Company Accounting

   Days Past Due                    Recorded
Investment >
90 Days and

Accruing
 

June 30, 2018

(Dollars in thousands)

   31-60      61-90      91 +      Total      Current      Total (1)  

Recreation

   $ 12,981      $ 3,242      $ 2,402      $ 18,625      $ 554,995      $ 573,620      $ —  

Home improvement

     391        173        115        679        200,882        201,561        —    

Commercial

     492        —          215        707        79,398        80,105        —    

Medallion

     8,517        10,429        12,429        31,375        236,808        268,183        506  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,381      $ 13,844      $ 15,161      $ 51,386      $ 1,072,083      $ 1,123,469      $ 506
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Excludes loan premiums of $12,378 resulting from purchase price accounting and $14,267 of capitalized loan origination costs.

 

Investment Company Accounting

   Days Past Due                           Recorded
Investment >
90 Days and

Accruing
 

December 31, 2017

(Dollars in thousands)

   31-60      61-90      91 +      Total      Current      Total  

Medallion loans

   $ 16,049      $ 12,387      $ 59,701      $ 88,137      $ 140,279      $ 228,416      $ 265  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     —          —          —          —          88,334        88,334        —    

 

Page 25 of 97


Table of Contents

Investment Company Accounting

   Days Past Due                    Recorded
Investment >
90 Days and
Accruing
 

December 31, 2017

(Dollars in thousands)

   31-60      61-90      91 +      Total      Current      Total (1)  

Other secured commercial

     —           —           749        749        1,728        2,477        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     —          —          749        749        90,062        90,811        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,049      $ 12,387      $ 60,450      $ 88,886      $ 230,341      $ 319,227      $ 265  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the troubled debt restructurings which the Company entered into during the three and six months ended June 30, 2018.

 

(Dollars in  thousands)

   Number of Loans      Pre-
Modification
Investment
     Post-
Modification
Investment
 

Medallion loans

     7      $ 2,695      $ 2,695  
  

 

 

    

 

 

    

 

 

 

During the twelve months ended June 30, 2018, five loans modified as troubled debt restructurings were in default and had an investment value of $904,000 as of June 30, 2018.

The following table shows troubled debt restructurings which the Company entered into during the quarter ended June 30, 2017.

 

(Dollars in  thousands)

   Number of Loans      Pre-
Modification
Investment
     Post-
Modification
Investment
 

Medallion loans

     12      $ 8,249      $ 8,175  
  

 

 

    

 

 

    

 

 

 

The following table shows troubled debt restructurings which the Company entered into during the six months ended June 30, 2017.

 

(Dollars in  thousands)

   Number of Loans      Pre-
Modification
Investment
     Post-
Modification
Investment
 

Medallion loans

     47      $ 31,911      $ 31,837  
  

 

 

    

 

 

    

 

 

 

Commercial loans

     2        6,547        6,547  
  

 

 

    

 

 

    

 

 

 

Total

     49      $ 38,458      $ 38,384  
  

 

 

    

 

 

    

 

 

 

During the twelve months ended June 30, 2017, ten loans modified as troubled debt restructurings were in default and had an investment value of $3,503,000 as of June 30, 2017, net of $2,456,000 of unrealized depreciation.

 

Page 26 of 97


Table of Contents

(5) UNREALIZED APPRECIATION (DEPRECIATION) AND REALIZED GAINS (LOSSES) ON INVESTMENTS (Investment Company Accounting)

The following table sets forth the pre-tax change in the Company’s unrealized appreciation (depreciation) on investments under Investment Company Accounting for the three months ended March 31, 2018 and the three and six months ended June 30, 2017.

 

(Dollars in  thousands)

   Medallion
Loans
    Commercial
Loans
    Investments in
Subsidiaries
     Equity
Investments
    Investments
Other
Than Securities
    Total  

Balance December 31, 2017

   ($ 20,338   ($ 513   $ 158,920      $ 3,121     ($ 1,490   $ 139,700  

Net change in unrealized

             

Appreciation on investments

     —         —         38,795        (998     —         37,797  

Depreciation on investments

     (38,170     18       —          —         (1,915     (40,067

Reversal of unrealized appreciation (depreciation) related to realized

             

Gains on investments

     —         —         —          —         —         —    

Losses on investments

     34,747       —         —          —         —         34,747  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance March 31, 2018

   ($ 23,761   ($ 495   $ 197,715      $ 2,123     ($ 3,405   $ 172,177  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(Dollars in thousands)

   Medallion
Loans
    Commercial
Loans
    Investment in
Subsidiaries
    Equity
Investments
    Investment
Securities
     Investments
Other
Than Securities
     Total  

Balance December 31, 2016

   ($ 28,523   ($ 1,378   $ 152,750     $ 3,934     $ —        $ 584      $ 127,367  

Net change in unrealized

                

Appreciation on investments

     —         —         3,751       1,261       —          —          5,012  

Depreciation on investments

     (8,670     (332     —         —         —          —          (9,002

Reversal of unrealized

appreciation (depreciation) related to realized

                

Gains on investments

     —         —         —         (2,093     —          —          (2,093

Losses on investments

     825       —         —         486       —          —          1,311  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance March 31, 2017

   ($ 36,368   ($ 1,710   $ 156,501     $ 3,588     $ —        $ 584      $ 122,595  

Net change in unrealized

                

Appreciation on investments

     —         —         (771     120       —          —          (651

Depreciation on investments

     (12,425     (118     —         —         —          —          (12,543

Reversal of unrealized appreciation (depreciation) related to realized

                

Gains on investments

     —         —         —         —         —          —          —    

Losses on investments

     337       636       —         —         —          —          973  

Other

     —         —         —         —         —          —          —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance June 30, 2017

   ($ 48,456   ($ 1,192   $ 155,730     $ 3,708     $ —        $ 584      $ 110,374  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

The table below summarizes pre-tax components of unrealized and realized gains and losses in the investment portfolio for the three months ended March 31, 2018 and the three and six months ended June 30, 2017 under Investment Company Accounting.

 

Page 27 of 97


Table of Contents
     Three Months Ended        

(Dollars in thousands)

   March 31, 2018     June 30, 2017     Six Months Ended
June 30, 2017
 

Net change in unrealized appreciation (depreciation) on investments

      

Unrealized appreciation

   ($ 998   $ 235     $ 1,493  

Unrealized depreciation

     (38,152     (12,659     (21,661

Net unrealized appreciation on investment in Medallion Bank and other controlled subsidiaries

     29,115       930       9,054  

Realized gains

     —         —         (2,090

Realized losses

     34,747       974       2,285  

Net unrealized losses on investments other than securities and other assets

     (1,915     —         —    
  

 

 

   

 

 

   

 

 

 

Total

   $ 22,797     $ (10,520   $ (10,919
  

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments

      

Realized gains

   $ —       $ 1     $ 2,091  

Realized losses

     (34,747     (974     (2,285

Other gains

     —         2,958       3,002  

Direct recoveries

     2       11       33  

Realized gains on investments other than securities and other assets

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Total

   ($ 34,745   $ 1,996     $ 2,841  
  

 

 

   

 

 

   

 

 

 

 

Page 28 of 97


Table of Contents

(6) MEDALLION BANK

The following note is included for informational purposes as it relates to the prior periods when the Company reported under Investment Company Accounting and as such, was not able to consolidate Medallion Bank’s results.

The following table presents information derived from Medallion Bank’s statement of comprehensive income and other valuation adjustments on other controlled subsidiaries for the three and six months ended June 30, 2017.

 

(Dollars in thousands)

   Three Months
Ended
     Six Months
Ended
 
   June 30, 2017      June 30, 2017  

Statement of comprehensive income

     

Investment income

   $ 26,660      $ 52,989  

Interest expense

     3,186        6,293  
  

 

 

    

 

 

 

Net interest income

     23,474        46,696  

Noninterest income

     37        72  

Operating expenses

     6,650        12,700  
  

 

 

    

 

 

 

Net investment income before income taxes

     16,861        34,068  

Income tax (provision)

     (1,638      (4,095
  

 

 

    

 

 

 

Net investment income after income taxes

     15,223        29,973  

Net realized/unrealized losses of Medallion Bank

     (13,306      (23,728
  

 

 

    

 

 

 

Net increase in net assets resulting from operations of Medallion Bank

     1,917        6,245  

Unrealized depreciation on Medallion Bank (1)

     (592      (620

Net realized/unrealized gains (losses) on controlled subsidiaries other than Medallion Bank

     (395      3,429  
  

 

 

    

 

 

 

Net increase in net assets resulting from operations of Medallion Bank and other controlled subsidiaries

   $ 930      $ 9,054  
  

 

 

    

 

 

 

 

(1)

Unrealized depreciation on Medallion Bank reflects the adjustment to the investment carrying amount to reflect the dividends declared to the Company and the US Treasury, and the fair value adjustments to the carrying amount of Medallion Bank.

The following table presents Medallion Bank’s balance sheet and the net investment in other controlled subsidiaries as of December 31, 2017.

 

(Dollars in  thousands)

   December 31,
2017
 

Loans

   $ 864,819  

Investment securities, at fair value

     43,478  
  

 

 

 

Net investments

     908,297  

Cash

     110,233  

Other assets, net

     58,827  
  

 

 

 

Total assets

   $ 1,077,357  
  

 

 

 

Other liabilities

   $ 3,836  

Due to affiliates

     1,055  

Deposits and other borrowings, including accrued interest payable

     908,236  
  

 

 

 

Total liabilities

     913,127  

Medallion Bank equity (2)

     164,230  
  

 

 

 

Total liabilities and equity

   $ 1,077,357  
  

 

 

 

Investment in other controlled subsidiaries

   $ 11,449  

Total investment in Medallion Bank and other controlled subsidiaries (3)

   $ 302,147  
  

 

 

 

 

(1)

Includes $26,303 of preferred stock issued to the US Treasury under the Small Business Lending Fund Program (SBLF).

(2)

Includes $152,267 of unrealized appreciation on Medallion Bank, in excess of Medallion Bank’s book value as of December 31, 2017.

 

Page 29 of 97


Table of Contents

(7) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows:

 

     Payments Due for the Fiscal Year Ending June 30,     

Bank
Holding
Company
Accounting

June 30,

     Investment
Company
Accounting
December 31,
     Interest  

(Dollars in  thousands)

   2019      2020      2021      2022      2023      Thereafter      2018      2017      Rate (1)  

Deposits

   $ 330,290      $ 255,172      $ 128,143      $ 142,250    $ 40,547      $ —        $ 896,402      $ —          1.91

DZ loan

     96,925        —          —          —          —          —          96,925        99,984        3.75

SBA debentures and borrowings

     3,716        25,881        8,500        —          5,000        35,000        78,097        79,564        3.39

Notes payable to banks

     70,551        2,164        —          —          —          —          72,715        81,450        4.19

Retail notes

     —          —          33,625        —          —          —          33,625        33,625        9.00

Preferred securities

     —          —          —          —          —          33,000        33,000        33,000        4.44

Other borrowings

     8,500        7,078        —          —          —          —          15,578        —          2.26
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 509,982      $ 290,295      $ 170,268      $ 142,250      $ 45,547      $ 68,000      $ 1,226,342      $ 327,623        2.59
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

(1)

Weighted average contractual rate as of June 30, 2018.

(A) DEPOSITS

Deposits are raised through the use of investment brokerage firms who package deposits qualifying for FDIC insurance into pools that are sold to the Bank. The rates paid on the deposits are highly competitive with market rates paid by other financial institutions. Additionally, a brokerage fee is paid, depending on the maturity of the deposits, which averages less than 0.15%. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity. All time deposits are in denominations of less than $250,000 and have been originated through certificates of deposit broker relationships. The table presents time deposits of $100,000 or more by their maturity:

 

(Dollars in  thousands)

   June 30, 2018  

Three months or less

   $ 109,148  

Over three months to six months

     65,750  

Over six months through one year

     155,392  

Over one year

     566,112  
  

 

 

 

Total deposits

   $ 896,402  
  

 

 

 

(B) DZ LOAN

In December 2008, Trust III entered into a loan agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC (DZ loan), which was extended in December 2013 until December 2016, and which has been further extended several times and currently terminates in December 2018. The line was reduced to $150,000,000, and was further reduced in stages to $125,000,000 on July 1, 2016, and remains as an amortizing facility, with $96,925,000 outstanding at June 30, 2018. During 2017 and 2018, the DZ loan was amended several times, for the most part to improve Trust III’s flexibility under the credit facility. Also, see Note 7(H) below.

Borrowings under Trust III’s DZ loan are collateralized by Trust III’s assets. MFC is the servicer of the loans owned by Trust III. The DZ loan includes a borrowing base covenant and rapid amortization in certain circumstances. In addition, if certain financial tests are not met, MFC can be replaced as the servicer. The interest rate with the 2013 extension is a pooled short-term commercial paper rate which approximates LIBOR (30 day LIBOR was 2.09% at June 30, 2018) plus 1.65%.

 

Page 30 of 97


Table of Contents

(C) SBA DEBENTURES AND BORROWINGS

Over the years, the SBA has approved commitments for MCI and FSVC, typically for a four and half year term and a 1% fee, which was paid. During 2017, the SBA restructured FSVC’s debentures with SBA totaling $33,485,000 in principal into a new loan by the SBA to FSVC in the principal amount of $34,024,756 (the SBA Loan). In connection with the SBA Loan, FSVC executed a Note (the SBA Note), with an effective date of March 1, 2017, in favor of SBA, in the principal amount of $34,024,756. The SBA Loan bears interest at a rate of 3.25% per annum, required a minimum of $5,000,000 of principal and interest to be paid on or before February 1, 2018 (which was paid), and requires a minimum of $10,000,000 of principal and interest to be paid on or before February 1, 2019, and all remaining unpaid principal and interest on or before February 1, 2020, the final maturity date. The SBA Loan agreement contains covenants and events of defaults, including, without limitation, payment defaults, breaches of representations and warranties and covenants defaults. As of June 30, 2018, $169,985,000 of commitments had been fully utilized, there were $5,500,000 of commitments available, and $78,097,000 was outstanding, including $29,597,000 under the SBA Note.

(D) NOTES PAYABLE TO BANKS

The Company and its subsidiaries have entered into note agreements with a variety of local and regional banking institutions over the years, as well as other non-bank lenders. The notes are typically secured by various assets of the underlying borrower.

The table below summarizes the key attributes of the Company’s various borrowing arrangements with these lenders as of June 30, 2018.

 

(Dollars in  thousands)

 

Borrower

  # of Lenders
/ Notes
    Note
Dates
    Maturity
Dates
    Type     Note
Amounts
    Balance
Outstanding at
June 30,
2018
    Monthly Payment     Average
Interest
Rate at
June 30,
2018
    Interest
Rate
Index(1)
 

The Company

    6/6       4/11 - 8/14       7/18 - 8/19      





Term
loans and
demand
notes
secured by
pledged
loans (2)
 
 
 
 
 
 
 
  $ 51,217     $ 51,217       Interest(3)       4.54%       Various (2)  

Medallion Chicago

    3/28       11/11 - 12/11       10/16 - 6/19      




Term
loans
secured by
owned
Chicago
medallions (4)
 
 
 
 
 
 
    25,708       21,498      
$181 principal &
interest

 
    3.34%       N/A  
         

 

 

   

 

 

       
          $ 76,925     $ 72,715        
         

 

 

   

 

 

       

 

(1)

At June 30, 2018, 30 day LIBOR was 2.09%, 360 day LIBOR was 2.76%, and the prime rate was 5.00%.

(2)

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

(3)

Various agreements call for remittance of all principal received on pledged loans subject to minimum monthly payments ranging from $0 to $75.

(4)

$12,708 guaranteed by the Company.

(E) RETAIL NOTES

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

(F) PREFERRED SECURITIES

In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bear a variable rate of interest of 90 day LIBOR (2.34% at June 30, 2018) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor. At June 30, 2018, $33,000,000 was outstanding on the preferred securities.

 

Page 31 of 97


Table of Contents

(G) OTHER BORROWINGS

In November and December 2017, RPAC amended the terms of various promissory notes with affiliate Richard Petty (refer to Note 13 for more details). At December 31, 2017, the total outstanding on these notes was $7,007,894 at a 2.00% annual interest rate compounded monthly and due March 31, 2020. As of June 30, 2018, $7,078,000 was outstanding on these notes. Additionally, RPAC has a short term promissory note to Travis Burt, an unrelated party, for $500,000 due on December 31, 2018.

In June 2018, the Company issued federal funds of $8,000,000 at a 2.50% interest rate that was repaid in July 2018.

(H) COVENANT COMPLIANCE

Certain of the Company’s debt agreements contain restrictions that require the Company and its subsidiaries to maintain certain financial ratios, including debt to equity and minimum net worth. The Company was not in compliance with a financial covenant in the DZ loan agreement as of June 30, 2018. The Company is currently in the process of working with DZ Bank to amend such covenant in the DZ loan agreement. Historically the Company has received approvals for similar amendments. While there can be no assurance that it will be received, the Company has received preliminary indication from DZ Bank that it will obtain approval for such an amendment. Except as previously set forth, the Company is in compliance with such restrictions as of June 30, 2018.

(8) INCOME TAXES

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

The following table sets forth the significant components of our deferred and other tax assets and liabilities as of June 30, 2018 and December 31, 2017.

 

(Dollars in  thousands)

   Bank Holding Company
Accounting
June 30, 2018
     Investment Company
Accounting
December 31, 2017
 

Goodwill and other intangibles/unrealized gain on investments in Medallion Bank

   ($ 46,089    ($ 35,297

Provision for loan losses/unrealized losses on loans and nonaccrual interest

     31,152        10,071  

Net operating loss carryforwards (1)

     2,133        615  

Unrealized gains on investments in other controlled subsidiaries

     —          (3,617

Unrealized gains on investments other than securities

     —          (1,395

Accrued expenses, compensation, and other

     1,218        782  

Unrealized gains on investments and other assets

     (3,958      (542
  

 

 

    

 

 

 

Total deferred tax liability

     (15,544      (29,383

Valuation allowance

     (108      (39
  

 

 

    

 

 

 

Deferred tax liability, net

     (15,652      (29,422

Taxes receivable

     19,112        16,886  
  

 

 

    

 

 

 

Net deferred and other tax assets (liabilities)

   $ 3,460      ($ 12,536
  

 

 

    

 

 

 

 

(1)

As of June 30, 2018, the Company had $11,148 of net operating loss carryforwards that expire at various dates between December 31, 2026 and December 31, 2035.

The components of our tax benefit for the three and six months ended June 30, 2018 and 2017 were as follows.

 

     Three Months Ended June 30,      Six Months Ended June 30,  

(Dollars in thousands)

   2018      2017      2018      2017  

Current

           

Federal

   $ 418      $ 780      $ 6,313      $ 1,549  

State

     58        185        1,240        363  

 

Page 32 of 97


Table of Contents
     Three Months Ended June 30,      Six Months Ended June 30,  

(Dollars in thousands)

   2018      2017      2018      2017  

Deferred

           

Federal

     2,919        4,785        (972      5,666  

State

     626        1,268        (1,920      1,412  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net benefit for income taxes

   $ 4,021      $ 7,018      $ 4,661      $ 8,990  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents a reconciliation of statutory federal income tax benefit to consolidated actual income tax benefit reported in net income/net increase in net assets for the three and six months ended June 30, 2018 and 2017.

 

     Three Months Ended June 30,      Six Months Ended June 30,  

(Dollars in thousands)

   2018      2017      2018      2017  

Statutory Federal Income tax benefit at 21% (35% in 2017)

   $ 3,971      $ 4,135      $ 7,229      $ 4,437  

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

     598        652        1,101        699  

Appreciation of Medallion Bank

     —          537        (1,974      2,061  

Utilization of carry forwards

     (663      1,338        (663      2,256  

Change in effective state income tax rate

     —          —          (1,358      —    

Other

     115        356        326        (463
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income tax benefit

   $ 4,021      $ 7,018      $ 4,661      $ 8,990  
  

 

 

    

 

 

    

 

 

    

 

 

 

On December 22, 2017, the US Government signed into law the “Tax Cuts and Jobs Act” which, starting in 2018, reduced the Company’s corporate statutory income tax rate from 35% to 21%, but eliminated or increased certain permanent differences.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible pursuant to ASC 740. The Company considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company’s evaluation of the realizability of deferred tax assets must consider both positive and negative evidence. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. Based upon these considerations, the Company has determined the valuation allowance as of June 30, 2018.

The Company has filed tax returns in many states. Federal, New York State, New York City, and Utah tax filings of the Company for the tax years 2014 through the present are the more significant filings that are open for examination. Currently the Company and the Bank are undergoing various state exams covering the years 2009 to 2011 and 2013 to 2016.

(9) STOCK OPTIONS AND RESTRICTED STOCK

The Company has a stock option plan (2006 Stock Option Plan) available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and the Company’s shareholders on June 16, 2006, provided for the issuance of a maximum of 800,000 shares of common stock of the Company. No additional shares are available for issuance under the 2006 Stock Option Plan. The 2006 Stock Option Plan is administered by the Compensation Committee of the Board of Directors. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. The term and vesting periods of the options are determined by the Compensation Committee, provided that the maximum term of an option may not exceed a period of ten years.

The Company’s Board of Directors approved the 2018 Equity Incentive Plan (2018 Plan), which was approved by the Company’s shareholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to the Company’s employees, including options, restricted stock, stock appreciation rights, etc. A total of 1,494,558 shares of the Company’s common stock are issuable under the 2018 Plan, and 1,470,558 remained issuable as of June 30, 2018. Awards under the 2018 Plan are subject to certain limitations as set forth in the 2018 Plan, which will terminate when all shares of common stock authorized for delivery have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2018 Plan, whichever first occurs.

The Company’s Board of Directors approved the 2015 Employee Restricted Stock Plan (2015 Restricted Stock Plan) on February 13, 2015, which was approved by the Company’s shareholders on June 5, 2015. The 2015 Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC on March 1, 2016. The terms of 2015 Restricted Stock Plan provide for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock which, at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to

 

Page 33 of 97


Table of Contents

transferability until such forfeiture restrictions have lapsed. A total of 700,000 shares of the Company’s common stock are issuable under the 2015 Restricted Stock Plan, and 236,224 remained issuable as of June 15, 2018. Effective June 15, 2018, the 2018 Plan was approved, and these remaining shares were rolled into the 2018 Plan. Awards under the 2015 Restricted Stock Plan are subject to certain limitations as set forth in the 2015 Restricted Stock Plan. The 2015 Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the 2015 Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2015 Restricted Stock Plan, whichever first occurs.

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

The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan (the Amended Director Plan) on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock were issuable under the Amended Director Plan. No additional shares are available for issuance under the Amended Director Plan. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company will grant options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board of Directors, with an adjustment for directors who are elected to serve less than a full term. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. Options granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options may not exceed ten years.

Additional shares are only available for future issuance under the 2018 Plan. At June 30, 2018, 129,666 options on the Company’s common stock were outstanding under the 2006 Stock Option Plan, and 2015 Director Plan, of which 76,000 options were exercisable, and there were 208,008 unvested shares of the Company’s common stock outstanding under the 2015 Restricted Stock Plan.

The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumption categories are used to determine the value of any option grants.

 

     Six Months Ended June 30,  
     2018     2017  

Risk free interest rate

     2.82     1.84

Expected dividend yield

     4.86       7.39  

Expected life of option in years (1)

     6.00       6.00  

Expected volatility (2)

     30.00       30.00  

 

(1)

Expected life is calculated using the simplified method.

(2)

We determine our expected volatility based on our historical volatility.

The following table presents the activity for the stock option programs for the 2018 quarters and the 2017 full year.

 

     Number of Options      Exercise
Price Per
Share
     Weighted
Average
Exercise Price
 

Outstanding at December 31, 2016

     345,518      $ 7.10-13.84      $ 9.67  

Granted

     29,666        2.14-2.61      2.35  

Cancelled

     (54,558      10.76-11.21        10.94  

Exercised (1)

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2017

     320,626        2.14-13.84        8.78  

 

Page 34 of 97


Table of Contents
     Number of Options      Exercise
Price Per
Share
     Weighted
Average
Exercise Price
 

Granted

     —          —          —    

Cancelled

     —          —          —    

Exercised (1)

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Outstanding at March 31, 2018

     320,626        2.14-13.84        8.78  

Granted

     24,000        5.58        5.58  

Cancelled

     (214,960      9.22-9.24        9.22  

Exercised (1)

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2018 (2)

     129,666      $ 2.14-13.84      $ 7.45  

Options exercisable at June 30, 2018 (2)

     76,000      $ 2.22-13.84      $ 9.78  
  

 

 

    

 

 

    

 

 

 
(1)

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at the exercise date and the related exercise price of the underlying options, was $0 and $0 for the 2018 and 2017 second quarter and six months.

(2)

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at June 30, 2018 and the related exercise price of the underlying options, was $93,000 for outstanding options and $13,000 for exercisable options as of June 30, 2018. The remaining contractual life was 7.17 years for outstanding options and 5.59 years for exercisable options at June 30, 2018.

The following table presents the activity for the restricted stock programs for the 2018 quarters and the 2017 full year.

 

     Number of Shares      Exercise
Price Per
Share
     Weighted
Average
Exercise Price
 

Outstanding at December 31, 2016

     167,703      $ 3.95-13.46      $ 8.88  

Granted

     327,251        2.06-3.93        2.48  

Cancelled

     (8,988      2.14-10.08        3.07  

Vested (1)

     (77,384      9.08-13.46        11.09  
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2017

     408,582        2.06-10.38        3.45  

Granted

     97,952        4.39        4.39  

Cancelled

     (2,226      3.93-9.08        5.86  

Vested (1)

     (296,313      2.06-10.38        3.24  
  

 

 

    

 

 

    

 

 

 

Outstanding at March 31, 2018

     207,995        2.06-7.98        4.16  

Granted

     212        3.93        3.93  

Cancelled

     (199      3.93        3.93  

Vested (1)

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2018 (2)

     208,008      $ 2.06-13.84      $ 7.45  
  

 

 

    

 

 

    

 

 

 

 

(1)

The aggregate fair value of the restricted stock vested was $0 and $1,209,000 for the three and six months ended June 30, 2018, and was $15,000 and $151,000 for the comparable 2017 periods.

(2)

The aggregate fair value of the restricted stock was $1,140,000 as of June 30, 2018. The remaining vesting period was 1.75 years at June 30, 2018.

The following table presents the activity for the unvested options outstanding under the plans for the quarter ended June 30, 2018.

 

     Number of
Options
     Exercise Price
Per Share
     Weighted Average Exercise
Price
 

Outstanding at December 31, 2017 and March 31, 2018

     46,666      $ 2.14-9.38      $ 4.52  

Granted

     24,000        5.58        5.58

Cancelled

     —          —          —    

Vested

     (17,000      2.22-9.38        7.16
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2018

     53,666      $ 2.14-7.10      $ 4.16  
  

 

 

    

 

 

    

 

 

 

 

Page 35 of 97


Table of Contents

The intrinsic value of the options vested was $14,000 for the three and six months ended June 30, 2018.

(10) SEGMENT REPORTING (Bank Holding Company Accounting)

Under Bank Holding Company Accounting, the Company has six business segments, which include four lending and two non-operating segments, which are reflective of how Company management makes decisions about its business and operations.

Prior to April 2, 2018, the Company had one business segment, its lending and investing operations. This segment originated and serviced medallion, secured commercial and consumer loans, and invested in both marketable and nonmarketable securities.

The four lending segments reflect the main types of lending performed at the Company, which are recreation, home improvement, commercial, and medallion. The recreation and home improvement lending segments are conducted by the Bank in all fifty states, with the highest concentrations in Texas, California, and Florida, at 17%, 11%, and 11% of loans outstanding and no other states over 10%. The recreation lending segment is a consumer finance business that works with third-party dealers and financial service providers for the purpose of financing RVs, boats, and other consumer recreational equipment. The home improvement lending segment works with contractors and financial service providers to finance residential home improvements concentrated in pools, solar panels, and roofing, at 38%, 15%, 11% of total loans outstanding, and no other product lines over 10%. The commercial lending segment focuses on enterprise wide industries, including manufacturing, retail trade, information, recreation and various other industries, in which 47% of these loans are made in the Midwest. The medallion lending segment arose in connection with the financing of the taxicab medallions, taxicabs, and related assets, of which 88% were in New York City as of June 30, 2018.

In addition, our non-operating segments include RPAC which is a race car team and our corporate and other segment which includes items not allocated to our operating segments such as investment securities, equity investments, intercompany eliminations, and other corporate elements.

The following table presents segment data at June 30, 2018 and for the three months then ended.

 

     Consumer Lending     Commercial
Lending
    Medallion
Lending
    RPAC     Corp.
and
Other
    Consolidated  
(dollars in thousands)    Recreation     Home
Improvement
 

Total interest income

   $ 22,132     $ 4,637     $ 2,322     $ 3,189     $ —       $ 364     $ 32,644  

Total interest expense

     2,136       739       655       3,373       41       981       7,925  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

     19,996       3,898       1,667       (184     (41     (617     24,719  

Provision for loan losses

     4,710       877       175       24,814                   30,576  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after loss provision

     15,286       3,021       1,492       (24,998     (41     (617     (5,857

Sponsorship and race winning

     —         —         —         —         5,228       —         5,228  

Race team related expenses

     —         —         —         —         (2,540     —         (2,540

Other income (expense)

     (5,520     (1,685     (1,110     (2,811     (2,237     (1,373     (14,736
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before taxes

     9,766       1,336       382       (27,809     410       (1,990     (17,905

Income tax benefit (provision)

     (2,162     (296     (85     6,157       (43     450       4,021  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss) after tax

   $ 7,604     $ 1,040     $ 297     ($ 21,652   $ 367     ($ 1,540   ($ 13,884
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data

              

Total loans net

   $ 595,385     $ 195,321     $ 79,930     $ 258,062     $ —       $ —       $ 1,128,698  

Total assets

     599,960       206,298       109,261       386,225       37,861       194,924       1,534,529  

Total funds borrowed

     456,955       159,913       68,224       402,955       7,578       130,717       1,226,342  

 

Page 36 of 97


Table of Contents

Selected Financial Ratios

              

Return on assets

     5.32     2.13     1.05     (21.69 %)      3.89     (2.99 %)      (4.53 %) 

Return on equity

     23.33       9.74       2.53       NM       22.38       (8.15     (22.00

Interest yield

     15.62       10.02       10.54       4.43       N/A       N/A       11.23  

Net interest margin

     14.12       8.43       7.57       (0.26     N/A       N/A       8.57  

Reserve coverage

     0.33       0.28       0.22       6.77       N/A       N/A       1.86  

Delinquency ratio

     0.40       0.06       0.27       4.49       N/A       N/A       1.32  

Charge off ratio

     0.82       0.30       0.00       2.18       N/A       N/A       3.19  

(11) OTHER OPERATING EXPENSES (Investment Company Accounting)

The major components of other operating expenses were as follows:

 

(dollars in thousands)

   For the Three
Months Ended
March 31, 2018
     For the Three
Months Ended
June 30, 2017
     For the Six
Months Ended
June 30, 2017
 

Directors’ fees

   $ 89      $ 114      $ 129  

Miscellaneous taxes

     120        69        87  

Computer expenses

     74        65        125  

Depreciation and amortization

     23        24        49  

Other expenses

     281        215        406  
  

 

 

    

 

 

    

 

 

 

Total other operating expenses

   $ 587      $ 487      $ 796  
  

 

 

    

 

 

    

 

 

 

(12) SELECTED FINANCIAL RATIOS AND OTHER DATA (Investment Company Accounting)

The following table provides selected financial ratios and other data for the three months ended March 31, 2018 and June 30, 2017 and the six months ended June 30, 2017 under Investment Company Accounting.

 

     Three Months Ended,      Six Months Ended,  

(Dollars in thousands, except per share data)

   March 31, 2018      June 30, 2017      June 30, 2017  

Net share data

        

Net asset value at the beginning of the period

   $ 11.80      $ 11.91      $ 11.91  

Net investment loss

     (0.15      (0.14      (0.19

Income tax benefit

     0.03        0.29        0.37  

Net realized gains (losses) on investments

     (1.44      0.08        0.12  

Net change in unrealized appreciation (depreciation) on investments

     0.94        (0.43      (0.45
  

 

 

    

 

 

    

 

 

 

Net decrease in net assets resulting from operations

     (0.62      (0.20      (0.15

Issuance of common stock

     (0.03      (0.06      (0.11

Repurchase of common stock

     —          —          —    

Net investment income

     —          —          —    

Return of capital

     —          —          —    

Net realized gains on investments

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total distributions

     —          —          —    

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total decrease in net asset value

     (0.65      (0.26      (0.26
  

 

 

    

 

 

    

 

 

 

Net asset value at the end of the period (1)

   $ 11.15      $ 11.65      $ 11.65  
  

 

 

    

 

 

    

 

 

 

Per share market value at beginning of period

   $ 3.53      $ 1.98      $ 3.02  

 

Page 37 of 97


Table of Contents
     Three Months Ended,     Six Months Ended,  

(Dollars in thousands, except per share data)

   March 31, 2018     June 30, 2017     June 30, 2017  

Per share market value at end of period

     4.65       2.39       2.39  

Total return (2)

     129     83     (42 %) 
  

 

 

   

 

 

   

 

 

 

Ratios/supplemental data

      

Total shareholders’ equity (net assets)

   $ 272,437     $ 282,739     $ 282,739  

Average net assets

   $ 284,021     $ 287,153     $ 286,123  

Total expense ratio (3) (4)

     10.02     0.10     2.58

Operating expenses to average net assets (4)

     5.87       5.14       4.16  

Net investment loss after income taxes to average net assets (4)

     (4.61 %)      (1.81 %)      (1.22 %) 

 

(1)

Includes $0 and $0 of undistributed net investment income per share and $0 and $0 of undistributed net realized gains per share as of March 31, 2018 and June 30, 2017.

(2)

Total return is calculated by dividing the change in market value of a share of common stock during the period, assuming the reinvestment of distributions on the payment date, by the per share market value at the beginning of the period.

(3)

Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average net assets.

(4)

MSC has assumed certain of the Company’s servicing obligations, and as a result, servicing fee income of $1,290 and $1,295, and operating expenses of $1,150 and $925, which formerly were the Company’s were now MSC’s for the three months ended March 31, 2018 and June 30, 2017 and were $2,608 of servicing fee income, and $2,092 of operating expenses for the six months ended June 30, 2017. Excluding the impact of the MSC amounts, the total expense ratio, operating expense ratio, and net investment income ratio would have been 11.75%, 6.88%, and 7.51% in the March 31, 2018 quarter, 1.66%, 6.44%, and (1.56%) in the June 30, 2017 quarter, and 4.25%, 5.64%, and (1.22%) in the six months ended June 30, 2017.

(13) RELATED PARTY TRANSACTIONS

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

Jeffrey Rudnick, the son of one of the Company’s directors, is an officer of LAX Group, LLC (LAX), one of the Company’s equity investments. Mr. Rudnick receives a salary from LAX of $172,000 per year, and certain equity from LAX consisting of 10% ownership in LAX Class B stock, vesting at 3.34% per year; 5% of any new equity raised from outside investors at a valuation of $1,500,000 or higher; and 10% of LAX’s profits as a year end bonus. In addition, Mr. Rudnick provides consulting services to the Company directly for a monthly retainer of $4,200.

The Company’s consolidated subsidiary RPAC, has an agreement with minority shareholder Richard Petty, in which they make an annual payment of $700,000 per year for services provided to the entity. In addition, RPAC has a note payable to a trust controlled by Petty of $7,078,000 that earns interest at an annual rate of 2% as of June 30, 2018.

The Company and MSC serviced $311,988,000 and $318,961,000 of loans for Medallion Bank at December 31, 2017 and June 30, 2017. Under Investment Company Accounting, included in net investment income were amounts as described in the table below that were received from Medallion Bank for services rendered in originating and servicing loans, and also for reimbursement of certain expenses incurred on their behalf.

The Company had assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned entity that had been unconsolidated under Investment Company Accounting. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed and collected from Medallion Bank by MSC. As a result, in the three months ended March 31, 2018 and the three and six months ended June 30, 2017, $1,290,000, $1,295,000 and $2,608,000 of servicing fee income were earned by MSC.

 

Page 38 of 97


Table of Contents

The following table summarizes the net revenues received from Medallion Bank not eliminated under Investment Company Accounting.

 

     Three Months Ended,      Six Months Ended,
June 30, 2017
 

(Dollars in thousands)

   March 31, 2018      June 30, 2017  

Reimbursement of operating expenses

   $ 250      $ 227      $ 454  

Loan origination and servicing fees

     6        3        3  
  

 

 

    

 

 

    

 

 

 

Total other income

   $ 256      $ 230      $ 457  
  

 

 

    

 

 

    

 

 

 

The Company had a loan to Medallion Fine Art, Inc. in the amount of $999,000 as of December 31, 2017, which was repaid in full during the 2018 first quarter. The loan bore interest at a rate of 12%, all of which was paid in kind. During 2017, the Company advanced $0, and was repaid $2,015,000 with respect to this loan. Additionally, the Company recognized $10,000 of interest income not eliminated for the three and six months ended June 30, 2018, and $44,000 and $126,000 in the three and six months ended June 30, 2017 with respect to this loan.

The Company and MCI have loans to RPAC, an affiliate of Medallion Motorsports LLC, which totaled $16,472,000 as of December 31, 2017 and under Investment Company Accounting had not been eliminated, and which were placed on nonaccrual during 2017. These loans have been eliminated in consolidation for the three months ended as of June 30, 2018. The loans bear interest at 2%, inclusive of cash and paid in kind interest. The Company and MCI recognized $0 of interest income for the three months ended March 31, 2018, and $118,000 and $208,000 for the three and six months ended June 30, 2017 with respect to these loans.

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

(a) Cash—Book value equals market value.

(b) Equity securities—The Company’s equity securities are recorded at cost less impairment, which approximated fair value.

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

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

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

(f) Commitments to extend credit—The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At June 30, 2018 and December 31, 2017, the estimated fair value of these off-balance-sheet instruments was not material.

 

Page 39 of 97


Table of Contents

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

 

     Bank Holding Company Accounting
June 30, 2018
     Investment Company Accounting
December 31, 2017
 

(Dollars in  thousands)

   Carrying Amount      Fair Value      Carrying Amount      Fair Value  

Financial assets

           

Cash and federal funds sold (1)

   $ 35,581      $ 35,581      $ 12,690      $ 12,690  

Equity investments

     10,773        10,773        —          —    

Investment securities

     44,717        44,717        —          —    

Loans receivable

     1,128,698        1,128,698        —          —    

Investments

     —          —          610,135        610,135  

Accrued interest receivable (2)

     7,360        7,360        547        547  

Financial liabilities

           

Funds borrowed (3)

     1,226,342        1,226,694        327,623        330,084  

Accrued interest payable

     4,246        4,246        3,831        3,831  

 

(1)

Categorized as level 1 within the fair value hierarchy.

(2)

Categorized as level 3 within the fair value hierarchy.

(3)

As of June 30, 2018 and December 31, 2017, publicly traded retail notes traded at a premium to par of $352 and $2,461.

(15) FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

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

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

 

  A)

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

 

  B)

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

 

  C)

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

 

Page 40 of 97


Table of Contents
  D)

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

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

A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur. The following paragraphs describe the sensitivity of the various level 3 valuations to the factors that are relevant in their valuation analysis under both Bank Holding Company Accounting (applicable as of June 30, 2018 and for the quarter then ended) and Investment Company Accounting (applicable to prior periods).

Bank Holding Company Accounting

Commencing with the quarter ended June 30, 2018, equity investments are recorded at cost and are evaluated for impairment periodically.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2018.

 

Bank Holding Company Accounting

(Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Equity investments

   $ —      $ —      $ 10,773      $ 10,773  

Available for sale investment securities(1)

     —          44,717        —          44,717  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —      $ 44,717      $ 10,773      $ 55,490  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Total unrealized losses of $255, net of tax, was included in accumulated other comprehensive income (loss) for the three months ended June 30, 2018 related to these assets.

Investment Company Accounting

Medallion loans are primarily collateral-based lending, whereby the collateral value exceeds the amount of the loan, providing sufficient excess collateral to protect against losses to the Company. As a result, the initial valuation assessment is that as long as the loan is current and performing, its fair value approximates the par value of the loan. To the extent a loan becomes nonperforming, the collateral value has been adequate to result in a complete recovery. In a case where the collateral value was inadequate, an unrealized loss would be recorded to reflect any shortfall. Collateral values for medallion loans are typically obtained from transfer prices reported by the regulatory agency in a particular local market (e.g. New York City Taxi and Limousine Commission). Those portfolios had historically been at very low loan to collateral value ratios, and as a result, historically have not been highly sensitive to changes in collateral values. Over the last few years, as medallion collateral values have declined, the impact on the Company’s valuation analysis has become more significant, which could result in a significantly lower fair value measurement.

The mezzanine and other secured commercial portions of the commercial loan portfolio are a combination of cash flow and collateral based lending. The initial valuation assessment is that as long as the loan is current and performing, its fair value approximates the par value of the loan. If a loan becomes nonperforming, an evaluation is performed which considers and analyzes a variety of factors which may include the financial condition and operating performance of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience, the relationships between current and projected market rates and portfolio rates of interest and maturities, as well as general market trends for businesses in the same industry. Since each individual nonperforming loan has its own unique attributes, the factors analyzed, and their relative importance to each valuation analysis, differ between each asset, and may differ from period to period for a particular asset. The valuation is highly sensitive to changes in the assumptions used. To the extent that any assumption in the analysis changes significantly from one period to another, that change could result in a significantly lower or higher fair market value measurement. For example, if a borrower’s valuation was determined primarily on the cash flow generated from their business, then if that cash flow deteriorated significantly from a prior period valuation, that could have a material impact on the valuation in the current period.

 

Page 41 of 97


Table of Contents

The investment in Medallion Bank was subject to a thorough valuation analysis as described previously, and on at least an annual basis, the Company also received an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value. The Company determined whether any factors gave rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013, and the lack of any new charter issuances since the moratorium’s expiration. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments In the 2015 second quarter, the Company first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the 2016 third quarter there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016, $7,489,000 was recorded in 2017 and $39,826,000 was recorded in 2018.

Investments in controlled subsidiaries, other than Medallion Bank, equity investments, and investments other than securities were valued similarly, while also considering available current market data, including relevant and applicable market trading and transaction comparables, the nature and realizable value of any collateral, applicable interest rates and market yields, the portfolio company’s ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, and borrower financial analysis, among other factors. As a result of this valuation process, the Company used the actual results of operations of the controlled subsidiaries as the best estimate of changes in fair value, in most cases, and records the results as a component of unrealized appreciation (depreciation) on investments. For the balance of controlled subsidiary investments, equity investments, and investments other than securities positions, the result of the analysis resulted in changes to the value of the position if there is clear evidence that its value has either decreased or increased in light of the specific facts considered for each investment. The valuation is highly sensitive to changes in the assumptions used. To the extent that any assumption in the analysis changes significantly from one period to another, that change could result in a significantly lower or higher fair market value measurement. For example, if an investee’s valuation was determined primarily on the cash flow generated from their business, then if that cash flow deteriorated significantly from a prior period valuation, that could have a material impact on the valuation in the current period.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2017.

 

Investment Company Accounting

(Dollars in  thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —      $ —      $ 208,279      $ 208,279  

Commercial loans

     —          —          90,188        90,188  

Investments in Medallion Bank and other controlled subsidiaries

     —          —          302,147        302,147  

Equity investments

     —          —          9,521        9,521  

Investments other than securities

     —          —          7,450        7,450  

Other assets

     —          —          339        339  
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in level 3 investments as of December 31, 2017 is primarily the investment in Medallion Bank, as well as other consolidated subsidiaries such as MSC, and other investments detailed in the consolidated summary schedule of investments following these footnotes. Included in level 3 equity investments are unregistered shares of common stock in a publicly-held company, as well as certain private equity positions in non-marketable securities.

 

Page 42 of 97


Table of Contents

The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilities for the quarter ended June 30, 2018, under Bank Holding Company Accounting, and for the quarters ended March 31, 2018 and June 30, 2017 and the six months ended June 30, 2017 under Investment Company Accounting.

 

(Dollars in  thousands)

   Equity
Investments
 

March 31, 2018

   $ 9,458  

Gains (losses) included in earnings

     (374

Purchases, investments, and issuances

     529  

Sales, maturities, settlements, and distributions

     (217

Transfers in (1)

     1,377  
  

 

 

 

June 30, 2018

   $ 10,773  
  

 

 

 

Amounts related to held assets(2)

   ($ 374
  

 

 

 

 

(1)

Represents the removal of RPAC Racing investments eliminated in consolidation as well as the transfer of LAX from controlled subsidiaries during the 2018 second quarter.

(2)

Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2018.

 

(Dollars in  thousands)

   Medallion
Loans
    Commercial
Loans
    Investments in
Medallion
Bank & Other
Controlled
Subsidiaries
    Equity
Investments
    Investments
Other Than
Securities
    Other
Assets
 

December 31, 2017

   $ 208,279     $ 90,188     $ 302,147     $ 9,521     $ 7,450     $ 339  

Gains (losses) included in earnings

     (38,190     (8     29,143       (993     (1,915     —    

Purchases, investments, and issuances

     7       7,252       462       935       —         —    

Sales, maturities, settlements, and distributions

     (8,941     (3,812     (583     (5     —         —    

Transfers in (out)

     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2018

   $ 161,155     $ 93,620     $ 331,169     $ 9,458     $ 5,535     $ 339  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   ($ 38,190   ($ 10   $ 29,143     ($ 993   ($ 1,915   $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of March 31, 2018.

 

(Dollars in  thousands)

   Medallion
Loans
    Commercial
Loans
    Investments in
Medallion
Bank & Other
Controlled
Subsidiaries
    Equity
Investments
    Investments
Other Than
Securities
     Other
Assets
 

March 31, 2017

   $ 250,976     $ 73,748     $ 300,886     $ 9,640     $ 9,510      $ 354  

Gains (losses) included in earnings

     (12,452     (109     930       2,894       —          —    

Purchases, investments, and issuances

     320       7,720       402       856       —          —    

Sales, maturities, settlements, and distributions

     (5,429     (3,267     (399     (3,074     —          —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2017

   $ 233,415     $ 78,092     $ 301,819     $ 10,316     $ 9,510      $ 354  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Amounts related to held assets(1)

   ($ 12,426   ($ 118   $ 930     $ 120     $ —        $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)

Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2017.

 

Page 43 of 97


Table of Contents

(Dollars in  thousands)

   Medallion
Loans
    Commercial
Loans
    Investments in
Medallion
Bank & Other
Controlled
Subs
    Equity
Investments
    Investments
Other Than
Securities
     Other
Assets
 

December 31, 2016

   $ 266,816     $ 83,634     $ 293,360     $ 8,407     $ 9,510      $ 354  

Gains (losses) included in earnings

     (21,147     (403     9,054       4,155       —          —    

Purchases, investments, and issuances

     320       7,816       402       856       —          —    

Sales, maturities, settlements, and distributions

     (12,574     (12,955     (997     (3,102     —          —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2017

   $ 233,415     $ 78,092     $ 301,819     $ 10,316     $ 9,510      $ 354  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Amounts related to held assets(1)

   ($ 21,095   ($ 450   $ 9,054     $ 1,381     $ —        $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)

Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2017.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2018.

 

2018 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Impaired loans

   $ —        $ —        $ 49,558      $ 49,558  

Loan collateral in process of foreclosure

           60,052        60,052  

Other receivables

           5,500        5,500  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 115,110      $ 115,110  
  

 

 

    

 

 

    

 

 

    

 

 

 

Significant Unobservable Inputs

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

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of June 30, 2018 were as follows under Bank Holding Company Accounting.

 

(Dollars in  thousands)