UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 20172018
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 number814-00188001-37747
MEDALLION FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE | 04-3291176 | |
(State of Incorporation) | (IRS Employer Identification No.) |
437 MADISON AVENUE, 38th Floor, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212)328-2100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act
Common Stock, par value $0.01 per share
(Title of class)Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:Act. YES ☐ NO ☒
Indicate by check mark whether the Registrantregistrant (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 Registrantregistrant 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 Registrantregistrant 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 RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES ☐☒ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K ☐10-K. ☒
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (check one):
Large | ☐ | Accelerated | ☒ | |||
Non | ☐ | Smaller | ☒ | |||
Emerging | ☐ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ActAct. ☐
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the voting common equity held bynon-affiliates of the registrant, computed by reference to the last reported price at which the stock was sold on June 30, 201729, 2018, was $48,849,597.$111,869,794.
The number of outstanding shares of registrant’s Common Stock,common stock, par value $0.01, as of March 13, 201811, 2019 was 24,439,957.24,433,178.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for its 20182019 Annual Meeting of Shareholders, which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscalyear-end of December 31, 2017,2018, are incorporated by reference into Part III of this formForm10-K10-K.
MEDALLION FINANCIAL CORP.
20172018 FORM10-K ANNUAL REPORT
CERTIFICATIONS
The following discussion should be read in conjunction with our financial statements and the notes to those statements and other financial information appearing elsewhere in this report.
This report contains forward-looking statements relating to future events and future performance applicable to us within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions,
or future strategies that are signified by the words expects, anticipates, intends, believes, or similar language. ActualIn connection with certain forward-looking statements contained in this Form10-K and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results couldto differ materially from those anticipatedset forth in any such forward-looking statements. The forward-looking statements contained in this Form10-K were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict, and many of which are beyond control of the Company. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statements. We caution investors that ourThe statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form10-K should consider these facts in evaluating the information contained herein. In addition, the business and financial performanceoperations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form10-K. The inclusion of the forward-looking statements contained in this Form10-K should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form10-K will be achieved. In light of the foregoing, readers of this Form10-K are cautioned not to place undue reliance on the forward-looking statements contained herein. You should consider these risks and uncertainties.those described under Risk Factors below and others that are detailed in this Form10-K and other documents that the Company files from time to time with the Securities and Exchange Commission, including quarterly reports onForm 10-Q and any current reports onForm 8-K.
ITEM 1. | OUR BUSINESS |
We, Medallion Financial Corp. or the Company, are aclosed-end,non-diversified management investment finance company, organized as a Delaware corporation. We have electedcorporation, that includes Medallion Bank, our primary operating subsidiary. Effective April 2, 2018, following authorization by our shareholders, we withdrew our previous election to be treatedregulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act, although as described below, expectAct. Prior to withdraw from this status on or about April 1, 2018. We are such time, we werea specialty financeclosed-end, non-diversified management investment company that hashad elected to be treated as a BDC under the 1940 Act.
As a result of this change in status, commencing with the three months ended June 30, 2018:
we consolidated the results of 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 RegulationS-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 Companies, we made this change to our financial reporting prospectively, and did not restate or revise periods prior to our change in status to anon-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.
We historically have 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 a wholly-owned portfolio company of ours, Medallion Bank 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 16%. Since 1996, the year in which we became a public company, we have increased our taxicab medallion (19% if there had been no loan portfolio at a compound annual growth rate of 2%,sales during 2016, 2017, and our commercial loan portfolio at a compound annual growth rate of 4% (5% and 4% on a managed basis when combined with Medallion Bank)2018). 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 our management and the management of our unconsolidated wholly-owned subsidiaries, which includes our managed net investment portfolio, as well as assets serviced for third party investors and unconsolidated subsidiaries, were $1,522,000,000 as of December 31, 2018, and were $1,593,000,000 as of December 31, 2017, and $1,632,000,000 as of December 31, 2016, and have grown at a compound annual growth rate of 10%9% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paidpaid/declared distributions in excess of $263,060,000, or $14.66 per share.
We conduct our business through various wholly-owned investment company subsidiaries, including:
Medallion Bank, or the Bank, an FDIC-insured industrial bank that originates consumer loans, raises deposits and conducts other banking activity and has a separate board of directors with a majority of independent directors;
Medallion Funding LLC, or Medallion Funding, a Small Business Investment Company, or SBIC, our primary taxicab medallion lending company;
Medallion Capital, Inc., or Medallion Capital, an SBIC and a regulated investment company, or RIC, which conducts a mezzanine financing business; and
Freshstart Venture Capital Corp., or Freshstart, an SBIC and a RIC, which originates and services taxicab medallion and commercial loans.loans; and
We formed a wholly-owned portfolio company,
Medallion Servicing Corporation,Corp., or MSC, to providewhich provides loan services to Medallion Bank, also a portfolio company wholly-owned by us. We have assigned all of our 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 us for MSC’s share of these servicing costs.Bank.
In addition, we conduct business through a wholly-owned portfolio company, Medallion Bank, a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we have referred a portion of our taxicab medallion loans to Medallion Bank, which then originated these loans and are serviced by MSC. As anon-investment company, Medallion Bank is not currently consolidated with the Company, which is an investment company under the 1940 Act. We would be permitted to consolidate Medallion Bank with the Company to the extent we withdraw our election to be treated as a BDC under the 1940 Act as discussed in further detail below.
Our diversified investments in other controlledconsolidated subsidiaries are comprised of Medallion Fine Art, Inc., Medallion Taxi Media, Inc.,CDI-LP Holdings, Inc., Medallion Motorsports, LLC, and LAX Group, LLC.RPAC Racing, LLC, or RPAC. In addition, we mademake both marketable and nonmarketable equity investments.
We are aclosed-end,non-diversified management investment company, organizedinvestments, primarily as a Delaware corporation, under the 1940 Act. We have elected to be treated as a BDC under the 1940 Act. On March 7, 2018, a majority of the Company’s shareholders authorized the Company’s Board of Directors to withdraw the Company’s election to be regulated as a BDC under the 1940 Act and our Board of Directors approved the filing of the Company’s withdrawal form with the SEC to be made on or about April 1, 2018. At that point, we would no longer be a BDC or be subject to the provisions of the 1940 Act applicable to BDCs.
During our tax years ended December 31, 2017 and 2016, we did not qualify as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code, and therefore we became subject to taxation as a corporation under Subchapter C of the Code. We had in previous years qualified and elected to be treated for federal income tax purposes as a RIC. As a RIC, we generally did not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distributed to our shareholders as dividends, if we met certainsource-of-income and asset diversification requirements. Medallion Bank is not a RIC and must pay corporate-level US federal and state income taxes. If the Company withdraws its election to be regulated as a BDC under the 1940 Act, the Company would remain ineligible to file as a RIC under the Code and would be treated as a C corporation for tax purposes. See Note 5 for more information.
We are managed by our executive officers under the supervisionfunction of our Board of Directors. As a result, we do not pay investment advisory fees, but instead we incur the operating costs associated with employing investment and portfolio management professionals. Alvin Murstein, our chairman and chief executive officer, has over 60 years of experience in the ownership, management, and financing of taxicab medallions and other commercial businesses. Andrew M. Murstein, our president, has over 30 years of experience and is the third generation in his family to participate in themezzanine lending business.
Below is our organizational structure reflecting our consolidated and unconsolidated subsidiaries.
Our Market
We provide loans to individuals and small tomid-size businesses, both directly through our investment company subsidiaries, and also through Medallion Bank, in three primary markets:four segments:
loans that finance consumer small scale home improvements.improvements;
loans that finance commercial businesses; and
loans that finance taxicab medallions.
The following chart shows the componentsdetails of our loans receivable as of December 31, 2018:
(Dollars in thousands) | Loans | Allowance for Loan Loss | Net Loans Receivable | |||||||||
Recreation | $ | 587,038 | $ | 6,856 | $ | 580,182 | ||||||
Home improvement | 183,155 | 1,796 | 181,359 | |||||||||
Commercial | 64,083 | — | 64,083 | |||||||||
Medallion | 183,606 | 27,743 | 155,863 | |||||||||
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Total | $ | 1,017,882 | $ | 36,395 | $ | 981,487 | ||||||
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Consumer Loans
Consumer loans are originated by the Bank and consist of loans for the purchase of recreational vehicles, boats and trailers (recreation lending) and to finance home improvements such as replacement windows and roofs (home improvement lending). Combined consumer loans outstanding were $761,541,000 at December 31, 2018 and comprised 77% of our net loans receivable compared to $683,502,000 comprising 49% of our $1,380,054,000 managed net investment portfolio as of December 31, 2017. The managed net investment portfolio was all investments held by our consolidated and unconsolidated subsidiaries. We believe that the consumer loan portfolio is of acceptable credit quality given the high interest rates earned on the loans, which compensate for the higher degree of credit risk in the loan portfolio.
(Dollars in thousands) | On-Balance Sheet | Off-Balance Sheet (1) | Total Managed Investments | |||||||||
Medallion loans | $ | 208,279 | $ | 179,722 | $ | 388,001 | ||||||
Commercial loans | 90,188 | 1,595 | 91,783 | |||||||||
Consumer loans | — | 683,502 | 683,502 | |||||||||
Investments in Medallion Bank and other controlled subsidiaries | 302,147 | (138,378 | ) | 163,769 | ||||||||
Investment securities | — | 43,478 | 43,478 | |||||||||
Equity investments | 9,521 | — | 9,521 | |||||||||
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Net investment portfolio | $ | 610,135 | $ | 769,919 | $ | 1,380,054 | ||||||
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Medallion LoansRecreation Lending
Taxi medallion loans. Recreation lending is a high-growth business focused on originating prime andnon-prime recreation loans. The segment is a significant source of $208,279,000 comprised 34%income, accounting for 71.0% of our $610,135,000 net investmentinterest income for the nine months ended December 31, 2018. All of our recreation loans are serviced by a third-party loan servicer, and we have used the same loan servicer since the business’s inception.
Through the Bank, we maintainnon-exclusive relationships with more than 2,800 dealers and financial service providers (FSPs), not all of which are active at any one time. FSPs are entities that provide finance and insurance (F&I) services to small dealers that do not have the desire or ability to provide F&I services themselves. The ability of FSPs to aggregate the financing and relationship management for many small dealers makes them valuable to the Bank. We receive approximately half of our loan volume from dealers and the other half from FSPs. A dedicated sales team working from the Bank’s Salt Lake City headquarters manages our relationships with dealers and FSPs. Approximately 4% of recreation lending’s new loan originations for the nine months ended December 31, 2018 were from our top ten dealer relationships and an additional 24% were from our top three FSP relationships.
The recreation lending portfolio consists of thousands of geographically distributed loans with an average loan size of approximately $13,500 as of December 31, 2017, compared to $266,816,000 or 41%2018.The loans are fixed rate loans with an average loan term at origination of approximately 10 years. The weighted average remaining term of our $652,278,000 net investment portfolioloans outstanding at December 31, 2018 is 8.5 years. The size, geographic dispersion, source variety and collateral variety of the loans reduce risk to the Company.
Home Improvement Lending. Through the Bank, we work directly with contractors and an FSP to offer flexible customer financing for window, siding and roof replacement, swimming pool installation and solar system installation, and other home improvement projects. Our core product is a standard installment loan, which features affordable monthly payments and competitive interest rates for prime credit customers at no cost to the contractor. We also offer a variety of promotional loan options to help contractors close a challenging sale. Promotional loan options includesame-as-cash, no interest and deferred payment features, which allow borrowers to reduce the total cost of financing or start repayments when it is most convenient.
Home improvement lending operates in a manner similar to recreation lending, with a few key differences. Through the Bank, we maintain a smaller number ofnon-exclusive relationships; the Bank currently has relationships with approximately 600 contractors. Most of our home improvement-financed sales take place in the borrower’s home instead of a store, with the contractor presenting the borrower with a bid that includes a financing option.
A large proportion of our home improvement-financed sales are facilitated by contractor salespeople with limited financing backgrounds rather than by contractor employees who provide F&I services. The result is contractor demand for financing services that facilitate anin-home transaction (e.g., information technology and extended operating hours) and additional support for the salesperson throughout the financing process. The Bank’s contractor relationships are managed by a remote sales team with employees located in the geographical regions served. Approximately 59% of home improvement lending’s new loan originations for the nine months ended December 31, 2018 were from our top ten contractors and our FSP relationship.
We offer only fixed rate home improvement loans with an average loan term at origination of approximately 12 years. The weighted average remaining term of our loans outstanding is 10.2 years as of December 31, 2016. Managed taxi medallion loans of $388,001,000 comprised 28% of our $1,380,054,000 managed net investment portfolio as of December 31, 2017, compared to $528,643,000 or 35% of our $1,517,592,000 managed net investment portfolio as of December 31, 2016. Including loans to unaffiliated investors, the total amount of medallion loans under our management was $414,350,000 as of December 31, 2017, compared to $553,439,000 as of December 31, 2016. Since 1979, we and Medallion Bank have originated, on a combined basis, approximately $3,630,000,000 in medallion loans in New York City, Chicago, Boston, Newark, Cambridge, and other cities within the United States. In addition, our management has a long history of owning, managing, and financing taxicab fleets, taxicab medallions, and corporate car services, dating back to 1956.
Medallion loans collateralized by New York City taxicab medallions and related assets comprised 73% and 69% of the value of the medallion loan portfolio as of December 31, 2017 and 2016, and were 81% and 76% on a managed basis. Based on taxi medallion values published by the New York City Taxi and Limousine Commission, or TLC, and our cash flow analysis, we estimate that the total value of all of New York City taxicab medallions and related assets such as the vehicle, taximeter, and roof lights exceeded $4.6 billion as of December 31, 2017. We estimate that the total value of all taxicab medallions and related assets in our major US markets exceeded $5.7 billion as of December 31, 2017.
While medallion loans do become delinquent or in default, all of our medallion loans are secured by the medallion and enhanced with personal guarantees of the shareholders and owners. When a borrower defaults on a loan, we have the ability to restructure the underlying loan or repossess the medallion collateralizing that loan and sell it in the market or through a foreclosure auction and pursue the personal guarantees. Given the current market conditions we have taken significant realized and unrealized losses againstnon-performing loans to mitigate potential future losses.
2018. The following table displays information on managed medallion loans outstanding (other than those managed for third party investors) in each of our major markets at December 31, 2017. For a presentation of only the consolidatedon-balance sheet medallion loans, see the Consolidated Summary Schedule of Investments in the consolidated financial statements on page F-39.
(Dollars in thousands) | # of Loans | % of Medallion Loan Portfolio (1) | Average Interest Rate (2) | Principal Balance | ||||||||||||
Managed medallion loans | ||||||||||||||||
New York | 659 | 81 | % | 4.23 | % | $ | 366,266 | |||||||||
Chicago | 158 | 8 | 4.69 | 35,833 | ||||||||||||
Newark | 136 | 6 | 5.36 | 28,021 | ||||||||||||
Boston | 61 | 4 | 4.52 | 18,887 | ||||||||||||
Cambridge | 14 | 1 | 4.59 | 820 | ||||||||||||
Other | 17 | — | 7.08 | 842 | ||||||||||||
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Total managed medallion loans | 1,045 | 100 | % | 4.36 | 450,669 | |||||||||||
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Deferred loan acquisition costs | 55 | |||||||||||||||
Unrealized depreciation on loans | (62,723 | ) | ||||||||||||||
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Net managed medallion loans | $ | 388,001 | ||||||||||||||
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The New York City Market. A New York City taxicab medallion is the only permitted license to operate a taxicab and accept street hails in New York City, except as discussed below. As reported by the TLC, individual (owner-driver) medallions and corporate medallions sold for a wide variety of prices during the year. Our analysis of transaction activity combined with cash flow analysis of owners and operators supported our estimated value of $315,000, net of liquidation costs, as of December 31, 2017. The number of taxicab medallions is limited by law to 13,630 medallions outstanding as of December 31, 2017. The New York State legislature enacted a law on December 21, 2011 which was amended on February 17, 2012 to permit cars for hire to pick up street hails in the boroughs outside Manhattan. Pursuant to the law, the TLC began issuing Street Hail Livery licenses in June 2013.
A prospective medallion owner must qualify under the medallion ownership standards set and enforced by the TLC. These standards prohibit individuals with criminal records from owning medallions, require that the funds used to purchase medallions be derived from legitimate sources, and mandate that taxicab vehicles and meters meet TLC specifications. In addition, before the TLC will approve a medallion transfer, the TLC requires a letter from the seller’s insurer stating that there are no outstanding claims for personal injuries in excess of insurance coverage. After the transfer is approved, the owner’s taxicab is subject to quarterly TLC inspections.
Most New York City medallion transfers are handled through approximately 20 medallion brokers licensed by the TLC. In addition to brokering medallions, these brokers also arrange for TLC documentation insurance, vehicles, meters, and financing. We have excellent relations with many of the most active brokers, and regularly receive referrals from them. Brokers generated 5%average size of the loans originated during 2017,in our home improvement portfolio is approximately $14,100, and 26% for 2016. However, we receive mostgeographic dispersion, source variety and collateral variety of our referrals from a small number of brokers.home improvement loans reduce risk to the Company.
The Chicago Market. We estimate that Chicago medallions sold for approximately $47,000, net, as of December 31, 2017. Pursuant to a municipal ordinance, the number of outstanding medallions is capped at 6,995 as of December 31, 2017. We estimate that the total value of all Chicago medallions and related assets is over $373,908,000 as of December 31, 2017.
The Boston Market. We estimate that Boston medallions sold for approximately $274,400, net, as of December 31, 2017. The number of Boston medallions is capped at 1,825 as of December 31, 2017. We estimate that the total value of all Boston medallions and related assets is over $522,242,000 as of December 31, 2017.
The Newark Market. We estimate that Newark medallions sold for approximately $196,000, net, as of December 31, 2017. The number of Newark medallions has been limited to 600 since 1950 by local law. We estimate that the total value of all Newark medallions and related assets is over $121,800,000 as of December 31, 2017.
The Cambridge Market. We estimate that Cambridge medallions sold for approximately $49,000, net, as of December 31, 2017. The number of Cambridge medallions is 257 as of December 31, 2017. We estimate that the total value of all Cambridge medallions and related assets is over $14,225,000 as of December 31, 2017.
Commercial Loans
Commercial loans finance either the purchase of the equipment and related assets necessary to open a new business or the purchase or improvement of an existing business. From the inception of the commercial loan business in 1987 through December 31, 2017,2018, we and Medallion Bank have originated more than $955,837,000$970,572,000 of commercial loans. Commercial loans of $90,188,000$64,083,000 comprised 15%7% of our $610,135,000 net investment portfolioloans receivable as of December 31, 2017,2018, compared to $83,634,000 or 13% of our $652,278,000 net investment portfolio as of December 31, 2016. Managedmanaged commercial loans of $91,783,000, comprisedor 7%, of our $1,380,054,000 net investment portfolio as of December 31, 2017, compared to $86,200,000 or 6% of our $1,517,592,000 managed net investment portfolio as of December 31, 2016.2017. We have worked to increase our commercial loan activity in recent years, primarily because of the attractive higher yielding nature of most of this business. The outstanding balances of managed commercial loans have grown at a compound annual rate of 4% since 1996. The increase since 1996 has been primarily driven by internal growth through the origination of additional commercial loans. We focus our marketing efforts on the manufacturing, professional, scientific, and technical services and other services. The majority of our commercial borrowers are located in the New York metropolitan area and the Midwest. We plan to continue expanding our commercial loan activities by developing a more diverse borrower base, with a wider geographic area of coverage, and by expanding targeted industries.
Commercial loans are generally secured by equipment, accounts receivable, real estate, or other assets, and have interest rates averaging 735 basis points over the prevailing prime rate at year end, down from 901 basis points over prime at the end of 2016. As with medallion loans, the vast majority of the principals of borrowers personally guarantee commercial loans. The aggregate realized loss of principal on managed commercial loans has averaged less than 2.0% per annum for the last five years.
The following table displays information on managed commercial loans outstanding (other than those managed for third party investors) in each of our major markets at December 31, 2017. For a presentation of only the consolidatedon-balance sheet commercial loans, see the Consolidated Summary Schedule of Investments in the consolidated financial statements on F-39.
(Dollars in thousands) | # of Loans | % of Commercial Loan Portfolio (1) | Average Interest Rate (2) | Principal Balance | ||||||||||||
Managed commercial loans | ||||||||||||||||
Secured mezzanine | 33 | 96 | % | 12.09 | % | $ | 88,334 | |||||||||
Other secured commercial | 16 | 4 | 6.61 | 4,075 | ||||||||||||
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Total managed commercial loans | 49 | 100 | % | 11.85 | % | 92,409 | ||||||||||
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Deferred loan acquisition income | (110 | ) | ||||||||||||||
Unrealized depreciation on loans | (516 | ) | ||||||||||||||
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Net managed commercial loans | $ | 91,783 | ||||||||||||||
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Secured Mezzanine Loans. ThroughMainly through our subsidiary Medallion Capital, we originate both senior and subordinated loans nationwide to businesses in a variety of industries, including manufacturing and various service providers, more than 53%51% of which are located in the Midwest and Northeast regions, with the rest scattered across the country. These mezzaninecommercial loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $1,000,000 to $5,000,000 at origination,origination. As a component of most of the transactions, a portion of the investment is an equity or partnership stake, and represent approximately 96% of our managed commercial loan portfolio as of December 31, 2017, and were 87% as of December 31, 2016. Frequently,occasionally, we also receive warrants to purchase an equity interest in the borrowers or some other form of secured mezzanine loans.success fee or profit participation.
Other Secured Commercial Loans. We originate other commercial loans to a variety of businesses nationwide, including retail trade and various service providers. These commercial loans are generally secured by allequipment, accounts receivable, real estate, or other assets, and have interest rates averaging 806 basis points over the prevailing prime rate at the end of 2018, up from 735 basis points over prime at the assetsend of the businesses and are generally personally guaranteed by the principals. Frequently, we receive assignments2017.
Medallion Loans
Taxi medallion loans of lease from$155,863,000 comprised 16% of our borrowers. Thenet loans generally range in size from under $100,000 to approximately $1,000,000. These loans represented approximately 4% of the managed commercial loan portfolioreceivable as of December 31, 2017 and were 13% of as December 31, 2016. Historically, most of the portfolio has consisted of fixed-rate loans.
Consumer Loans. Consumer loans are originated by Medallion Bank, a wholly-owned, unconsolidated portfolio company. Consumer2018, compared to managed taxi medallion loans of $683,502,000 comprised 49%$388,001,000, or 28%, of our $1,380,054,000 managed net investment portfolio as of December 31, 2017,2017. Including loans to unaffiliated investors and unconsolidated subsidiaries, the total amount of medallion loans under our management was $323,786,000 as of December 31, 2018, compared to $700,685,000 or 46%$414,350,000 as of December 31, 2017. Since 1979, we have originated approximately $3,631,000,000 in medallion loans in New York City, Chicago, Boston, Newark, Cambridge, and other cities within the United States. In addition, our $1,517,592,000management has a long history of owning, managing, and financing taxicab fleets, taxicab medallions, and corporate car services, dating back to 1956.
Medallion loans collateralized by New York City taxicab medallions and related assets comprised 87% and 73% (81% on a managed net investmentbasis) of the medallion loan portfolio as of December 31, 2016,2018 and represent2017. Based on taxi medallion values published by the New York City Taxi and Limousine Commission, or TLC, and our largest lending segment. Thecash flow analysis, we estimate that the total value of all of New York City taxicab medallions and related assets such as the vehicle, taximeter, and roof lights exceeded $2.7 billion as of December 31, 2018. We estimate that the total value of all taxicab medallions and related assets in our major US markets exceeded $3.1 billion as of December 31, 2018.
While medallion loans do become delinquent or in default, all of our medallion loans are collateralizedsecured by recreational vehicles, boats, trailers,the medallion and home improvements, located in all 50 states. The portfolio is serviced byenhanced with personal guarantees of the owners, shareholders or equity members. When a large third party servicer. We believe
borrower defaults on a loan, we have the ability to restructure the underlying loan or repossess the medallion collateralizing that Medallion Bank’s consumer loan portfolio is of acceptable credit quality given the high interest rates earned on the loans, which compensate for the higher degree of credit riskand sell it in the portfolio.market or through a foreclosure auction and pursue the personal guarantees, all of which we have done. Given the current market conditions, we have recorded an allowance for loan losses against performing and nonperforming loans to mitigate potential future losses.
The New York City Market. A New York City taxicab medallion is the only permitted license to operate a taxicab and accept street hails in New York City, except as discussed below. As reported by the TLC, individual (owner-driver) medallions and corporate medallions sold for a wide variety of prices during the year. Our analysis of transaction activity combined with cash flow analysis of owners and operators supported our estimated value of $181,000, net of liquidation costs, as of December 31, 2018. The number of taxicab medallions is limited by law to 13,630 medallions outstanding as of December 31, 2018. A New York State law permits cars for hire to pick up street hails in the boroughs outside Manhattan. Pursuant to such law, the TLC began issuing Street Hail Livery licenses in June 2013.
A prospective medallion owner must qualify under the medallion ownership standards set and enforced by the TLC. These standards prohibit individuals with criminal records from owning medallions, require that the funds used to purchase medallions be derived from legitimate sources, and mandate that taxicab vehicles and meters meet TLC specifications. In addition, before the TLC will approve a medallion transfer, the TLC requires a letter from the seller’s insurer stating that there are no outstanding claims for personal injuries in excess of insurance coverage. After the transfer is approved, the owner’s taxicab is subject to quarterly TLC inspections.
Most New York City medallion transfers are handled through approximately 20 medallion brokers licensed by the TLC. In addition to brokering medallions, these brokers also arrange for TLC documentation insurance, vehicles, meters, and financing. We have excellent relations with many of the most active brokers, and regularly receive referrals from them.
The Newark Market. We estimate that Newark medallions sold for approximately $147,000, net, as of December 31, 2018. The number of Newark medallions has been limited to 600 since 1950 by local law. We estimate that the total value of all Newark medallions and related assets is over $91,800,000 as of December 31, 2018.
The Chicago Market. We estimate that Chicago medallions sold for approximately $27,000, net, as of December 31, 2018. Pursuant to a municipal ordinance, the number of outstanding medallions is capped at 6,995 as of December 31, 2018. We estimate that the total value of all Chicago medallions and related assets is over $230,835,000 as of December 31, 2018.
Other Markets.. We also provide debt, mezzanine,estimated that Boston and equity investment capital to companies in a varietyCambridge medallions sold for approximately $43,000 and $22,000, net, as of industries.December 31, 2018. These investments may be venture capital style investments which may not be fully collateralized. This is a small, but growing portionother markets make up 0.4% of our business.total medallion loans receivable.
Our Strategy
Our core philosophy has been “In niches there are riches.” We try to identify markets that are profitable and where we can be an industry leader. Key elements of our strategy include:
Capitalize on our relationships with brokers and dealers. We are committed to establishing, building, and maintaining our relationships with our brokers and dealers. Our marketing efforts are focused on building relationships with dealers in the consumer market andmarkets as we work directly with dealerships, contractors and suppliers in the home improvement sector.FSPs to offer quality financing for their customers, including those with past credit challenges. We believe that our relationships with dealers and brokers provide us with, in addition to potential investment opportunities, other significant benefits, including an additional layer of due diligence and additional monitoring capabilities. We have assembled a management team that has developed an extensive network of dealer and broker relationships
in our target markets over the last 50 years. We believe that our management team’s relationships with these dealers and brokers have and will continue to provide us with significant investment opportunities. In 2017,2018, 100% of our consumer loans were generated by brokers and dealers, and there were few originations in the medallion or commercial lending space.
Focus on niche industries and our expertise in these niche fields.We specialize in providing consumer loans for the purchase of recreational vehicles (RVs), boats and trailers, and to finance home improvements through contractors and suppliers in the home improvement sector. We believe our focus on these niche areas provides us with an opportunity to realize favorable returns, with less competition.
Employ disciplined underwriting policies and maintain rigorous portfolio monitoring. We have an extensive investmentloan underwriting and monitoring process. We conduct a thorough analysis of each potential investmentloan portfolio and its prospects, competitive position, financial performance, and industry dynamics. We stress the importance of credit and risk analysis in our underwriting process. We believe that our continued adherence to this disciplined process will permit us to continue to generate a stable, diversified and increasing revenue stream of current income from our debt investmentsearning assets to enable us to make distributions to our shareholders.
Leverage the skills of our experienced management team. Our management team is led by our Chief Executive Officer, Mr. Alvin Murstein, and our President, Mr. Andrew M. Murstein. Alvin Murstein has over 60 years of experience in the ownership, management, and financing of taxicab medallions and other commercial businesses, and Andrew M. Murstein is the third generation in his family to participate in the business and has over 30 years of experience in the ownership, management, and financing of taxicab medallions and other commercial businesses. The other members of our management team including Medallion Bank have broad investment backgrounds, with prior experience in banking andnon-bank consumer lending, at specialty finance companies, middle market commercial banks, and other financial services companies. We believe that the experience and contacts of our management team will continue to allow us to effectively implement the key aspects of our business strategy.
Perform Strategic Acquisitions. In addition to increasing market share in existing lending markets and identifying new niches, we seek to acquire medallion financing businesses and related portfolios and specialty finance companies that make secured loans to small businesses which have experienced historically low loan losses similar to our own. Since our initial public offering in May 1996, we have acquired eight specialty finance companies, five loan portfolios, and three taxicab rooftop advertising companies have been acquired.companies.
Loan/Investment Activity
The following table sets forth the components of loan/investment activity in the consolidated/managed investment portfolio for the years indicated.
Year ended December 31, | ||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Net investments at beginning of year | $ | 1,517,592 | $ | 1,501,555 | $ | 1,310,685 | ||||||
Investments originated(1) | 475,465 | 738,238 | 492,127 | |||||||||
Repayments of investments(1) | (270,133 | ) | (655,071 | ) | (288,783 | ) | ||||||
Consumer loans sold to third parties | (221,447 | ) | (97,511 | ) | — | |||||||
Net realized losses on investments(2) | (79,264 | ) | (34,888 | ) | (3,902 | ) | ||||||
Net increase in unrealized appreciation (depreciation)(3) | 6,390 | 79,650 | 3,286 | |||||||||
Transfers to other assets/liabilities, net | (44,968 | ) | (10,941 | ) | (8,553 | ) | ||||||
Amortization of origination costs | (3,581 | ) | (3,440 | ) | (3,305 | ) | ||||||
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Net increase (decrease) in investments | (137,538 | ) | 16,037 | 190,870 | ||||||||
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Net investments at end of year | $ | 1,380,054 | $ | 1,517,592 | $ | 1,501,555 | ||||||
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Year ended December 31, | ||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
Net investments at beginning of year | $ | 1,380,054 | $ | 1,517,592 | $ | 1,501,555 | ||||||
Loans/investments originated(1) | 428,510 | 475,465 | 738,238 | |||||||||
Repayments of loans/investments(1) | (261,383 | ) | (270,133 | ) | (655,071 | ) | ||||||
Consumer loans sold to third parties | (100,920 | ) | (221,447 | ) | (97,511 | ) | ||||||
Net realized losses on loans/investments(2) | (42,305 | ) | (79,264 | ) | (34,888 | ) | ||||||
Provision for loan losses | (59,008 | ) | — | — | ||||||||
Net increase in unrealized appreciation (depreciation)(3) | 29,864 | 6,390 | 79,650 | |||||||||
Transfers to loans in process of foreclosure | (53,756 | ) | (44,968 | ) | (10,941 | ) | ||||||
Investment transfers excluded from loans in process of foreclosure(4) | (262,064 | ) | — | — | ||||||||
Deconsolidation of Trust III(5) | (71,409 | ) | — | — | ||||||||
Amortization of origination costs | (3,950 | ) | (3,581 | ) | (3,440 | ) | ||||||
Other, net | (2,146 | ) | — | — | ||||||||
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Net increase (decrease) in loans/investments | (398,567 | ) | (137,538 | ) | 16,037 | |||||||
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Net loans receivable/investments at end of year | $ | 981,487 | $ | 1,380,054 | $ | 1,517,592 | ||||||
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(1) | Includes refinancings. |
(2) | Excludes net realized losses of $7,736 |
(3) | Excludes net unrealized depreciation of $1,915 for the three months ended March 31, 2018 and $2,076 |
(4) | Represents portfolio investments transferred to other asset categories and excluded from net loans receivable. |
(5) | Represents the Trust III gross loans of $53,546 and loans in process of foreclosure that had been transferred to other assets of $17,863 as a result of the Company no longer considered the primary beneficiary of, and thus not consolidating, Trust III. |
Loan/Investment Characteristics
MedallionConsumer Loans. Our medallion loan portfolio consists of mostly fixed-rate loans, collateralized by first security interests in taxicab medallions and related assets (vehicles, meters, and the like). We estimate that the weighted averageloan-to-value ratio of all of the medallion loans was 131% as of December 31, 2017, compared to 129% as of December 31, 2016, reflecting the conservative values we have placed on all medallion loans, including the vast majority which are performing as agreed. These ratios also do not factor in the managed unrealized depreciation on these loans of $62,723,000 and $63,252,000 as of December 31, 2017 and 2016. In addition, we have recourse against a vast majority of the owners of the taxicab medallions and related assets through personal guarantees.
MedallionConsumer loans generally require equal monthly payments covering accrued interest and amortization of principal over a fivenegotiated term, generally around ten to twenty-five year schedule, subject to a balloon payment of all outstanding principal at maturity. Historically, we have originated loans withone-to-five year maturities where interesttwelve years. Interest rates offered are adjusted and a new maturity period set. In most cases, borrowersfixed. Borrowers may prepay medallionconsumer loans upon paymentwithout any prepayment penalty. In general, Medallion Bank has established relationships with dealers, FSPs, and contractors in the industry, who are the sources for consumer loan volumes. The loans are made up of recreation loans and home improvement loans which were 76% and 24% of total consumer loans at December 31, 2018.
Our recreation loans are secured primarily by RVs, boats and trailers with a feesmall proportion of approximately 1% to 2%loans secured by other collateral such as autos, motorcycles and boat motors. These loans, which together make up our largest and most profitable loan portfolio, have a weighted average yield of 16.88% at December 31, 2018. Our home improvement loans are secured by the personal property installed, and the security interest for a majority of these loans is perfected with a UCC fixture filing. As of December 31, 2018, these loans had a weighted average yield of 9.20%.
Historically, we generally retain the medallion loans we originate; however, from time to time, we participate or sell shares of some loans or portfolios to interested third party financial institutions. In these cases, we retain the borrower relationships and service the sold loans.
Mezzanine and Commercial Loans. We have typically originated mezzanine and commercial loans in principal amounts generally ranging from under $1,000,000 to $5,000,000, and occasionally have originated loans in excess of that amount. These loans are generally retained and typically have maturities ranging from three to ten years and require monthly payments ranging from full amortization over the loan term to fully deferred interest and principal at maturity, with multiple payment options in between. Substantially all loans may be prepaid, and in the first five years, a fee will be owed to us. The term of, and interest rate charged on, certain of our outstanding loans are subject to the regulations of the Small Business Administration, or the SBA. Under SBA regulations, the maximum rate of interest permitted on loans originated by us is 19%,; however, terms and interest rates are subject to market competition for all loans. Unlike medallion loans, for which competition and market conditions precludespreclude us from charging the maximum rate of interest permitted under SBA regulations, we are able to charge the maximum rate on certain commercial loans.
ConsumerMedallion Loans. ConsumerOur medallion loan portfolio consists of mostly fixed-rate loans, collateralized by first security interests in taxicab medallions and related assets (vehicles, meters, and the like). We estimate that the weighted averageloan-to-value ratio of all of the medallion loans was 220% as of December 31, 2018, compared to 131% as of December 31, 2017. These ratios do not factor in the reserve on these loans of $27,743,000 as of December 31, 2018 and the unrealized depreciation on managed loans of $62,723,000 as of December 31, 2017. In addition, we have recourse against a vast majority of the owners of the taxicab medallions and related assets through personal guarantees.
Medallion loans generally require equal monthly payments covering accrued interest and amortization of principal over a negotiated term, generally around ten years. Interestfive to twenty-five year schedule, subject to a balloon payment of all outstanding principal at maturity. Historically, we have originated loans withone-to-five year maturities where interest rates offered are fixed. Borrowers may prepay consumeradjusted and a new maturity period set.
Historically, we have retained the medallion loans without any prepayment penalty.we originate; however, from time to time, we participate or sell shares of some loans or portfolios to interested third party financial institutions. In general, Medallion Bank has establishedthese cases, we retain the borrower relationships with dealers and contractors inservice the industry, who are the sources for most of the customers of Medallion Bank.sold loans.
Marketing, Origination, and Loan Approval Process
We employ 3878 personnel to originate, manage, service and collect on the medallion,consumer, commercial, and consumermedallion loans. Each loan application is individually reviewed through analysis of a number of factors, includingloan-to-value ratios, a review of the borrower’s credit history, public records, personal interviews, trade references, personal inspection of the premises, and approval from the TLC, SBA, or other regulatory body, if applicable. Each medallion and commercial loan applicant is required to provide personal or corporate tax returns, premises leases, and/or property deeds. SeniorThe Company’s senior management establishes loan origination criteria. Loans that conform to such criteria may be processed by a loan officer with the proper credit authority, andnon-conforming loans (other than those by the Bank) must be approved by the chief executive officerCompany’s Chief Executive Officer, President, and/or the chief credit officer.Chief Credit Officer and the Investment Oversight Committee of the Company’s Board of Directors. Loan criteria for loans originated with the Bank is established by the Bank’s board of directors and senior management. The Bank’s policies identify specific approval authorities for its recreation, home improvement, medallion and real estate loans. Policy exceptions are reported to the Bank’s board of directors. Both medallion and commercial loans are sourced from brokers with extensive networks of applicants, and commercial loans are also referred by contacts with banks, attorneys, and accounting firms. Consumer loans are primarily sourced through relationships which have been established with recreational vehicle and boat dealers, and home improvement contractors throughout our market area.
Sources of Funds
We have historically funded our lending operations primarily through credit facilities with bank syndicates and, to a lesser degree, through equity or debt offerings or private placements, and fixed-rate, senior secured
notes and long-term subordinated debentures issued to or guaranteed by the SBA. Since the inception of Medallion Bank, substantially all of Medallion Bank’s funding has been provided by FDIC insured brokered certificates of deposit. The determination of funding sources is established by our management, based upon an analysis of the respective financial and other costs and burdens associated with funding sources. Our funding strategy and interest rate risk management strategy is to have the proper structuring of debt to minimize both rate and maturity risk, while maximizing returns with the lowest cost of funding over an intermediate period of time.
The table below summarizes our sources of available funds and amounts outstanding under credit facilities and their respective end of period weighted average interest rates at December 31, 2017.2018. See Note 47 to the consolidated financial statements for additional information about each credit facility.
(Dollars in thousands) | Total | Total | ||||||
Cash and cash equivalents | $ | 12,690 | $ | 57,713 | ||||
Bank loans | 81,450 | 59,615 | ||||||
Average interest rate | 3.94 | % | 4.55 | % | ||||
Maturity | 10/16-11/18 | 3/19-12/23 | ||||||
Preferred securities | 33,000 | 33,000 | ||||||
Average interest rate | 3.63 | % | 4.86 | % | ||||
Maturity | 9/37 | 9/37 | ||||||
Retail notes | 33,625 | 33,625 | ||||||
Average interest rate | 9.00 | % | 9.00 | % | ||||
Maturity | 4/21 | 4/21 | ||||||
DZ loan | 99,984 | |||||||
Average interest rate | 3.02 | % | ||||||
Maturity | 3/18 | |||||||
SBA debentures and other borrowings | 85,064 | |||||||
SBA debentures and borrowings | 83,099 | |||||||
Amounts undisbursed | 5,500 | 3,000 | ||||||
Amounts outstanding | 79,564 | 80,099 | ||||||
Average interest rate | 3.39 | % | 3.40 | % | ||||
Maturity | 2/20-3/27 | 3/19-9/28 | ||||||
Brokered CDs & other funds borrowed | 848,040 | |||||||
Average interest rate | 2.14 | % | ||||||
Maturity | 1/19-07/23 | |||||||
Other borrowings | 7,649 | |||||||
Average interest rate | 2.00 | % | ||||||
Maturity | 12/19-3/20 | |||||||
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Total cash | $ | 57,713 | ||||||
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Total debt outstanding | $ | 327,623 | $ | 1,062,028 | ||||
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Medallion Bank | ||||||||
Cash and cash equivalents | $ | 110,233 | ||||||
Deposits and other borrowings | 906,748 | |||||||
Average interest rate | 1.51 | % | ||||||
Maturity | 1/18-10/22 | |||||||
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Total cash and cash equivalents, including Medallion Bank | $ | 122,923 | ||||||
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Total debt outstanding, including Medallion Bank | $ | 1,234,371 | ||||||
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We fund our fixed-rate loans with variable-rate credit lines and bank debt, and with fixed-rate SBA debentures and other borrowings. The mismatch between maturities and interest-rate sensitivities of these balance sheet items results in interest rate risk. We seek to manage our exposure to increases in market rates of interest to an acceptable level by:
Originating adjustable rate loans; and
Incurring fixed-rate debt; and
debt.
Nevertheless, we accept varying degrees of interest rate risk depending on market conditions. For additional discussion of our funding sources and asset liability management strategy, see Asset/Liability Management on page 53.65.
Competition
Banks, credit unions, and finance companies, some of which are SBICs, compete with us in originating medallion, commercial, and consumer loans. Many of these competitors have greater resources than we do and
certain competitors are subject to less restrictive regulations than us. As a result, we cannot assure you that we will be able to identify and complete the financing transactions that will permit us to compete successfully.
Employees
As of December 31, 20172018 we employed 138177 persons, including 6975 at our Medallion Bank subsidiary. We believe that relations with all of our employees are good.
MATERIAL USU.S. FEDERAL INCOME TAX CONSIDERATIONS
Taxation as a Corporation
For our tax years ended December 31, 20172018 and 2016, we did not qualify for RIC status and as a result our status changed from a RIC subject to Subchapter M of the Code to a corporation subject to taxation under Subchapter C of the Code. As a result of such change for the taxable periods ended December 31, 2017, and 2016, we have been taxed as a corporation and must pay corporate-level federal and state income taxes on our taxable income. Through December 31, 2015, we qualified and elected to be treated as a RIC under Subchapter M of the Code. As a result of our status as a RIC in prior years, we generally were not subject to federal income tax on the portion of our taxable income and capital gains we distributed to our shareholders, but we were also not permitted to carry forward net operating losses from year to year. Because we were taxed as a corporation under Subchapter C of the Internal Revenue Code (the Code) for the tax year ended December 31, 2016,2018 and 2017, we are able to carry forward any net operating losses historically incurred to succeeding years, which we would not be permitted to do if we were subject to taxation as a RIC under Subchapter M of the Code. However, because we did not qualify for RIC status for the tax years ended December 31, 2017 and 2016,years. In addition, distributions will generally be taxable to our shareholders to the extent of our current and accumulated earnings and profits for U.S. federal tax purposes. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of a shareholder’s tax basis, and any remaining distributions would be treated as a capital gain. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction. Qualification as a RIC is made on an annual basis and, although we and some of our subsidiaries have qualified in the past, we cannot assure you that we will qualify for such treatment in the future. If the Company withdraws its election to be regulated as a BDC under the 1940 Act, the Company would remain ineligible to file as a RIC under the Code and would be treated as a C corporation for tax purposes.
On December 22, 2017, the U.S. Government signed into law the “Tax Cuts and Jobs Act,”Act” which, makes significant changes tostarting in 2018, reduced the U.S.Company’s corporate statutory income tax rules applicablerate from 35% to both individuals and entities, including corporations. The Tax Cuts and Jobs Act includes provisions that, among other things, reduce the U.S. corporate tax rate, introduce a capital investment deduction, limit the interest deduction, limit the use of net operating losses to offset future taxable income and make extensive changes to the U.S. international tax system. The Tax Cuts and Jobs Act is complex andfar-reaching, and we cannot predict the impact its enactment will have on us, our subsidiaries, our portfolio companies and our shareholders.21%, but eliminated or increased certain permanent differences.
Taxation as a RICREGULATION
If and to the extent that the Company remains a BDC underExemption from the 1940 Act and we satisfy the requirements to be treated as a RIC in a future taxable year, the following discussion is a general summary of the material U.S. federal income tax considerations that would be applicable to us and to an investment in shares of our common stock in such tax year. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment in a year in which we satisfy the requirements to be treated as a RIC. For example, we have not described tax consequences that we assume to be generally known by investors or certain considerations that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including shareholders subject to the alternative minimum tax,tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, and financial institutions. This summary assumes that investors will hold our common stock in such a taxable year as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this annual report and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the Internal Revenue Service, or the IRS, regarding an investment in our common stock for a year in which we satisfy the requirements to be treated as a RIC. This summary does not discuss any aspects of the Medicare Contribution tax, U.S. estate or gift tax, or foreign, state, or local tax. It does not discuss the special treatment under US federal income tax laws that could result if we invested intax-exempt securities or certain other investment assets.
As used herein, a “US person” is a person that is for US federal income tax purposes:
A “US shareholder” is a beneficial owner of shares of our common stock that is a US person.
A“non-US shareholder” is a beneficial owner of shares of our common stock that is not a US shareholder and is not a partnership for US federal income tax purposes.
If a partnership (including an entity treated as a partnership for US federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective shareholder that is a partner of a partnership holding shares of our common stock should consult its tax advisors with respect to the purchase, ownership, and disposition of shares of our common stock.
Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her, or its particular situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of federal, state, local, and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.
In the event we meet the requirements to be treated as a RIC in a taxable year, in such tax year we generally would not have to pay corporate-level US federal income taxes on any ordinary income or capital gains that we distribute to our shareholders as dividends for such taxable year. To qualify as a RIC in a taxable year, we must, among other things, meet certainsource-of-income and asset diversification requirements (as described below). In addition, to obtain RIC tax treatment in a taxable year we would be required to distribute to our shareholders, for each such taxable year, at least 90% of our “investment company taxable income,” which is generally our ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses. We refer to this distribution requirement as the Annual Distribution Requirement.
If we, in a taxable year:
then we would not be subject to US federal income tax for such tax year on the portion of our investment company taxable income and net capital gain (i.e., net long-term capital gains in excess of net short-term capital losses) we distribute to shareholders. We will be subject to US federal income tax at the regular corporate rates in such tax year on any income or capital gain not distributed (or deemed distributed) to our shareholders.
As a RIC we would be subject to a 4% nondeductible US federal excise tax on certain undistributed income of RICs unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for theone-year period ending October 31 in that calendar year, and (3) any income realized, but not distributed, in preceding years. We refer to this distribution requirement as the Excise Tax Avoidance Requirement.
In order to qualifymaintain our status as a RIC for US federal income tax purposes in a tax year,non-investment company, we must, among other things:
Regulation of Medallion Bank as an Industrial Bank
In May 2002, we formed Medallion Bank, which received approval from the FDIC for federal deposit insurance in October 2003. Medallion Bank, a Utah-chartered industrial bank, is a depository institution subject to regulatory oversight and examination for safety and soundness by both the FDIC and the Utah Department of Financial Institutions. Medallion Bank is examined annually by the FDIC and the Utah Department of Financial Institutions. Numerous other federal and state laws and regulations govern almost all aspects of Medallion Bank’s operations and, to some degree, our operations and those of ournon-bank subsidiaries as institution-affiliated parties. Under its banking charter, Medallion Bank is empowered to make consumer and commercial loans, and may accept all FDIC-insured deposits other than demand deposits (checking accounts). Medallion Bank provides stable andlow-cost bank deposit funding for our key lending business activities conducted through Medallion Bank.
In addition, the FDIC has regulatory authority to prohibit Medallion Bank from engaging in any unsafe or unsound practice in conducting its business.
Medallion Bank is subject to risk-based and leverage capital standards issued by the federal banking regulators. These standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, to account foroff-balance sheet exposure, to minimize disincentives for holding liquid assets, and to achieve greater consistency in evaluating the capital adequacy of major banks throughout the world. Under the risk-based capital standards, assets andoff-balance sheet items are assigned to broad risk categories, each with designated weights, and the resulting capital ratios represent capital as a percentage of total risk-weighted assets andoff-balance sheet items.
In July 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency adopted the U.S. Basel III capital rules, which implement many aspects of the Basel Committee on Banking Supervision’s Basel III capital framework and are aimed at all times during each such taxable year;increasing both the quantity and quality of regulatory capital. The requirements in the U.S. Basel III capital rules began to phase in on January 1, 2015, for many covered banking organizations, including Medallion Bank. Most requirements in the U.S. Basel III capital rules were fully phased in by January 1, 2019. Because Medallion Bank was already subject to a capital maintenance agreement with the FDIC that required it to hold capital in excess of the then applicable capital requirements, we do not believe that the U.S. Basel III capital rules will have a material impact on Medallion Bank’s business.
Under the U.S. Basel III capital rules, Medallion Bank is subject to the following minimum capital ratios:
a new Common Equity Tier 1 risk-based capital ratio of 4.5%;
a Tier 1 risk-based capital ratio of 6%;
a Total risk-based capital ratio of 8%; and
a Tier 1 leverage ratio of 4%.
In addition, Medallion 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 increased by 0.625% each such taxable year at least 90%subsequent January 1 until January 1, 2019. Including the buffer, as of our grossJanuary 1, 2019, Medallion Bank is 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%. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, from dividends, interest, payments with respect to certain securities loans, gains from the saleand limited amounts of stock or other securities, or foreign currencies, or other income derived with respect to our business of investing in such stock or securities or currencies, and net income derived fromqualifying minority interests in “qualified publicly traded partnerships” (i.e., partnerships that are traded on an established securities marketin the form of common stock. For Medallion Bank to pay a dividend, they would need to comply with these capital requirements.
The U.S. Basel III capital rules retain or tradable on a secondary market, other than partnershipsmodify certain deductions from and adjustments to regulatory capital and also provide for new ones. In addition, the U.S. Basel III capital rules provide for limited recognition in Common Equity Tier 1 capital, and deduction from Common Equity Tier 1 capital above certain thresholds, of three categories of assets: (i) deferred tax assets arising from temporary differences that derive 90%cannot be realized through net operating loss carrybacks (net of their income from interest, dividends, capital gains,related valuation allowances and other traditionally permitted mutual fund income describedof deferred tax liabilities), (ii) mortgage servicing assets (net of associated deferred tax liabilities) and (iii) investments in this paragraph) or the 90% Income Test; and
For purposes of calculating the denominator of the issuer;three risk-based capital ratios, the assets of covered banking organizations are given risk weights that, under the U.S. Basel III capital rules, range from 0% to 1,250%, depending on the nature of the asset. Direct obligations of the U.S. Treasury or obligations unconditionally guaranteed by the U.S. government have a 0% risk weight, while general obligation claims on states or other political subdivisions of the United States are assigned a 20% risk weight, except for municipal or state revenue bonds, which have a 50% risk weight. Most first-lien residential mortgage exposures that are prudently underwritten and performing according to their original terms carry a 50% risk weight, with a 100%
risk weight for other residential mortgage exposures. In addition, certainoff-balance sheet items are assigned credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk weight is applied. For example, the unused portion of unconditionally cancellable commitments is assigned a 0% conversion factor, while self-liquidating, transaction-related contingent items with an original maturity of one year or less and the amount of a commitment with an initial maturity of one year or less that is not unconditionally cancellable by the covered banking organization are converted at 20%. Transaction-related contingencies such as bid bonds and standby letters of credit backing nonfinancial obligations, as well as the amount of a commitment with an original maturity of more than 25%one year that is not unconditionally cancellable, have a 50% conversion factor. General guarantees and standby letters of credit backing financial obligations are given a 100% conversion factor.
In addition, pursuant to provisions of the valueFDIC Improvement Act of our1991, or FDICIA, and related regulations with respect to prompt corrective action, FDIC-insured institutions such as Medallion Bank may only accept brokered deposits without FDIC permission if they meet specified capital standards, and are subject to restrictions with respect to the interest they may pay on deposits unless they are well capitalized. The U.S. Basel III capital rules revised the capital threshold to be well capitalized. Effective January 1, 2015, in order to qualify as well capitalized, an insured depository institution must maintain a Common Equity Tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 5.0%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level.
Pursuant to a capital maintenance agreement with the FDIC, we and Medallion Bank have agreed that the capital levels of Medallion Bank will at all times meet or exceed the levels required for Medallion Bank to be considered well-capitalized under the FDIC rules and regulations, that Medallion Bank’s Tier 1 capital to total assets is invested in the securities, otherleverage ratio will be maintained at not less than US Government securities or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us15%, and that are engagedMedallion Bank will maintain an adequate allowance for loan and lease losses. As of December 31, 2018, Medallion Bank was in compliance with the sameabove rules and tests.
Medallion Bank is also subject to certain federal laws that restrict and control its ability to extend credit and provide or similar or related trades or businesses or in the securities of one or more qualified publicly traded partnerships. We refer to these two requirements as the Diversification Tests.
In such taxable year in which we meet the RIC qualification requirements, we may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments withpayment-in-kind interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income in such taxable year a portionservices between affiliates. Sections 23A and 23B of the original issue discount that accrues overFederal Reserve Act and Regulation W promulgated thereunder limit the lifetransfer of the obligation, regardlessfunds by a depository institution to certain of whether cash representing such income is received byits affiliates, including us, in the same taxable year. Because any original issue discount accrued willform of loans, extensions of credit, investments, or purchases of assets. Sections 23A and 23B and Regulation W also require generally that the depository institution’s transactions with its affiliates be includedon terms no less favorable to Medallion Bank than comparable transactions with unrelated third parties.
The USA Patriot Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, or the Patriot Act, is intended to detect and prosecute terrorism and international money laundering. The Patriot Act establishes new standards for verifying customer identification incidental to the opening of new accounts. Medallion Bank has undertaken appropriate measures to comply with the Patriot Act and associated regulations. Other provisions of the Patriot Act provide for special information sharing procedures governing communications with the government and other financial institutions with respect to suspected terrorists and money laundering activity, and enhancements to suspicious activity reporting, including electronic filing of suspicious activity reports over a secure filing network. The compliance programs required by the Patriot Act are intended to supplementpre-existing compliance requirements that apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control, or OFAC, regulations to which Medallion Bank is also subject. The Bank Secrecy Act requires all financial institutions, including banks, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The Bank Secrecy Act includes a variety of record-keeping and reporting requirements (such as cash and suspicious activity reporting), as well as due diligence/know-your-customer documentation requirements. Medallion Bank has in our investment company taxable income for the year of accrual, we may be required to make a distribution to our shareholders in such taxable year in which we are treated as a RICplace policies, procedures and internal controls in order to satisfycomply with Bank Secrecy Act and OFAC laws and regulations. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the Annual Distribution Requirement, even though we would not have received any corresponding cash amount.regulatory review of applications.
In the taxable years we met the requirements
Federal and state banking agencies require Medallion Bank to be treated as a RIC, we were authorized to borrow fundsprepare annual reports on financial condition and to sell assetsconduct an annual audit of financial affairs in ordercompliance with minimum standards and procedures. Medallion Bank must undergo regularon-site examinations by the appropriate banking agency, which will examine for adherence to satisfy distribution requirements. However, undera range of legal and regulatory compliance responsibilities. A bank regulator conducting an examination has complete access to the 1940 Act, we were not permitted to make distributions to our shareholders while our debt obligationsbooks and other senior securities were outstanding unless certain “asset coverage” tests were met. See “Regulation—Senior Securities.” In any tax year that we qualify as a RIC, our ability to disposerecords of assets to meet the distribution requirements in such yearexamined institution. The results of the examination are confidential. The cost of examinations may be limited by (1)assessed against the illiquid nature of our portfolio and/examined institution as the agency deems necessary or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we were to dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement in such tax year, we may have to make such dispositions at times that, from an investment standpoint, are not advantageous.appropriate.
GOVERNMENT REGULATION
Regulation by the SBA
Medallion Funding, Medallion Capital, and Freshstart are each licensed by the SBA to operate as SBICs, under the Small Business Investment Act of 1958, as amended, or the SBIA. The SBIA authorizes the organization of SBICs as vehicles for providing equity capital, long term financing, and management assistance to small business concerns. Under the regulations promulgated by the SBA a “small business concern” is defined as a business that is independently owned and operated, which does not dominate its field of operation, and which (i) has a tangible net worth, together with any affiliates, of $19.5 million or less and average annual net income after USU.S. federal income taxes for the preceding two fiscal years of $6.5 million or less (average annual net income is computed without the benefit of any carryover loss), or (ii) satisfies alternative criteria under the Federal government’s North American Classification System, or the NAICS, that assigns codes to the industry in which a small business is engaged and provides a small business size standard based either on the number of persons employed by the business or its gross revenues. In addition, at the end of each fiscal year, at least 25% of the total amount of loans made (after April 25, 1994) must be made in “smaller businesses” that have a net worth of $6.0 million or less, and average net income after federal income taxes for the preceding two years of $2.0 million or less. A business that meets the NAICS size standards also qualifies as a “smaller business” for purposes of meeting SBA’s size standard regulations.
Investments by SBICs must be in active, primarily domestic businesses. SBIC regulations preclude investment in the following types of businesses: (1) financial companies whose principal business activity is as a relender or reinvestor (that is, directly or indirectly, providing funds to others, purchasing debt obligations, factoring, or long term leasing of equipment with no provision for maintenance or repair); (2) many kinds of real estate projects; (3) single purpose projects that are not continuing businesses; (4) companies located outside the U. S.U.S. intending to use the proceeds of the investment outside of the U.S. or companies that are located in the U.S. that have more than 50% of their employees or tangible assets located outside of the U.S.; (5) businesses that are passive and do not carry on an active trade or business; (6) businesses that use 50% or more of the funds to buy goods or services from an associated supplier; and (7) certain “sin businesses” such as gambling and the like. Nonetheless, the regulations provide an exception to (1) above for an SBIC that provides Venture Capital Financing investments (represented by common or preferred stock, a limited partnership interest or a similar partnership interest) to a Disadvantaged Business that is a relender or reinvestor)reinvestor (except banks or savings and loans insured by agencies of the Federal Government, and agricultural credit companies), so long as, without SBA prior approval, total outstanding financings do not exceed the SBICs regulatory capital at the end of its fiscal year.
Under current SBA regulations, the maximum rate of interest that Medallion Funding, Medallion Capital and Freshstart may charge may not exceed the higher of (i) 19% or (ii) the sum of (a) the higher of (i) that company’s weighted average cost of qualified borrowings, as determined under SBA regulations, or (ii) the current SBA debenture rate, plus (b) 11%, rounded to the next lower eighth of one percent. As of December 31, 2017,2018, the maximum rate of interest permitted on loans originated by Medallion Funding, Medallion Capital, and Freshstart was 19%. As of December 31, 2017,2018, our outstanding medallion loans had a weighted average rate of interest 4.41%4.43% and our outstanding commercial loans had a weighted average rate of interest of 12.02%13.56%. Current SBA regulations also require that each loan originated by an SBIC has a term between one and 20 years.
In addition, SBICs are subject to periodic examination by the SBA, for which the SBA charges examination fees. SBICs are required to maintain certain minimum levels of capital and must maintain certain records and
make them available for SBA examination. SBICs also are required to prepare valuations of their portfolio investments in accordance with prescribed valuation
guidelines, to maintain certain minimum levels of capital, to file annual reports containing financial, management and other information and to file notices of certain material changes in their ownership and operations. We are examined by the SBA annually for compliance with applicable SBA regulations.
SBICs are precluded from making investments in a small business if it would give rise to a conflict of interest. Generally, a conflict of interest may arise if an associate of the SBIC has or makes an investment in the small business the SBIC is financing or serves as one of its officers or would otherwise benefit from the financing. A conflict of interest would also occur if an SBIC were to lend money to any of its officers, directors, and employees, or invest in any affiliates thereof. Joint investing with an associate (such as another fund controlled by affiliates of the General Partner)general partner of the fund) may be made on identical terms or on terms that are fair to the SBIC. The SBA also prohibits, without prior SBA approval, a “change of control” or transfers which would result in any person (or group of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC. A “change of control” is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements, or otherwise.
Under SBA regulations, without prior SBA approval, loans by licensees with outstanding SBA leverage to any single small business concern may not exceed 30% of an SBIC’s regulatory capital, as defined in the SBIA.
SBICs must invest idle funds that are not being used to make loans in investments permitted under SBA regulations. These permitted investments include direct obligations of, or obligations guaranteed as to principal and interest by, the government of the USU.S. with a term of 15 months or less and deposits maturing in one year or less issued by an institution insured by the FDIC. These permitted investments must be maintained in (i) direct obligations of, or obligations guaranteed as to principal and interest by, the US,U.S., which mature within 15 months from the date of the investment; (ii) repurchase agreements with federally insured institutions with a maturity of seven days or less if the securities underlying the repurchase agreements are direct obligations of, or obligations guaranteed as to principal and interest by the US,U.S., and such securities must be maintained in a custodial account in a federally insured institution; (iii) mutual funds, securities, or other instruments that exclusively consist of, or represent pooled assets of, investments described in (i) or (ii) above; (iv) certificates of deposit with a maturity of one year or less, issued by a federally insured institution; (v) a deposit account in a federally insured institution, subject to withdrawal restriction of one year or less; (vi) a checking account in a federally insured institution; or (vii) a reasonable petty cash fund.
SBICs may purchase voting securities of small business concerns in accordance with SBA regulations. Although prior regulations prohibited an SBIC from controlling a small business concern except in limited circumstances, regulations adopted by the SBA on October 22, 2002 (pursuant to Public Law106-554)regulations allow an SBIC to exercise control over a small business for a period of seven years from the date on which the SBIC initially acquires its control position. This control period may be extended for an additional period of time with the SBA’s prior written approval.
If an SBIC defaults in its payment obligations to SBA under its outstanding debentures, fails to comply with any terms of its securities, or violates any law or regulation applicable to it, the SBA has the right to accelerate the maturity of all amounts due under its debentures. Additionally, the SBA can bring suit for the appointment of a receiver for the SBIC and for its liquidation in the event a default on payment of a SBIC’s debentures or for serious regulatory violations.
Regulation of Medallion Bank as an Industrial Bank
In May 2002, we formed Medallion Bank, which received approval from the FDIC for federal deposit insurance in October 2003. Medallion Bank, a Utah-chartered industrial bank, is a depository institution subject to regulatory oversight and examination for safety and soundness by both the FDIC and the Utah Department of Financial Institutions. Medallion Bank is examined annually by the FDIC and the Utah Department of Financial Institutions. Numerous other federal and state laws and regulations govern almost all aspects of Medallion Bank’s operations and, to some degree, our operations and those of ournon-bank subsidiaries as institution-affiliated parties. Under its banking charter, Medallion Bank is empowered to make consumer and commercial loans, and may accept all FDIC-insured deposits other than demand deposits (checking accounts). Medallion Bank provides stable andlow-cost bank deposit funding for our key lending business activities conducted through Medallion Bank.
In addition, the FDIC has regulatory authority to prohibit Medallion Bank from engaging in any unsafe or unsound practice in conducting its business.
Medallion Bank is subject to risk-based and leverage capital standards issued by the federal banking regulators. These standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, to account foroff-balance sheet exposure, to minimize disincentives for holding liquid assets, and to achieve greater consistency in evaluating the capital adequacy of major banks throughout the world. Under the risk-based capital standards, assets andoff-balance sheet items are assigned to broad risk categories, each with designated weights, and the resulting capital ratios represent capital as a percentage of total risk-weighted assets andoff-balance sheet items.
In July 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency adopted the U.S. Basel III capital rules, which implement many aspects of the Basel Committee on Banking Supervision’s Basel III capital framework and are aimed at increasing both the quantity and quality of regulatory capital. The requirements in the U.S. Basel III capital rules began to phase in on January 1, 2015, for many covered banking organizations, including Medallion Bank. Most requirements in the U.S. Basel III capital rules will be fully phased in by January 1, 2019. Because Medallion Bank was already subject to a capital maintenance agreement with the FDIC that required it to hold capital in excess of the then applicable capital requirements, we do not believe that the U.S. Basel III capital rules will have a material impact on Medallion Bank’s business.
Under the U.S. Basel III capital rules, Medallion Bank is subject to the following minimum capital ratios:
In addition, Medallion 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, Medallion 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%. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of qualifying minority interests that are in the form of common stock.
The U.S. Basel III capital rules retain or modify certain deductions from and adjustments to regulatory capital and also provide for new ones. In addition, the U.S. Basel III capital rules provide for limited recognition in Common Equity Tier 1 capital, and deduction from Common Equity Tier 1 capital above certain thresholds, of three categories of assets: (i) deferred tax assets arising from temporary differences that cannot be realized through net operating loss carrybacks (net of related valuation allowances and of deferred tax liabilities), (ii) mortgage servicing assets (net of associated deferred tax liabilities) and (iii) investments in more than 10% of the issued and outstanding common stock of unconsolidated financial institutions (net of associated deferred tax liabilities).
For purposes of calculating the denominator of the three risk-based capital ratios, the assets of covered banking organizations are given risk weights that, under the U.S. Basel III capital rules, range from 0% to 1,250%, depending on the nature of the asset. Direct obligations of the U.S. Treasury or obligations unconditionally guaranteed by the U.S. government have a 0% risk weight, while general obligation claims on states or other political subdivisions of the United States are assigned a 20% risk weight, except for municipal or state revenue bonds, which have a 50% risk weight. Most first-lien residential mortgage exposures that are prudently underwritten and performing according to their original terms carry a 50% risk weight, with a 100% risk weight for other residential mortgage exposures. In addition, certainoff-balance sheet items are assigned credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk weight is applied. For example, the unused portion of unconditionally cancellable commitments is assigned a 0% conversion factor, while self-liquidating, transaction-related contingent items with an original maturity of one year or less and the amount of a commitment with an initial maturity of one year or less that is not unconditionally cancellable by the covered banking organization are converted at 20%. Transaction-related contingencies such as bid bonds and standby letters of credit backing nonfinancial obligations, as well as the amount of a commitment with an original maturity of more than one year that is not unconditionally cancellable, have a 50% conversion factor. General guarantees and standby letters of credit backing financial obligations are given a 100% conversion factor.
In addition, pursuant to provisions of the FDIC Improvement Act of 1991, or FDICIA, and related regulations with respect to prompt corrective action, FDIC-insured institutions such as Medallion Bank may only accept brokered deposits without FDIC permission if they meet specified capital standards, and are subject to restrictions with respect to the interest they may pay on deposits unless they are well capitalized. The U.S. Basel III capital rules revised the capital threshold to be well capitalized. Effective January 1, 2015, in order to qualify as well capitalized, an insured depository institution must maintain a Common Equity Tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 5.0%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level.
Pursuant to a capital maintenance agreement with the FDIC, we and Medallion Bank have agreed that the capital levels of Medallion Bank will at all times meet or exceed the levels required for Medallion Bank to be considered well-capitalized under the FDIC rules and regulations, that Medallion Bank’s Tier 1 capital to total assets leverage ratio will be maintained at not less than 15%, and that Medallion Bank will maintain an adequate allowance for loan and lease losses.
Medallion Bank is also subject to certain federal laws that restrict and control its ability to extend credit and provide or receive services between affiliates. Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder limit the transfer of funds by a depository institution to certain of its affiliates, including us, in the form of loans, extensions of credit, investments, or purchases of assets. Sections 23A and 23B and Regulation W also require generally that the depository institution’s transactions with its affiliates be on terms no less favorable to Medallion Bank than comparable transactions with unrelated third parties.
The USA Patriot Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, or the Patriot Act, was enacted on October 26, 2001, and is intended to detect and prosecute terrorism and international money laundering. The Patriot Act establishes new standards for verifying customer identification incidental to the opening of new accounts. Medallion Bank has undertaken appropriate measures to comply with the Patriot Act and associated regulations. Other provisions of the Patriot Act provide for special information sharing procedures governing communications with the government and other financial institutions with respect to suspected terrorists and money laundering activity, and enhancements to suspicious activity reporting, including electronic filing of suspicious activity reports over a secure filing network. The compliance programs required by the Patriot Act are intended to supplementpre-existing compliance requirements that apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control, or OFAC, regulations to which Medallion Bank is also subject. The Bank Secrecy Act requires all financial institutions, including banks, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The Bank Secrecy Act includes a variety of record-keeping and reporting requirements (such as cash and suspicious activity reporting), as well as due diligence/know-your-customer documentation requirements. Medallion Bank has in place policies, procedures and internal controls in order to comply with Bank Secrecy Act and OFAC laws and regulations. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.
Federal and state banking agencies require Medallion Bank to prepare annual reports on financial condition and to conduct an annual audit of financial affairs in compliance with minimum standards and procedures. Medallion Bank must undergo regularon-site examinations by the appropriate banking agency, which will examine for adherence to a range of legal and regulatory compliance responsibilities. A bank regulator conducting an examination has complete access to the books and records of the examined institution. The results of the examination are confidential. The cost of examinations may be assessed against the examined institution as the agency deems necessary or appropriate.
Regulation by the SEC and under the 1940 Act
We are aclosed-end, management investment company that has elected to be treated as a business development company (BDC) under the 1940 Act. We conduct our business through various wholly-owned investment company subsidiaries including Medallion Funding LLC, a closed end investment company, Medallion Capital, Inc., a BDC, and Freshstart Venture Capital Corp., a BDC. Pursuant to various exemptive orders, we operate and are regulated as a single BDC. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers orsub-advisers), principal underwriters and affiliates of those affiliates or underwriters, and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a majority of our outstanding voting securities voting as a class.
On March 7, 2018, a majority of the Company’s shareholders authorized the Company’s Board of Directors to withdraw the Company’s election to be regulated as a BDC under the 1940 Act and our Board of Directors approved the filing of the Company’s withdrawal form with the SEC to be made on or about April 1, 2018. At that point, we would no longer be a BDC or be subject to the provisions of the 1940 Act applicable to BDCs. For a discussion of the shareholder protections of the 1940 Act that would no longer apply if the Company ceases to operate as a BDC, see “Risk Factors — Risks Relating to Our Business and Structure – Our shareholders would no longer have the protections of the 1940 Act upon the withdrawal of the Company’s election to be regulated as a BDC.”
The remainder of the discussion in this subsection currently applies to our operations as a BDC and would continue to apply in the future only if the Company remains a BDC under the 1940 Act.
We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act of 1933. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of acquired securities
or their affiliates to repurchase them under certain circumstances. We also do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any registered investment company, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment company. Certain of these limits are not applicable to our investments in our wholly-owned SBIC subsidiaries. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. None of our policies are fundamental, and each may be changed without stockholder approval.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following:
Managerial Assistance to Portfolio Companies
In addition, a BDC must have been organized and have its principal place of business in the US and must be operated for the purpose of making investments in the types of securities described in (1), (2), or (3) above. However, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than certain companies described above) significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers, or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company.
Temporary Investments
Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash equivalents, US government securities, or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in US Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the US government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements.
Senior Securities
We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our shareholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary purposes without regard to full asset coverage requirements. In addition to the 1940 Act, we are subject to two exemptive orders which govern how we calculate our senior securities and under which we have agreed that we will meet the applicable asset coverage ratios both individually and on a consolidated basis. For a discussion of the risks associated with leverage, see “Risk Factors—Risks Relating to Our Operations as a BDC—Regulations governing our operation as a BDC will affect our ability to, and the way in which we raise additional capital.”
Other considerations under the 1940 Act
We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC.
We are periodically examined by the SEC for compliance with the 1940 Act.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our shareholders arising from willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of such person’s office.
We have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws, and intend to review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We have designated a chief compliance officer to be responsible for administering our policies and procedures. If the Company withdraws its election to be regulated as a BDC under the 1940 Act, we anticipate modifying these policies and procedures to reflect our status as anon-BDC.
Other
Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or
company from acquiring control of us and, indirectly, Medallion Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations.AlthoughMedallionBankisan“insureddepositoryinstitution”withinthemeaningoftheFederalDepositInsuranceActandtheChangeinBankControlAct,yourinvestmentinMedallionFinancialCorp.isnotinsured or guaranteedbytheFDIC,or any other agency, andissubjecttoloss. Under the Utah Financial Institutions Act, control is defined as the power to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an individual. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval.
In addition to the regulations detailed above, our operations are subject to supervision and regulation by other federal, state, and local laws and regulations. Additionally, our operations may be subject to various laws and judicial and administrative decisions. This oversight may serve to:
regulate credit granting activities, including establishing licensing requirements, if any, in various jurisdictions;
establish maximum interest rates, finance charges and other charges;
require disclosures to customers;
govern secured transactions;
set collection, foreclosure, repossession and claims handling procedures and other trade practices;
prohibit discrimination in the extension of credit and administration of loans; and
regulate the use and reporting of information related to a borrower’s credit experience and other data collection.
Changes to laws of states in which we do business could affect the operating environment in substantial and unpredictable ways. We cannot accurately predict whether such changes will occur or, if they occur, the ultimate effect they would have upon our financial condition or results of operations.
Compliance with the Sarbanes-Oxley Act of 2002 and NASDAQ Corporate Governance Regulations
The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. The Sarbanes-Oxley Act has required us to review our policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all future regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.
In addition, NASDAQ has adopted corporate governance listing standards. We believe we are in compliance with such corporate governance listing standards. We will continue to monitor our compliance with all future listing standards and will take actions necessary to ensure that we are in compliance therewith.
AVAILABLE INFORMATION
Our corporate website is located atwww.medallion.com. We make copies of our Annual Reports onForm10-K, Quarterly Reports onForm10-Q, Current Reports onForm8-K, and any amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act available to investors on or through our website free of charge as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Our SEC filings can be found in the For Investors section of our website, the address of which ishttp://www.medallion.com/investors.html, or on the SEC website atwww.sec.gov. Our Code of Ethical Conduct and Insider Trading Policy can be located in the Corporate Governance section of our website athttp://www.medallion.com/investors_corporate_governance.html. These documents, as well as our SEC filings, are available in print free of charge to any stockholder who requests a copy from our Secretary.
ITEM 1A. | RISK FACTORS |
Risks Relating to Our Business and Structure
Our business is heavily concentrated in consumer lending, which carries a high risk of loss and could be adversely affected by an economic downturn.
Our business is heavily concentrated in consumer lending. As a result, we are more susceptible to fluctuations and risks particular to consumer credit than a more diversified company. For example, our business is particularly sensitive to macroeconomic conditions that affect the U.S. economy, consumer spending and consumer credit. We are also more susceptible to the risks of increased regulations and legal and other regulatory actions that are targeted at consumer credit or the specific consumer credit products that we offer (including promotional financing). Our business concentration could have a material adverse effect on our results of operations.
By its nature, lending to consumers carries with it different risks and typically a higher risk of loss than commercial lending. Although the net interest margins are intended to be higher to compensate us for this increased risk, an economic downturn could result in higher loss rates and lower returns than expected, and could affect the profitability of our consumer loan portfolio. During periods of economic slowdown, such as the 2007-2009 recession, delinquencies, defaults, repossessions, and losses generally increase, and consumers are likely to reduce their discretionary spending in areas such as recreation and home improvement, which comprise a high proportion of our business. These periods may also be accompanied by increasing unemployment rates and declining values of consumer products securing outstanding accounts, which weaken collateral coverage and increase the amount of a loss in the event of default.
Additionally, higher gasoline prices, volatile real estate values and market conditions, reset of adjustable rate mortgages to higher interest rates, general availability of consumer credit, or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for RVs, boats, trailers and other consumer products (including in connection with home improvement projects), as well as weaken collateral values on certain types of consumer products. Any decrease in consumer demand for those products could have a material adverse effect on our ability to originate new loans and, accordingly, on our business, financial condition, and results of operations.
Although declines in commodity prices, and more particularly gasoline prices, generally are financially beneficial to the individual consumer, such declines may also have a negative impact on unemployment rates in geographic areas that are highly dependent upon the oil and natural gas industry, which could adversely affect the credit quality of consumers in those areas.
Our balance sheet consists of a significant percentage of nonprime consumer loans, which are associated with higher than average delinquency rates. The actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn. In addition, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in our net interest income.
Furthermore, our business is significantly affected by monetary and regulatory policies of the U.S. Federal Government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control and could have a material adverse effect on us through interest rate changes, costs of compliance with increased regulation, and other factors. Although market conditions have improved since the 2007-2009 recession, conditions remain challenging for financial institutions.
The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how those economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the quality of our assets.
Changes in the taxicab andfor-hire vehicle industries have resulted in significantly increased competition and have had a material adverse effect on our business, financial condition, and operations.
There have been recent changes in the taxicab andfor-hire vehicle industries that have resulted in significantly increased competition in all of our taxi medallion markets. Ridesharing applications, or ridesharing apps, utilized byfor-hire vehicles were introduced in New York City in 2011 and continue to expand domestically and globally. Many of thesefor-hire vehicle operators operate outside of the regulatory regime with which we and our borrowers operate, which posesoperate. As a result, there is an increased risk ofin competition because such operators are able to pass the cost savings of not having to comply with certain regulations to its passengers. Since 2017, New York State, New York City Council and the New York City Taxi and Limousine Commissions have made several changes to the medallion classes and regulations forcing greater transparency and equal regulation among transportation companies, including; eliminating the distinction between individual and corporate medallions, temporarily capping the number of ride-sharing licenses, minimum-wage regulations forfor-hire vehicle (FHV) companies, and congestion pricing. Until the market fully stabilizes we will not be able to determine the ultimate impact of these changes. According to the TLC, between January 20172018 and January 20182019 approximately 16,00015,500 newfor-hire vehicle licenses were issued, increasing the total number offor-hire vehicles to approximately 105,100120,608 as of January 31, 2018, an 18%25, 2019, a 14.8% increase from January 2017.2018.
In addition, the New York State legislature enacted a law on December 21, 2011, which was amended on February 17, 2012, to permit carsfor-hire to pickuppick up street hails in boroughs outside of Manhattan. Pursuant to this law the TLC has issued approximately 8,300 Street Hail Livery licenses since June 2013, of which approximately 3,8003,400 are active.
TLC annualized data through December 2017November 2018 has shown a 13.9%8.9% reduction in total New York City taxicab fares, compared to the same period in 2016,annualized data of December 2017, and a 13.5%9.1% reduction in the total number of New York City taxicab trips. Such reductions in fare totals and taxicab trips are likely the result of a combination of ridesharing apps, Street Hail Livery licenses, and other forms of public transportation.
As of December 31, 2017, 15.9%2018, 8.6% of our managed medallion loan portfolio and 26.1% of ouron-balance sheet loan portfolios werewas 90 days or more past due, compared to 18.8% and 24.4% at December 31, 2016.due. As discussed in further detail below, there have also been recent decreases in the values of our medallion loan collateral and our Chicago medallions purchased out of foreclosure. Increased competition from ridesharing apps and Street Hail Livery licenses has reduced our market share, the overall market for taxicab services, the supply of taxicab drivers, income from operating medallions, and the value of taxicab medallions. If these trends continue and intensify, there would be a further material increase to our loan to value ratios, loan delinquencies, and loan defaults resulting in a material adverse effect on our business, financial condition, and results of operations.
Decreases in the value of our medallion loan collateral and our Chicago medallions purchased out of foreclosure have had, and may continue to have, a material adverse effect on our business.
A significant portion of our loan revenue is derived from loans collateralized by New York City taxicab medallions. According to TLC data, over the past 20 years New York City taxicab medallions had appreciated in value from under $200,000 to $1,320,000 for corporate medallions and $1,050,000 for individual medallions in 2014. As reported by the TLC, individual (owner-driver) medallions and corporate medallions sold for a wide rangeHowever, based on our evaluation of prices during 2017. Like many other financial institutions, we evaluate thevarious sale transactions and cash flows of our underlying borrowerborrowers performance, andwe determined that a market value of $324,000, $315,000$186,400, $181,000 net of liquidation costs, was appropriate, reflecting a blend ofthe median transactional activity and values supported by borrower cash flows. In March 2017,for the New York City Council made changes to the medallion classes, eliminating the distinction between individual and corporate medallions. Until the market fully stabilizes we will not be able to determine the ultimate impact of this change, however, we believe it will allow for greater economic investment as these rules were a significant barrier of entry into the industry.quarter ended December 31, 2018.
We own 159 Chicago taxicab medallions that were purchased out of foreclosure in 2003. Additionally, a portion of our loan revenue is derived from loans collateralized by Chicago taxicab medallions. The Chicago medallions had appreciated in value from $50,000 in 2003 to approximately $370,000 in 2013. Since that time, however, there has been a decline in the value of Chicago taxicab medallions to approximately $48,000, $47,000$28,000, $27,160 net of liquidation costs, at the endas of 2017.December 31, 2018.
Decreases in the value of our medallion loan collateral hashave resulted in an increase in theloan-to-value ratios of our medallion loans. We estimate that the weighted averageloan-to-value ratio of our managed medallion loans was approximately 131%220% as of December 31, 2017 and 129% as of December 31, 2016.2018. If taxicab medallion values continue to decline, there could be an increase in medallion loan delinquencies, foreclosures, and borrower bankruptcies. Our ability to recover on defaulted medallion loans by foreclosing on and selling the medallion collateral wouldcould be diminished, which wouldcould result in material losses on defaulted medallion loans which wouldcould have a material adverse effect on our business. A substantial decreaseContinued decreases in the value of our Chicago medallions purchased out of foreclosure wouldcould adversely affect our ability to dispose of such medallions at times when it may be advantageous for us to do so. If we are required to liquidate all or a portion of our medallions quickly, we wouldcould realize less than the value at which we had previously recorded such medallions.
Our financial condition, liquidity and results of operations depend on the credit performance of our loans.
As of December 31, 2018, more than half of our recreation loans are nonprime receivables with obligors who do not qualify for conventional consumer finance products as a result of, among other things, adverse credit history. While our underwriting guidelines are designed to confirm that, notwithstanding such factors, the obligor would be a reasonable credit risk, the receivables nonetheless are expected to experience higher default rates than a portfolio of obligations of prime obligors. The weakening of our underwriting guidelines for any reason, such as in response to the competitive environment, in an effort to originate higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans or our inability to adequately adapt policies and procedures to changes in economic or other conditions, may result in loan defaults and charge-offs that may necessitate increases to our allowance for loan losses, each of which could adversely affect our net income and financial condition. In the event of a default on a recreation loan, generally the most practical recovery method is repossession of the financed vehicle, although the collateral value of the vehicle usually does not fully cover the outstanding account balance and costs of recovery. Repossession sales that do not yield sufficient proceeds to repay the receivables in full typically result in losses on those receivables.
In addition, our prime portfolio has grown in proportion to our overall portfolio over the past several years. While prime portfolios typically have lower default rates than nonprime portfolios, we have less ability to make risk adjustments to the pricing of prime loans compared to nonprime loans. As a result, to the extent our prime portfolio continues to grow, a larger proportion of our business will consist of loans with respect to which we will have less flexibility to adjust pricing to absorb losses. As a result of these factors, we may sustain higher losses than anticipated in our prime portfolio. Additionally, if our prime loan losses are higher than expected then we may also be at risk with regards to our forecasted losses, which could impact our loss reserves and results of operations.
We are subject to certain financial covenants and other restrictions under our loan and credit arrangements, which could affect our ability to finance future operations or capital needs or to engage in other business activities.
Our loan and credit agreements contain financial covenants and other restrictions relating to borrowing base eligibility, tangible net worth, net income, leverage ratios, shareholders’ equity, and collateral values. Our ability to meet these financial covenants and restrictions could be affected by events beyond our control, such as a substantial decline in collateral values or a rise in borrower delinquencies. A breach of these covenants could result in an event of default under the applicable debt instrument. Such a default, if not cured or waived, may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default provision. Most of our credit facility debt is subject to cross default provisions. Certain other events can constitute an event of default. Furthermore, if we were unable to repay the amounts due and payable under our credit facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or holders of the related notes accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that
indebtedness. We have regularly needed waivers and extensions and there can be no guarantee that we will be able to continue to get them if requested. Based on the foregoing factors, the operating and financial restrictions and covenants in our current credit agreements and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
Our business, financial condition and results of operations could be negatively impacted if we are unsuccessful in developing and maintaining our relationships with dealerships, contractors and FSPs.
We originate loans by working with third-party sellers of consumer products and not working directly with consumers. As a result, our ability to originate consumer loans depends on our relationships with dealerships, contractors and FSPs. Although we have relationships with various dealerships, contractors and FSPs, none of our relationships are exclusive and each may be terminated at any time. In particular, there is significant competition for the contractor and FSP relationships we depend on in connection with our home improvement lending business. The loss of any of these relationships, our failure to develop additional relationships, and circumstances in which our existing dealer, contractor, and FSP relationships generate decreased sales and loan volume all may have a material adverse effect on our business, financial condition and results of operations.
We borrow money, which magnifies the potential for gain or loss on amounts invested, and may increaseincreases the risk of investing in us.
Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested, and therefore increase the risk associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders, and through long-term subordinated SBA debentures. These creditors have fixed dollar claims on our assets that are superior to the claims of our shareholders. If the value of our assets increases, then leveraging would cause the net asset value to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could reduce the amount available for distribution payments.
As of December 31, 2017,2018, we had $327,623,000$1,062,028,000 of outstanding indebtedness, which hadwith a weighted average borrowing cost of 4.01% at December 31, 2017, and our wholly-owned unconsolidated portfolio companies, primarily Medallion Bank, had $906,748,000 of outstanding indebtedness at a weighted average borrowing cost of 1.51%2.67%.
Most of our borrowing relationships have maturity dates during 2018.2019 through 2021. We have been in active and ongoing discussions with each of these lenders and have extended each of the facilities as they matured except as set forth in the following risk factor.matured. Certain lenders have worked with us to extend and change the terms of the borrowing agreements. See Note 47 of our consolidated financial statements for a discussion of the current and new lending arrangements to date.
Failure to obtain an extension of our existing credit facilities or failure to obtain additional revolving credit facilities could have a material adverse effect on our results of operations and financial position.
We utilize secured revolving credit facilities and other facilities to fund our investments. We cannot guarantee that our credit facilities will continue to be available beyond their current maturity dates on reasonable terms or at all or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. Our revolving credit facilities have converted to term loans. Obtaining additional revolving credit facilities or other alternative sources of financing may be difficult and we cannot guarantee that we will be able to do so on terms favorable to us or at all. The availability of revolving credit facilities depends, in part, on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit, the financial strength and strategic objectives of the banks that participate in our credit facilities and the availability of bank liquidity in general. If the credit facilities are not renewed or extended by our lenders by their maturity dates, we will not be able to make further borrowings under the facilities after
they mature and the outstanding principal balances under such facilities will be due and payable at maturity. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, our financial condition would be adversely affected and our lenders may foreclose on the property securing such indebtedness. If we are unable to extend or replace these facilities or arrange new credit facilities or other types of interim financing, we may need to curtail or suspend loan origination and funding activities which could have a material adverse effect on our results of operations and financial position.
WeOur use of brokered deposits for our deposit-gathering activities may not be available when needed. The inability to accept and renew brokered deposits would have a material adverse effect on our subsidiaries obtain financing under lending facilities extended by various banksbusiness, financial condition, liquidity and other financial institutions, someresults of which are secured by loans, taxi medallions and other assets. Where these facilities are extended to our subsidiaries, we and others of our subsidiaries may guarantee the obligations of the relevant borrower. Five of our smallest subsidiaries are borrowers under promissory notes extended to them by a bank that total $8.8 million that came due on October 17, 2016. These loans are secured by Chicago taxi medallions owned by our subsidiaries. These notes are guaranteed by Medallion Funding, not by Medallion Financial Corp. These subsidiaries have not repaid the amounts due under the notes and the bank has filed a suit seeking payment of these amounts. This failure to pay would constitute an event of default under certain loan agreements which we or our subsidiaries are borrowers, but the lenders under those agreements have waived the default. If judgment is entered against us in the suit brought by the bank or entered and not satisfied within specified periods of time, these outcomes may constitute an additional event of default under these other agreements. If waivers are required and not granted for this additional event of default, it would lead to events of default under other of our financing arrangements.operations.
We rely on the established brokered deposit market to originate deposits to fund our operations. Additionally, our business, strategy and prospects are subject to certain financial covenants and other restrictions under our loan and credit arrangements, which could affectdependent on our ability to finance future operations or capital needs oraccept and renew brokered deposits without limitation and, therefore, dependent on our ability to engage in other business activities.be “well-capitalized” under the FDIC’s regulatory framework.
Our loanbrokered deposits consist of deposits raised through the brokered deposit market rather than through retail branches. Although we have developed contractual relationships with a diversified group of investment brokers, and credit agreements containthe brokered deposit market is well developed and utilized by many banking institutions, conditions could change that might affect the availability of brokered deposits. In addition, our ability to rely on brokered deposits as a source of funding is subject to capitalization requirements set forth in the FDIC’s prompt corrective action framework. We may not accept or renew brokered deposits unless we are “well-capitalized” or we are “adequately capitalized” and we receive a waiver from the FDIC. A bank that is “adequately capitalized” and that accepts or renews brokered deposits under a waiver from the FDIC is subject to additional restrictions on the interest rates it may offer. See “Supervision and Regulation” for additional information.
If our capital levels fall below the “well-capitalized” level as defined by the FDIC our ability to raise brokered deposits would be materially impaired. If our capital levels fall below the “adequately capitalized” level as defined by the FDIC, we would be unable to raise brokered deposits. Any impairment or inability to raise brokered deposits would have a material adverse effect on our business, financial covenantscondition, liquidity and results of operations. Brokered deposits may also not be as stable as other restrictions relating to borrowing base eligibility, tangible net worth, net income, leverage ratios, shareholders’ equity,types of deposits, and collateral values.if we experience a period of sustained operating losses, the cost of attracting deposits from the brokered deposit market could increase significantly. Our ability to meet these financial covenants and restrictions could be affected by events beyondmanage our control, such as a substantial decline in collateral values or a rise in borrower delinquencies. A breach of these covenants could result in an event of default undergrowth to stay within the applicable debt instrument. Such a default, if not cured or waived, may allow the creditors“well-capitalized” level is critical to accelerate the related debt and may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default provision. Certain other events can constitute an event of default. Furthermore, if we were unable to repay the amounts due and payable under our credit facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or holders of the related notes accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Based on the foregoing factors, the operating and financial restrictions and covenants in our current credit agreements and any future financing agreements could adversely affect our ability to finance future operations or capital needs orretain open access to engage in other business activities.this funding source.
The issuance of debt securities or preferred stock and our borrowing money from banks or other financial institutions may affect holders of our common stock.
Our business may periodically require capital. We may issue debt securities or preferred stock, and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities. Any amounts that we use to service our debt or make payments on preferred stock will not be available for distributions to our common shareholders. It is likely that any senior securities we issue will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, some of these securities or other indebtedness may be rated by rating agencies, and in obtaining a rating for such securities and other indebtedness, we may be required to abide by operating and investment guidelines that further restrict operating and financial flexibility. We and, indirectly, our shareholders will bear the cost of issuing and servicing such securities and other indebtedness. Preferred stock or any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges more favorable than those of our common stock, including separate voting rights, and could delay or prevent a transaction or a change in control to the detriment of the holders of our common stock.
If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our shareholders at that time would decrease
and they may experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all.
Consumer lending by Medallion Bank carries a higher risk of loss and could be adversely affected by an economic downturn.
By its nature, lending to consumers carries with it a higher risk of loss than commercial lending. Although the net interest margins should be higher to compensate Medallion Bank for this increased risk, an economic downturn could result in higher loss rates and lower returns than expected, and could affect the profitability of Medallion Bank’s consumer loan portfolio.
We are dependent upon our key investment personnel for our future success.
We depend on the diligence, skill, and network of business contacts of the investment professionals we employ for sourcing, evaluating, negotiating, structuring, and monitoring our investments. Our future success will also depend, to a significant extent, on the continued service and coordination of our senior management team, particularly, Alvin Murstein, our Chairman and Chief Executive Officer, Andrew M. Murstein, our President, and Larry D. Hall, our Chief Financial Officer.Officer, Donald Poulton and his management team for Medallion Bank, and Alex Travis and his management team at Medallion Capital. The departure of Messrs. Murstein or Mr. Hall, or any other member of our senior management team, could have a material adverse effect on our ability to achieve our investment objective.business and financial results.
Changes in taxicab industry regulations that result in the issuance of additional medallions or increases in the expenses involved in operating a medallion would lead to a decrease in the value of our medallion loan collateral and our Chicago medallions purchased out of foreclosure.
Every city in which we originate medallion loans, and most other major cities in the United States, limits the supply of taxicab medallions. This regulation results in supply restrictions that support the value of medallions. Actions that loosen these restrictions and result in the issuance of additional medallions into a market could decrease the value of medallions in that market. If this were to occur, the value of the collateral securing our then outstanding medallion loans in that market would be adversely affected. We are unable to forecast with any degree of certainty whether any other potential increases in the supply of medallions will occur.
In New York City, Chicago, Boston, and other markets where we originate medallion loans, taxicab fares are generally set by government agencies. Expenses associated with operating taxicabs are largely unregulated. As a result, the ability of taxicab operators to recoup increases in expenses is limited in the short term. Escalating expenses, such as rising gas prices and an increase in interest rates, can render taxicab operations less profitable, could cause borrowers to default on loans from us and would adversely affect the value of our collateral.
We operate in a highly regulated environment, and if we are found to be in violation of any of the federal, state, or local laws or regulations applicable to us, our business could suffer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted in 2010. The Dodd-Frank Act significantly changed federal financial services regulation and affects, among other things, the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. In addition to the statutory requirements under the Dodd-Frank Act, the legislation also delegated authority to USU.S. banking, securities and derivatives regulators to impose additional restrictions through required rulemaking. The Dodd-Frank Act requires a company that owns an industrial bank to serve as a “source of strength” to the institution. We believe that we have historically served,institution and will serve in the future, as a source of strength to our industrial bank subsidiary, Medallion Bank. We do not believe that the codification of this requirement under the Dodd-Frank Act materially impacts our obligations. A company that owns an industrial bank is also subject to the Dodd-Frank Act “Volcker Rule.” We doAlthough these requirements have not believematerially impacted us, we cannot assure you that they will not in the “Volcker Rule” materially impacts our operations as presently conducted.
For so long as we remain a BDC, the 1940 Act imposes numerous constraints on our operations. For a discussion of those constraints, see “Government Regulation—Regulation by the SEC and under the 1940 Act.” Any failure to comply with the requirements imposed on BDCs by the 1940 Act, if applicable, could have material adverse consequences to us or our investors, including possible enforcement action by the SEC. See “Risk Factors—Risks Associated with Our Operations as a BDC.”future.
Other changes in the laws or regulations applicable to us more generally, may negatively impact the profitability of our business activities, require us to change certain of our business practices, materially affect our business model, limit the activities in which we may engage, affect retention of key personnel, require us to raise additional regulatory capital, increase the amount of liquid assets that we hold, or otherwise affect our funding profile or expose us to additional costs (including increased compliance costs). Any such changes may also require us to invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our business as previously conducted or our results of operations or financial condition.
We are also subject to a wide range of federal, state, and local laws and regulations, such as local licensing requirements, and retail financing, debt collection, consumer protection, environmental, health and safety, creditor, wage-hour, anti-discrimination, whistleblower and other employment practices laws and regulations and we expect these costs to increase going forward. The violation of these or future requirements or laws and regulations could result in administrative, civil, or criminal sanctions against us, which may include fines, a cease and desist order against the subject operations or even revocation or suspension of our license to operate the subject business. As a result, we have incurred and will continue to incur capital and operating expenditures and other costs to comply with these requirements and laws and regulations.regulations.
Changes in laws, regulations, or policies may adversely affect our business.
The post-financial crisis era has been marked by an increase in regulation, regulatory intensity, and enforcement. We are unable to predict all of the ways in which this change in the regulatory environment could impact our business models or objectives. The laws and regulations governing our lending, servicing, and debt collection activities or the regulatory or enforcement environment at the federal level or in any of the states in which we operate may change at any time which may have an adverse effect on our business.
We expect, however, to see an increase over time in regulatory scrutiny and enforcement in the area of consumer financial products regulation, as a result of the establishment of the Consumer Financial Protection Bureau, or the CFPB, by the Dodd-Frank Act. The CFPB is responsible for interpreting and enforcing a broad range of consumer protection laws that govern the provision of deposit accounts and the making of loans, including the regulation of mortgage lending and servicing and automobile finance. While Medallion Bank’s size currently falls below the threshold that would give the CFPB direct authority over it, Medallion Bank’s existing bank supervisors may pursue similar policies and make similar information requests to those of the CFPB with respect to consumer financial products and other matters within the scope of the CFPB’s authority. We believe that the CFPB’s regulatory reforms, together with other provisions of the Dodd-Frank Act, and increased regulatory supervision, may increase our cost of doing business, impose new restrictions on the way in which we conduct our business, or add significant operational constraints that might impair our profitability.
We are unable to predict how these or any other future legislative proposals or programs will be administered or implemented or in what form, or whether any additional or similar changes to statutes or regulations, including the interpretation or implementation thereof, will occur in the future. Any such action could affect us in substantial and unpredictable ways and could have an adverse effect on our results of operations and financial condition.
Our inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse effect on our operations in that market and on our reputation generally. No assurance can be given that applicable laws or regulations will not be amended or construed differently or that new laws and regulations will not be adopted, either of which could materially adversely affect our business, financial condition, or results of operations.
Federal and state law may discourage certain acquisitions of our common stock which could have a material adverse effect on our shareholders.
Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly Medallion Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of the Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control
factors” as set forth in the applicable regulations. Under the Utah Financial Institutions Act, control is defined as the power to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an individual. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval. These provisions could delay or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the market price of our common stock. AlthoughMedallionBankisan“insureddepositoryinstitution”withinthemeaningoftheFederalDepositInsuranceActandtheChangeinBankControlAct,yourinvestmentinMedallionFinancialCorp.isnotinsuredorguaranteedbytheFDIC,oranyotheragency,andissubjecttoloss.
The banking industry is an “insured depository institution” within the meaning of the Federal Deposit Insurance Acthighly regulated, and the Change in Bank Control Act, your investment in Medallion Financial Corp.regulatory framework, together with any future legislative or regulatory changes, may have a significant adverse effect on our operations.
The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, federal deposit insurance funds, and the banking system as a whole, not insured or guaranteedfor the protection of our stockholders and creditors. We are subject to regulation and supervision by the FDIC or any other agency, and is subjectthe Utah Department of Financial Institutions. The laws and regulations applicable to loss.
Change inus govern a variety of matters, including permissible types, amounts, and terms of loans and investments we may make, the Company’s Tax Classification.
RIC qualification rules requiremaximum interest rate that at the end of each quarter of our taxable year, (i) at least 50% of the market value of our assets must be represented by cash, securities of other RICs, US government securities, and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of our assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of our assets may be invested in the securities (other than US government securities or securities of other RICs) of any one issuer, any two or more issuers of which 20% or more of the voting stock is held by us and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships. We monitor our compliance with these asset tests and any other
investment concentrations in conjunction with the diversification tests. As of December 31, 2017 our largest investment subject to this test was our investment in Medallion Bank, representing 52.9% of our RIC assets, and no other investments were more than 5% of our RIC assets. As a result of our failure of the 25% asset diversification test, we were not eligible to file our tax returns as a RIC for 2017.
Because we did not meet the qualifications for RIC tax treatment for the tax years ended December 31, 2017 and 2016, and now we are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets,charged, the amount of income available for distributionreserves we must hold against deposits we take, the types of deposits we may accept, maintenance of adequate capital and the amount of our distributions. Qualification as a RIC is made on an annual basis and, although we and some of our subsidiaries have qualifiedliquidity, changes in the past,control of Medallion Bank and us, restrictions on dividends, and establishment of new offices. As long as we cannot assure youremain well-capitalized under federal regulatory standards, there are no restrictions on the rates we may pay on brokered deposits. We must obtain approval from our regulators before engaging in certain activities or acquisitions, and there is the risk that we will qualify for such treatmentapprovals may not be obtained, either in a timely manner or at all. Our regulators also have the future.
If we do not qualify as a RIC for more than two consecutive years, and then seekability to requalify and elect RIC status, we would be requiredcompel us to recognize gain to the extent of any unrealized appreciation on our assets unless we make a special election to pay corporate-level tax on any such unrealized appreciation recognized during the succeeding10-year period.
To obtain and maintain RIC tax treatment under the Code in any future taxable year, we must meet the following annual distribution, income source, and asset diversification requirements.
If we meet the requirementssanctions by regulatory agencies, civil money penalties, or damage to be treated asour reputation, all of which could have a RIC in a future tax year, for US federal income tax purposes, we would have to include in taxable income certain amounts that we would not have yet received in cash, such as original issue discount, which may arise if we received warrants in connection with the originationmaterial adverse effect our business, financial condition or results of a loan or possibly in other circumstances, or contractualpayment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount or increases in loan balances as a result ofpayment-in-kind interest will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.operations.
Since in certain cases,the 2007-2009 recession, federal and state banking laws and regulations, as well as interpretations and implementations of these laws and regulations, have undergone substantial review and change. In particular, the Dodd-Frank Act drastically revised the laws and regulations under which we operate. Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities. These changes and increased scrutiny have resulted and may recognize income before or without receiving cash representing such income, we may have difficulty meeting the annual distribution requirement necessarycontinue to achieve and maintain RIC tax treatment under the Code. Accordingly, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital, or reduce new investment originations for this purpose. If we are not able to obtain cash from other sources, we may subsequently fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax. If the Company withdraws its election to be regulated as a BDC under the 1940 Act, the Company would remain ineligible to file as a RIC under the Code and would be treated as a C corporation for tax purposes. See Note 5 for more information.
Our SBIC subsidiaries may be unable to meet the investment company requirements, which could result in increased costs of doing business and may in the imposition of an entity-level tax.
Some of our subsidiaries are subject to the SBIA. Our SBIC subsidiaries that are RICs may be prohibited by the SBIA from making the distributions necessary to qualify as a RIC. The SBA has agreed that our SBIC subsidiaries can make these distributions provided we reinvest the distributions in our SBIC subsidiaries as undistributed net realized earnings. We cannot assure you that this will continue to be the SBA’s policy or that our subsidiaries will have adequate capital to make the required adjustments. If our subsidiaries are unable to obtain a waiver, compliance with the SBA regulations mayfuture result in lossdecreased revenues and net income, reduce our ability to effectively compete to attract and retain customers, or make it less attractive for us to continue providing certain products and services. Any future changes in federal and state law and regulations, as well as the interpretations and implementations, or modifications or repeals, of RIC statussuch laws and regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a consequent impositionmaterial adverse effect on our business, financial condition or results of an entity-level tax at the subsidiary level. In the event we are granted a waiver, we will be required to reinvest the distribution into the SBIC as capital. This may result in us recognizing taxable income without receiving a corresponding amount of cash to pay the distribution. Any failure to pay the distribution could cause a loss of RIC status and the imposition of entity level tax. If the Company withdraws its election to be regulated as a BDC under the 1940 Act, the SBIC subsidiaries would be ineligible to file as a RIC under the Code.operations.
Our SBIC subsidiaries are licensed by the SBA, and are therefore subject to SBA regulations.
Our SBIC subsidiaries are licensed to operate as SBICs and are regulated by the SBA. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause the SBIC subsidiaries to forego attractive investment opportunities that are not permitted under SBA regulations.
Further, SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change
“change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of an SBIC. If the SBIC subsidiaries fail to comply with applicable SBIC regulations, the SBA could, depending on the severity of the violation, limit or prohibit their use of debentures, declare outstanding debentures immediately due and payable, and/or limit them from making new investments. In addition, the SBA could revoke or suspend an SBIC license or bring a suit for the appointment of a receiver for the SBIC and for its liquidation for willful or repeated violation of, or willful or repeated failure to observe, any provision of the SBIA or any rule or regulation promulgated thereunder. Such actions by the SBA would, in turn, negatively affect us.
We anticipate withdrawingNon-compliance with the Company’s election to be regulated as a BDCUSA PATRIOT Act, the Bank Secrecy Act or other laws and mayregulations could result in the future materially change our corporate structurefines or sanctions against us.
The USA PATRIOT Act of 2001 and the natureBank Secrecy Act require financial institutions to design and implement programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of our business.
On March 7, 2018,Financial Crimes Enforcement Network (FinCEN). These rules require financial institutions to establish procedures for identifying and verifying the identity of customers and beneficial owners of certain legal entity customers seeking to open new financial accounts. Federal and state bank regulators also have focused on compliance with Bank Secrecy Act and anti-money laundering regulations. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or expanding activities. During the last several years, a majoritynumber of banking institutions have received large fines fornon-compliance with these laws and regulations. Although we have policies and procedures designed to assist in compliance with the Bank Secrecy Act and other anti-money laundering laws and regulations, there can be no assurance that such policies or procedures will work effectively all of the Company’s shareholders authorized the Company’s Boardtime or protect us against liability for actions taken by our employees, agents, and intermediaries with respect to our business or any businesses that we may acquire. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us, which could have a material adverse effect on our business, financial condition or results of Directorsoperations.
Regulations relating to withdraw the Company’s electionprivacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security, and data protection laws, including requirements concerning security breach notification, and we could be regulated as a BDC under the 1940 Act andnegatively affected by these laws. For example, our Board of Directors approved the filing of the Company’s withdrawal form with the SEC to be made on or about April 1, 2018. At that point, we would no longer be a BDC or bebusiness is subject to the provisions of the 1940Gramm-Leach-Bliley Act applicable to BDCs.
The withdrawal of the Company’s election to be regulated as a BDC would result in a significant change in our accounting and financial reporting requirements.
If the Company withdraws its election to be regulated as a BDC, as expected, commencing with the second quarter of 2018, the Company would no longer be subject to FASB Accounting Standards Codification Topic 946, Financial Services – Investment Companies, which, would result in a significant change in our accounting and financial reporting requirements. Our financial statements are currently presented and accounted for under the specialized method of accounting applicable to investment companies, which requires us to recognize our investments, including controlled investments, at fair value. As a BDC, we are currently precluded from consolidating any entityamong other than another investment company that acts as an extension of our investment operations and facilitates the execution of our investment strategy or an investment in a controlled operating company that provides substantially all of its services to us. Our financial statements currently consolidate the accounts of the Company and its wholly-owned investment company subsidiaries, except for Medallion Bank and other portfolio investments. Our financial statements reflect our investment in Medallion Bank and other portfolio investments at fair value, as determined in good faith by our Board of Directors. Medallion Bank’s financial statements are separately provided as a significant unconsolidated wholly-owned subsidiary. If the Company withdraws its election to be regulated as a BDC, the Company will consolidate the financial statements of Medallion Bank and controlled or majority-owned portfolio investments together with those of the Company, which would be a significant change in our accounting and financial reporting requirements.
Our shareholders would no longer have the protections of the 1940 Act upon the withdrawal of the Company’s election to be regulated as a BDC.
If the Company ceases to operate as a BDC, our shareholders would no longer have the following protections of the 1940 Act:
Compliance with current or future privacy, data protection, and information security laws (including those regarding security breach notification) affecting customer or employee data to issue warrantswhich we are subject could result in higher compliance and options;
In addition, we are very much affected by the legal, regulatory, tax and accounting regimes under which we operate. We periodically evaluate whether those regimes and our existing corporate structure are the optimum means for the operation and capitalization of our business. As a result of these evaluations, we may decide to proceed with structural and organizational changes (certain of which may require the approval of our shareholders), whichinformation security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions, and damage to our reputation, which could have a material dispositionsadverse effect on our business, financial condition, or results of various assets, changes in our corporate form or other fundamental changes. We may incur certain costs in completing these evaluations and may receive no benefit from these expenditures, particularly if we do not proceed with any changes.operations.
If we withdrawHaving withdrawn our election to be regulated as a BDC, maintainingwe must maintain an exception from registration under the 1940 Act which could limit our ability to take advantage of attractive investment opportunities, and the failure to maintain that exception wouldcould have material adverse consequences on our business.
A company that meets the definition of an “investment company” under the 1940 Act, in the absence of an exception or exemption, must either register with the SEC as an investment company or elect BDC status. Historically, the composition of the Company’s assets caused us to meet the definition of an “investment company,” and the Company made a corresponding election to be treated as a BDC. If theThe Company were tohasde-electde-elected BDC status, as expected, we would either have to operateand now operates so as to fall outside the definition of an “investment company” or within an applicable exception. To the extent the Company withdraws its election to be regulated as a BDC, theThe Company expects 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 would beis required to monitor ourits continued compliance with this exception, which wouldcould limit our ability to take advantage of attractive investment opportunities that would cause us to be out of compliance with its limitations and could have a material adverse effect on our business. For example, we could be limited in growing Medallion Capital, Inc., which is currently engaged in a business that generally does not qualify for the exception.
If the SEC or a court were to find that we were required, but failed, to register as an investment company in violation of the 1940 Act, we may have to cease business activities, we would breach representations and warranties and/or be in default as to certain of our contracts and obligations, civil or criminal actions could be brought against us, our contracts would be unenforceable unless a court were to require enforcement and a court could appoint a receiver to take control of us and liquidate our business, any or all of which could have a material adverse effect on our business.
We operate in a highly competitive market for investment opportunities.
We compete for loans/investments with other business development companies and other investment funds, as well as traditional financial services companies such as commercial banks and credit unions. Many of our competitors are substantially larger and have considerably greater financial, technical, and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments. These characteristics could allow our competitors to consider a wider variety of investments,
establish more relationships, and offer better pricing and more flexible structuring than us. We may be unwilling to match our competitors’ pricing, terms, and structure of certain loans and investments opportunities due to potential risks, which may result in us earning less income than our competitors. If we are forced to match our competitors’ pricing, terms, and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us for so long as we remain a BDC.
We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time.
Changes in interest rates may affect our cost of capital and net investmentinterest income.
Because we borrow to fund our loans and investments, a portion of our income is dependent upon the difference between the interest rate at which we borrow funds and the interest rate at which we invest these funds. A portion of our investments, such as taxi medallion loans, will have fixed interest rates, while a portion of our borrowings will likely have floating interest rates. As a result, a significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income. We may hedge against interest rate fluctuations by using standard hedging instruments, subject to applicable legal requirements. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition, and results of operations. Also, we will have to rely on our counterparties to perform their obligations under such hedges.
A decrease in prevailing interest rates may lead to more loan prepayments, which could adversely affect our business.
Our commercial borrowers generally have the right to prepay their loans upon payment of a fee ranging from 1% to 2% for standard commodity loans, and for higher amounts, as negotiated, for larger more custom loan arrangements. A borrower is likely to exercise prepayment rights at a time when the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. In a lower interest rate environment, we will have difficultyre-lending prepaid funds at comparable rates, which may reduce the net interest income that we receive. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if a substantial number of our portfolio companies elect to prepay amounts owed to us and we are not able to reinvest the proceeds for comparable yields in a timely fashion. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.
An increase in prevailing interest rates could adversely affect our business.
The majority of our loan portfolio is comprised of fixed-rate loans. An abrupt increase in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at higher prevailing interest rates.
We depend on cash flow from our subsidiaries to make distribution payments to our shareholders.
We are primarily a holding company, and we derive most of our operating income and cash flow from our subsidiaries. As a result, we rely heavily upon distributions from our subsidiaries to generate the funds necessary to make distribution payments to our shareholders. Funds are provided to us by our subsidiaries through dividends and payments on intercompany indebtedness, but we cannot assure you that our subsidiaries will be in a position to continue to make these dividend or debt payments. The Utah Department of Financial Institutions and FDIC have the authority to prohibit or to limit the payment of dividends by Medallion Bank. In addition, as a condition to receipt of FDIC insurance, Medallion Bank entered into a capital maintenance agreement with the FDIC requiring it to maintain a 15% Tier 1 leverage ratio (Tier 1 capital to average assets). As of December 31, 20172018, Medallion Bank’s Tier 1 leverage ratio was 14.5% and15.85%. We have not received dividends from Medallion Bank may be restricted from declaring and paying dividends as a result of the leverage ratio being below 15%.since 2016.
Medallion Bank’s use of brokered deposit sources for its deposit-gathering activities may not be available when needed.
Medallion Bank relies on the established brokered deposit market to originate deposits to fund its operations. Medallion Bank’s brokered deposits consist of deposits raised through the brokered deposit market rather than through retail branches. While Medallion Bank has developed contractual relationships with a diversified group of investment brokers, and the brokered deposit market is well developed and utilized by many banking institutions, conditions could change that might affect the availability of deposits. Applicable
statutes and regulations restrict the use of brokered deposits and the interest rates paid on such deposits for institutions that are less than “well capitalized”“well-capitalized”. If the capital levels at Medallion Bank fall below the “well-capitalized” level as defined by the FDIC or the capital level currently required by the FDIC pursuant to its capital maintenance agreement, or if Medallion Bank experiences a period of sustained operating losses, the cost of attracting deposits from the brokered deposit market could increase significantly, and the ability of Medallion Bank to raise deposits from this source could be impaired. Brokered deposits may also not be as stable as other types of deposits. Medallion Bank’s ability to manage its growth to stay within the “well-capitalized” level, and the capital level currently required by the FDIC pursuant to its capital maintenance agreement, which is also considerably higher than the level required to be classified as “well-capitalized”, is critical to Medallion Bank’s retaining open access to this funding source.
Uncertainty relating to the reporting of collateral values for our loans may adversely affect the value of our portfolio.
Medallion loans are primarily collateral-based lending, whereby the collateral value exceeds the amount of the loan, providing sufficient excess collateral to protect us against losses. Despite our reliance on collateral values, medallions are income producing assets that generate cash flow which is utilized to repay our loans. We rely on the integrity of the collateral value benchmarks obtained by the applicable regulatory agencies and other third parties. If these benchmarks are artificially influenced by market participants we could suffer losses. We have experienced a significant downward movement in medallion collateral values which may continue, and has caused a negative impact on our valuation analysis and could result in further significant lower fair market value measurements of our portfolio.
We require an objective benchmark in determining the fair value of our portfolio. If the benchmarks that we currently use are deemed to be unreliable, we will need to use other intrinsic factors in determining the collateral values for our loans.
Our allowance for loan losses may prove to be insufficient to cover losses on our loans.
We maintain an allowance for loan losses (a reserve established through a provision for losses that decreases our earnings and that, accordingly, affects our financial condition) that we believe is appropriate to provide for incurred losses in our loan portfolio.
The process for establishing an allowance for loan losses is critical to our results of operations and financial condition, and requires complex models and judgments, including forecasts of economic conditions. Changes in economic conditions affecting borrowers, growth in our loan portfolio, changes in the credit characteristics of our loan portfolio, new information regarding our loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. We may underestimate our incurred losses and fail to maintain an allowance for loan losses sufficient to account for these losses. In cases where we modify a loan, if the modified loans do not perform as anticipated, we may be required to establish additional allowances on these loans.
We periodically review and update our methodology, models and the underlying assumptions, estimates and assessments we use to establish our allowance for loan losses to reflect our view of current conditions. Moreover,
our regulators, as part of their supervisory function, periodically review the methodology, models and the underlying assumptions, estimates and assessments we use for calculating, and the adequacy of, our allowance for loan losses. Our regulators, based on their judgment, may conclude that we should modify our methodology, models or the underlying assumptions, estimates and assessments, increase our allowance for loan losses, and/or recognize further losses. We continue to review and evaluate our methodology, models and the underlying assumptions, estimates, and assessments we use and we will implement further enhancements or changes to them, as needed. We cannot assure you that our loan loss reserves will be sufficient to cover actual losses. Future increases in the allowance for loan losses or recognized losses (as a result of any review, update, regulatory guidance, changes in accounting standards or otherwise) will result in a decrease in net earnings and capital and could have a material adverse effect on our business, results of operations, and financial condition.
The lack of liquidity in our investments may adversely affect our business.
We generally make investments in private companies. Substantially all of these securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded our investments. We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we have materialnon-public information regarding such portfolio company.
In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.activities. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item “net increase in net assets resulting from operations”income” as of December 31, 20172018 by approximately $1,778,000$549,000 on an annualized basis, compared to a positive impact of $1,100,000 at December 31, 2016, and the impact of such an immediate increase of 1% over a one year period would have been approximately ($984,000)1,012,000) at December 31, 2017, compared to ($792,000) at December 31, 2016.2018. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net increase in net assets resulting from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability to make investments in companiesoriginate loans that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of our expenses, variations in and the timing of the recognition of realizedcharge-offs and unrealized gains orprovision for loan losses, the degree to which we encounter competition in our markets, and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
A reduction in demand for our products and failure by us to adapt to such reduction could adversely affect our business, financial condition and results of operations.
The demand for the products we offer may be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences or financial conditions, regulatory restrictions that decrease customer access to particular products or the availability of competing products. If we fail to adapt to significant changes in our customers’ demand for, or access to, our products, our revenues could decrease and our operations could be adversely affected. Even if we do make changes to our product offerings to fulfill customer demand, customers may resist such changes or may reject such products. Moreover, the effect of any product change on the results of our business may not be fully ascertainable until the change has been in effect for some time, and, by that time, it may be too late to make further modifications to such product without causing further adverse effects to our business, results of operations and financial condition.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers and personally identifiable information of our customers and employees, in ourthird-party data centers, and on our networks. The secure processing, maintenance, and transmission of this information is critical to our operations. Despite our security and business continuity measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions.disruptions or vulnerable to other disruptions as a result of system failures, operational events, employee error or incidents affecting our third-party service providers (or providers to those third-party service providers). Any such breach or disruption could compromise our networks and the information stored there could be accessed, publicly disclosed, lost, destroyed or stolen. Any such access, disclosure, destruction or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information and regulatory penalties, disrupt our operations and damage our reputation, which could adversely affect our business. In addition, we may also be required to incur significant costs in connection with any regulatory investigation or civil litigation resulting from a security breach or other information technology disruption that affects us.
Our operations could be interrupted if certain external vendors on which we rely experience difficulty, terminate their services or fail to comply with banking laws and regulations.
We depend to a significant extent on relationships with third parties that provide services, primarily information technology services critical to our operations. Currently, we obtain services from third parties that include information technology infrastructure and support, plus loan origination, loan servicing, and accounting systems and support. If any of our third-party service providers experience difficulties or terminate their services and we are unable to replace our service providers with other service providers, our operations could be interrupted. It may be difficult for us to replace some of our third-party vendors, particularly vendors providing our loan origination, loan servicing and accounting services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason. If an interruption were to continue for a significant period of time, it could have a material adverse effect on our business, financial condition or results of operations. Even if we are able to replace these third parties, it may be at higher cost to us, which could have a material adverse effect on our business, financial condition or results of operations. In addition, if a third-party provider fails to provide the services we require, fails to meet contractual requirements, such as compliance with applicable laws and regulations, or suffers a cyber-attack or other security breach, our business could suffer economic and reputational harm that could have a material adverse effect on our business, financial condition or results of operations.
Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements and attention.
We regularly use third-party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by our federal and state bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third-party vendors and other ongoing third-party business relationships. In certain cases, we may be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase our costs and potentially limit our competitiveness. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third-party vendors or other ongoing third-party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
Our business depends on our ability to adapt to rapid technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new, technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to serve customers better and to reduce costs. Our future success depends, in part, upon our ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to effectively implement new, technology-driven products and services or be successful in marketing these products and services to our customers. In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. Failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition or results of operations.
We expect that new technologies and business processes applicable to the banking industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to maintain current technology and business processes could cause disruptions in our operations or cause our products and services to be less competitive, all of which could have a material adverse effect on our business, financial condition or results of operations.
We depend on the accuracy and completeness of information about customers.
In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan portfolio on an ongoing basis, we may rely on information furnished by or on behalf of customers, including financial statements, credit reports and other financial information. We may also rely on representations of those customers or of other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate, incomplete, fraudulent or misleading financial statements, credit reports or other financial or business information, or the failure to receive such information on a timely basis, could result in loan losses, reputational damage or other effects that could have a material adverse effect on our business, financial condition or results of operations.
Terrorist attacks, other acts of violence or war, and natural disasters may affect any market for our securities, impact the businesses in which we invest, and harm our operations and profitability.
Terrorist attacks and natural disasters may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the USU.S. or USU.S. businesses or major natural disasters hitting the United States. Such attacks or natural disasters in the USU.S. or elsewhere may impact the businesses in which we directly or indirectly invest by undermining economic conditions in the United States. In addition, a substantial portion of our business is focused in the New York City metropolitan area, which suffered a terrorist attack in 2001.2001 and has faced continued threats. Another terrorist attack in New York City or elsewhere could severely impact our results of operations. Losses resulting from terrorist attacks are generally uninsurable.
Our financial condition and results of operations will depend on our ability to manage growth effectively.
Our ability to achieve our loan and investment objective will depend on our ability to grow, which will depend, in turn, on our management team’s ability to identify, evaluate, and monitor, and our ability to finance and invest in, companies that meet our investment criteria.
Accomplishing this result on a cost-effective basis will be largely a function of our management team’s handling of the investment process, its ability to provide competent, attentive, and efficient services, and our access to financing on acceptable terms. In addition to monitoring the performance of our existing investments, members of our management team and our investment professionals may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time may distract them or slow the rate of investment. In order to grow, we will need to hire, train, supervise, and manage new employees. However, we cannot assure you that any such employees will contribute to the success of our business. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition, and results of operations.
Our ability to enter into transactions with our affiliates is restricted.
The SBA restricts the ability of SBICs to lend money to any of their officers, directors, and employees, or invest in any affiliates thereof.
Medallion Bank is subject to certain federal laws that restrict and control its ability to engage in transactions with its affiliates. Sections 23A and 23B of the Federal Reserve Act and applicable regulations restrict the transfer of funds by Medallion Bank to certain of its affiliates, including us, in the form of loans, extensions of credit, investments, or purchases of assets and restrict its ability to provide services to, or receive services from, its affiliates. Sections 23A and 23B also require generally that Medallion Bank’s transactions with its affiliates be on terms no less favorable to Medallion Bank than comparable transactions with unrelated third parties.
IfCurrent or former employee misconduct could expose us to significant legal liability and reputational harm.
We are vulnerable to reputational harm because we operate in an industry in which integrity and the extent that the Company remains a BDC under the 1940 Act, our ability to enter into certain transactions with our affiliates is restricted. See “Risks Associated with Our Operations as a BDC— The 1940 Act restricts our ability to enter into transactions with our affiliates.”
Our Board of Directors may change our operating policies and strategies without prior notice or shareholder approval, the effects of which may be adverse.
Our Board of Directors has the authority to modify or waive our current operating policies and strategies without prior notice and without shareholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results, and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you distributions and cause you to lose all or part of your investment.
Risks Associated with Our Operations as a BDC
On March 7, 2018, a majorityconfidence of the Company’s shareholders authorized the Company’s Boarddealerships, contractors and FSPs that sell our consumer products are of Directorscritical importance. Our employees could engage, or our former directors, employees, or our controlling shareholder could have engaged, in misconduct that adversely affects our business. For example, if such a person were to withdraw the Company’s election to be regulated as a BDC under the 1940 Act and our Board of Directors approved the filing of the Company’s withdrawal form with the SEC to be made onengage, or about April 1, 2018. At that point,previously engaged, in fraudulent, illegal or suspicious activities, we would no longer be a BDC orcould be subject to the provisionsregulatory sanctions and suffer serious harm to our reputation (as a consequence of the 1940 Act applicable to BDCs.
Ifnegative perception resulting from such activities), financial position, third-party relationships and to the extent that the Company remains a BDC under the 1940 Act, the following discussion is a summary of the material risks associated with our operations as a BDC.
We operate in a highly regulated environment, and if we are found to be in violation of any of the 1940 Act, our business could suffer.
The 1940 Act imposes numerous constraints on the operations of BDC’s. For example, BDC’s are required to invest at least 70% of their total assets in qualifying assets, primarily securities of “eligible portfolio companies” (as defined under the 1940 Act), cash, cash equivalents, US government securities, and other high quality debt investments that mature in one year or less. Our regulatory requirements may hinder our ability to forge new relationships with third-party dealers or contractors. Our business often requires that we deal with confidential information. If our employees were to improperly use or disclose this information, or if former directors, employees, or our controlling shareholder
previously improperly used or disclosed this information, even if inadvertently, we could suffer serious harm to our reputation, financial position and current and future business relationships. It is not always possible to deter employee misconduct, and the precautions we take advantageto detect and prevent this activity may not always be effective. Misconduct by our employees or former directors, employees, or our controlling shareholder, or even unsubstantiated allegations of attractive investment opportunities and, as a result, achieve our investment objective. In addition, we rely upon several exemptive orders from the SEC permitting us to consolidate our financial reporting and operate our business as presently conducted. Our failure to satisfy the conditions set forth in those exemptive ordersmisconduct, could result in our inability to rely upon such orders or to cause the SEC to revoke the orders which could result in material changes in our financial reporting or the way in which we conduct our business. Furthermore, any failure to comply with the requirements imposed on BDC’s by the 1940 Act could have material adverse consequences to us or our investors, including possible enforcement action by the SEC.
Regulations governing our operation as a BDC may affect our ability to, and the way in which, we raise additional capital.
Senior Securities and Other Indebtedness. We may issue debt securities or preferred stock, and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities, up to the maximum amount permitted by the 1940 Act. If we issue senior securities, including debt or preferred stock, we will be exposed to additional risks, including the following:
Additional Common Stock. We are not generally able to issue and sell our common stock at a price below net asset value (less any distributing commission or discount) per share. We may, however, sell our common stock, warrants, options, or rights to acquire our common stock, at a price below the current net asset value of the common stock if our Board of Directors determines that such sale is in our best interests and that of our shareholders, and our shareholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our shareholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act.
Since our investments in assets that are not “qualifying assets” exceeded 30% of our total assets as of December 31, 2017, we are precluded from making anyfollow-on investments in Medallion Bank and our City of Chicago taxicab medallions purchased out of foreclosure, and could be precluded from investing in what we believe are attractive investments, which could have a material adverse effect on our business.
As a business, development company, we are not permitted to acquire any assets other than “qualifying assets” unless, at the timefinancial condition or results of such acquisition, at least 70% of our total assets are qualifying assets. Our investment in Medallion Bank and City of Chicago taxicab medallions purchased out of foreclosure, which are carried in investments other than securities on the consolidated balance sheet, arenon-qualifying assets. As of December 31, 2017, the percentage of our total assets that were invested innon-qualifying assets were up to 58.7% on an unconsolidated basis and up to 47.6% on a consolidated basis. We did not satisfy the requirement that no more than 30% of our total assets be comprised ofnon-qualifying assets, and are currently not permitted to acquire anynon-qualifying assets. We are therefore unable to make any investments innon-qualifying assets, includingfollow-on investments in Medallion Bank and our City of Chicago taxicab medallions purchased out of foreclosure. As a result of such failure, we could also be precluded from investing in what we believe are attractive investments or could be required to dispose ofnon-qualifying assets at times or on terms that may be disadvantageous to us. We would also not be able to support Medallion Bank’s capital requirements, if any, and Medallion Bank may also not be able to grow as quickly because we are precluded from providing additional funding to Medallion Bank. Any of the foregoing consequences could have a material adverse effect on us. If we purchase anon-qualifying asset after failing to satisfy the requirement that no more than 30% of our total assets be comprised ofnon-qualifying assets, then we would be deemed to be in violation of the 1940 Act and the violation could also result in an event of default on our debt obligations.operations
Our investment portfolio is, and will continue to be, recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is, and will continue to be, uncertainty as to the value of our portfolio investments which could adversely affect our net asset value.
Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by our Board of Directors. Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, we are required by the 1940 Act to specifically value each individual investment and record an unrealized gain or loss for any asset we believe has increased or decreased in value. Typically, there is not a public market for most of the investments in which we have invested and will generally continue to invest. As a result, our Board of Directors values our investments on a quarterly basis based on a determination of their fair value made in good faith and in accordance with the written guidelines approved by our Board of Directors. Our Board of Directors regularly review the appropriateness and accuracy of the method used in valuing our investments, and makes any necessary adjustments. The types of factors that may be considered in determining the fair value pricing of our investments include the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, market conditions for loans (e.g., values used by other lenders and any active bid/ask market), comparison to publicly traded companies, discounted cash flow, comparable sales and valuations of companies similar to the portfolio company, regulatory factors that may limit the value of the portfolio company, and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, the valuations may fluctuate over short periods of time and may be based on estimates. As a result, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed, and may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize upon the sale or disposition of one or more of our investments. Investors purchasing our securities in connection with an offering based on an overstated net asset value would pay a higher price than the value of our investments might warrant, and investors purchasing our securities in connection with an offering based on an understated net asset value would pay a lower price than the value of our investments might warrant. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities. Considering these factors, we have determined that the fair value of our portfolio is above its cost basis. As of December 31, 2017, our net unrealized appreciation on investments was $141,190,000 or 30% of our investment portfolio at cost, and the depreciation on our investments other than securities and other assets was $1,490,000 or 16% of our investments other than securities and other assets at cost.
The 1940 Act restricts our ability to enter into transactions with our affiliates.
The 1940 Act restricts our ability to knowingly participate in certain transactions with our affiliates. These restrictions limit our ability to buy or sell any security from or to our affiliates, or engage in “joint” transactions with our affiliates, which could include investments in the same portfolio company (whether at the same or different times). With respect to controlling or certain closely affiliated persons, we will generally be prohibited from engaging in such transactions absent the prior approval of the SEC. With respect to other affiliated persons, we may engage in such transactions only with the prior approval of our independent directors.
Risks Relating to Our Loan Portfolios and Investments
Lending to small businesses involves a high degree of risk and is highly speculative.
Lending to small businesses involves a high degree of business and financial risk, which can result in substantial losses and should be considered speculative. OurHistorically, our borrower base consists primarily of small business owners that may have limited resources and that are generally unable to obtain financing from traditional sources. There is generally no publicly available information about these small business owners, and we must rely on the diligence of our employees and agents to obtain information in connection with our credit decisions. In addition, these small businesses often do not have audited financial statements. Some smaller businesses have narrower product lines and market shares than their competition. Therefore, they may be more vulnerable to customer preferences, market conditions, or economic downturns, which may adversely affect the return on, or the recovery of, our investment in these businesses.
Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, and industries and sectors, which will subject us to a risk of significant loss if any of these companies defaults on its obligations to us or by a downturn in the particular industry or sector.
Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, and industries and sectors. In addition, taxicab companies that constitute separate issuers may have related management or guarantors and constitute larger business relationships to us. As of December 31, 2017, investments in2018, New York City taxi medallion loans represented approximately 81%87% of our managed taxi medallion loans, which in turn represented 28%16% of our managed net investmentloan portfolio. We do not have fixed guidelines for diversification, and while we are not targeting any specific industries, our investments are, and could continue to be, concentrated in relatively few industries. As a result, the aggregate returns we realize may be adversely affected if a small number of investmentsloans perform poorly or if we need to write down the value of any one investment.loan. If our larger borrowers were to significantly reduce their relationships with us and seek financing elsewhere, the size of our loan portfolio and operating results could decrease. In addition, larger business relationships may also impede our ability to immediately foreclose on a particular defaulted portfolio company as we may not want to impair an overall business relationship with either the portfolio company management or any related funding source. Additionally, a downturn in any particular industry or sector in which we are invested could also negatively impact the aggregate returns we realize.
If we are unable to continue to diversify geographically, our business may be further adversely affected if the New York City taxicab industry experiences a sustained economic downturn.
AHistorically, a significant portion of our loan revenue is derived from medallion loans collateralized by New York City taxicab medallions. An economic downturn in the New York City taxicab industry could lead to an additional increase in defaults on our medallion loans. We cannot assure you that we will be able to sufficiently diversify our operations geographically.
An economic downturn could result in additional commercial and consumer loan customers experiencing declines in business activities and/or personal resources, which could lead to difficulties in their servicing of their loans with us, and increasing the level of delinquencies, defaults, and loan losses in our commercial and consumer loan portfolios.
Laws and regulations implemented in response to climate change could result in increased operating costs for our portfolio companies.
Congress and other governmental authorities have either considered or implemented various laws and regulations in response to climate change and the reduction of greenhouse gases. Existing environmental regulations could be revised or reinterpreted, new laws and regulations could be adopted, and future changes in environmental laws and regulations could occur, which could impose additional costs on the operation of our portfolio companies. For example, regulations to cut gasoline use and control greenhouse gas emissions from new cars could adversely affect our medallion portfolio companies. Our portfolio companies may have to make significant capital and other expenditures to comply with these laws and regulations. Changes in, or new, environmental restrictions may force our portfolio companies to incur significant expenses or expenses that may exceed their estimates. There can be no assurance that such companies would be able to recover all or any increased environmental costs from their customers or that their business, financial condition or results of operations would not be materially and adversely affected by such expenditures or any changes in environmental laws and regulations, in which case the value of these companies could be adversely affected.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We invest in our portfolio companies primarily through senior secured loans, junior secured loans, and subordinated debt issued by small- tomid-sized companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization, or bankruptcy of the relevant portfolio company.
A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount was divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company’s liquidation. In May 2013, the bankruptcy court presiding over the third party finance company’s case entered an order converting the involuntary Chapter 7 case to a Chapter 11 case. On May 31, 2013, we commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the third party finance company’s assets. The third party finance company and bank lenders are contesting our position. In April 2014, we received a decision from the court granting summary judgment in our favor with respect to the issue of whether our loan participations are true participations. In March 2015, we and Medallion Bank received a decision from the court finding that the bank lenders generally held a first lien on our and Medallion Bank’s loan participations subject to, among other things, defenses still pending prosecution by the parties and adjudication by the court. We and Medallion Bank are appealing the decision. The remaining issues are still being litigated. Although we believe the claims raised by the third party finance company and the senior lenders are without merit and will vigorously defend against them, we cannot at this time predict the outcome of this litigation or determine our potential exposure. If we are incorrect in our assessments our results of operations could be materially adversely affected. At December 31, 2017, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. In September 2015, one loan was sold at a discount to a third party, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. One loan was charged off in September 2014. See page 43 for additional information regarding this matter.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
Even though we may have structured most of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance.
We may not control many of ourMedallion Capital’s portfolio companies.
We may not control many of ourMedallion Capital’s portfolio companies, even though we may have board representation or board observation rights, and our debt agreements may contain certain restrictive covenants.rights. As a result, we are subject to the risk that a Medallion Capital portfolio company in which we invest may make business decisions with which we disagree, and the management of such company may take risks or otherwise act in ways that do not serve our interests as debt investors.
We may not realize gains from our equity investments.
Certain investments that we have made in the past and may make in the future include warrants or other equity securities. In addition, we may from time to time makenon-control, equityco-investments in companies in conjunction with private equity sponsors. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization, or public offering, which would allow us to sell the underlying equity interests.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
We lease approximately 19,000 square feet of office space in New York City for our corporate headquarters under a lease expiring in April 2027, and lease a facility in Long Island City, New York, of approximately 6,000 square feet for certain corporate back-office operations.2027. We also lease office space for loan origination offices and subsidiary operations in Boston, MA,Long Island City, New York, Newark, New Jersey and Chicago, IL,Illinois, which, along with our New York City office, handles our medallion loan segment, and Minneapolis, MN.Minnesota, which handles our commercial lending segment. Medallion Bank leases office space in Salt Lake City, UT,Utah under a lease expiring in November 2023, which handles the recreation and Seattle, WA.home improvement lending segments, and Bothell, Washington, which handles our home improvement lending segment. We do not own any real property, other than foreclosed properties obtained as a result of lending relationships. We believe that our leased properties, taken as a whole, are in good operating condition and are suitable for our current business operations.
ITEM 3. | LEGAL PROCEEDINGS |
We and our subsidiaries are currently involved in various legal proceedings incident to the ordinary course of our business, including collection matters with respect to certain loans. We intend to vigorously defend any outstanding claims and pursue our legal rights. In the opinion of our management and based upon the advice of legal counsel, other than as set forth in the following paragraph there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse effect on our results of operations or financial condition.
We and our subsidiaries obtain financing under lending facilities extended by various banks and other financial institutions, some of which are secured by loans, taxi medallions and other assets. Where these facilities are extended to our subsidiaries, we and others of our subsidiaries may guarantee the obligations of the relevant borrower. Five of our smallest subsidiaries are borrowers under promissory notes extended to them by a bank that total $8.8 million that came due on October 17, 2016. These loans are secured by Chicago taxi medallions owned by our subsidiaries. These notes are guaranteed by Medallion Funding, not by Medallion Financial Corp. These subsidiaries have not repaid the amounts due under the notes and the bank has filed a suit seeking payment of these amounts. This failure to pay would constitute an event of default under certain loan agreements which we or our subsidiaries are borrowers, but the lenders under those agreements have waived the default. If judgment is entered against us in the suit brought by the bank or entered and not satisfied within specified periods of time, these outcomes may constitute an additional event of default under these other agreements. If waivers are required and not granted for this additional event of default, it would lead to events of default under other of our financing arrangements.
On December 20, 2017, a stockholder derivative action was filed in the Supreme Court of the State of New York, County of New York (Shields v. Murstein, et al.). The complaint namesnamed us as a nominal defendant and purports to assert claims derivatively on our behalf against certain of our current directors, one of our former directors, and a former independent contractor for one of our subsidiaries. The complaint allegesalleged that the director defendants breached their fiduciary duties with respect to certain alleged misconduct by the former independent contractor involving postings about us under an alleged pseudonym. On January 25, 2018, we and the director defendants filed a motion to dismiss the action. Plaintiff filed his opposition to the motionOn June 27, 2018, a hearing was held on March 1, 2018. We and the director defendants have until March 22, 2018 to file reply papers in further support of the motion. We believeOn November 26, 2018, the case is without merit and intendCourt entered a decision granting the motion. On December 17, 2018, the Court entered an order dismissing the plaintiff’s complaint with prejudice. The time for the plaintiff to defend it vigorously.appeal the Court’s order has elapsed.
ITEM 4. |
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
STOCK PERFORMANCE GRAPH
The following graph commences as of December 31, 20122013 and compares the Company’s Common Stock with the cumulative total return for the NASDAQ Composite Index and the Russell 2000 Index. Furthermore, the following graph assumes the investment of $100 on December 31, 20122013 in each of the Company’s Common Stock, the stocks comprising the NASDAQ Composite Index and the Russell 2000 Index and assumes dividends are reinvested.
Cumulative Total Return
Based on Initial Investment of $100 on December 31, 20122013
with dividends reinvested
Our common stock is quoted on NASDAQ under the symbol “MFIN.” Our common stock commenced trading on May 23, 1996. As of March 13, 2018,11, 2019, there were approximately 349324 holders of record of our common stock.
On March 13, 2018,11, 2019, the last reported sale price of our common stock was $4.65$6.60 per share. Since our initial public offering, our common stock has traded at a premium to net asset value per share more frequently than at a discount to net asset value per share, but there can be no assurance that our stock will trade at a premium in the future.
The following table sets forth, for the periods indicated, the range of high and low closing prices for our common stock on the Nasdaq Global Select Market.
2017 | DISTRIBUTIONS DECLARED | HIGH | LOW | |||||||||
Fourth Quarter | $ | 0.00 | $ | 4.09 | $ | 2.12 | ||||||
Third Quarter | 0.00 | 2.64 | 2.10 | |||||||||
Second Quarter | 0.00 | 2.93 | 1.84 | |||||||||
First Quarter | 0.00 | 3.33 | 1.68 | |||||||||
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2016 | ||||||||||||
Fourth Quarter | $ | 0.00 | $ | 4.59 | $ | 2.95 | ||||||
Third Quarter | 0.05 | 8.12 | 3.95 | |||||||||
Second Quarter | 0.05 | 9.42 | 7.00 | |||||||||
First Quarter | 0.25 | 9.90 | 6.11 |
We are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains, beginning with our tax year ended December 31, 2016, and are not subject to the annual distribution requirements under Subchapter M of the Code. Thus, there can be no assurance that we will pay any cash distributions as we may retain our earnings in certain circumstances to facilitate the growth of our business, to finance our investments, to provide liquidity or for other corporate purposes. We have not paid dividends since 2016 and do not currently anticipate paying dividends. We may, however,re-evaluate paying dividends in the future depending on market conditions.
We have adopted a dividend reinvestment plan pursuant to which shareholders may elect to have distributions reinvested in additional shares of common stock. When we declare a distribution, all participants will have credited to their plan accounts the number of full and fractional shares (computed to three decimal places) that could be obtained with the cash, net of any applicable withholding taxes that would have been paid to them if they were not participants. The number of full and fractional shares is computed at the weighted average price of all shares of common stock purchased for plan participants within the 30 days after the distribution is declared plus brokerage commissions. The automatic reinvestment of distributions will not release plan participants of any income tax that may be payable on the distribution. Shareholders may terminate their participation in the dividend reinvestment plan by providing written notice to the Plan Agent at least 10 days before any given distribution payment date. Upon termination, we will issue to a shareholder both a certificate
for the number of full shares of common stock owned and a check for any fractional shares, valued at the then current market price, less any applicable brokerage commissions and any other costs of sale. There are no additional fees or expenses for participation in the dividend reinvestment plan. Shareholders may obtain additional information about the dividend reinvestment plan by contacting the American Stock Transfer & Trust Company, LLC at 6201 15th Avenue, Brooklyn, NY, 11219.
ISSUER PURCHASESUNREGISTERED SALES OF EQUITY SECURITIES (1) AND USE OF PROCEEDS
We did not repurchase any of our shares during the three months ended December 31, 2018. Accordingly, under our Stock Repurchase Program previously authorized by our Board of Directors, up to 22,874,509 shares remain authorized for repurchase under the program.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
November 5 through December 31, 2003 | 10,816 | $ | 9.20 | 10,816 | $ | 9,900,492 | ||||||||||
January 1 through December 31, 2004 | 952,517 | 9.00 | 952,517 | 11,329,294 | ||||||||||||
January 1 through December 31, 2005 | 389,900 | 9.26 | 389,900 | 7,720,523 | ||||||||||||
January 1 through December 31, 2006 | — | — | — | 7,720,523 | ||||||||||||
January 1 through December 31, 2007 | 33,200 | 9.84 | 33,200 | 7,393,708 | ||||||||||||
January 1 through December 31, 2008 | 7,691 | 9.66 | 7,691 | 7,319,397 | ||||||||||||
January 1 through December 31, 2009 | — | — | — | 7,319,397 | ||||||||||||
January 1 through December 31, 2010 | 177,844 | 6.82 | 177,844 | 6,106,354 | ||||||||||||
January 1 through December 31, 2011 | 8,647 | 9.06 | 8,647 | 6,028,027 | ||||||||||||
January 1 through December 31, 2012 | — | — | — | 6,028,027 | ||||||||||||
January 1 through December 31, 2013 | — | — | — | 6,028,027 | ||||||||||||
January 1 through December 31, 2014 | 576,143 | 10.21 | 576,143 | 14,120,043 | ||||||||||||
January 1 through December 31, 2015 | 413,193 | 7.77 | 413,193 | 24,398,115 | ||||||||||||
January 1 through December 31, 2016 | 361,174 | 4.22 | 361,174 | 22,874,509 | ||||||||||||
January 1 through December 31, 2017 | — | — | — | 22,874,509 | ||||||||||||
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Total | 2,931,125 | 8.39 | 2,931,125 | |||||||||||||
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ITEM 6.SELECTED FINANCIAL DATA
Summary Consolidated Financial Data
You should read the consolidated financial information below with the Consolidated Financial Statements and Notes thereto included in this report. As described therein, for the nine months ended December 31, 2018, the Company reported under Bank Holding Company Accounting.
(Dollars in thousands, except per share data) | Nine Months Ended December 31, 2018 | |||
Statement of operations | ||||
Net interest income | $ | 71,987 | ||
Provision for loan losses | 59,008 | |||
Non-interest income (expense), net | (20,135 | ) | ||
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Net loss before taxes | (7,156 | ) | ||
Income tax provision | (709 | ) | ||
Lessnon-controlling interest | 2,307 | |||
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Net loss after taxes | (10,172 | ) | ||
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Per share data | ||||
Net loss after taxes | (0.42 | ) | ||
Distributions per share | 0.00 | |||
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Weighted average common shares outstanding | ||||
Diluted | 24,234,633 | |||
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Balance sheet data | ||||
Net loans receivable | $ | 981,487 | ||
Total assets | 1,381,846 | |||
Total borrowings | 1,062,028 | |||
Total liabilities | 1,091,642 | |||
Total equity(3) | 290,204 | |||
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Selected financial ratios | ||||
Return on average assets (ROA) | (0.90 | %) | ||
Return on average equity (ROE) | (4.62 | ) | ||
Dividend payout ratio | 0.00 | |||
Net interest margin | 8.19 | |||
Other income ratio(1) | 1.88 | |||
Total expense ratio(2) | 9.77 | |||
Equity to assets(3) | 21.00 | |||
Debt to equity(3) | 365.96 | |||
Loans receivable to assets | 71.03 | |||
Net charge-offs | 22,613 | |||
Net charge-offs as a % of average loans receivable | 2.73 | % | ||
Allowance coverage ratio | 3.58 |
(1) | Other income ratio represents other income divided by average interest earning assets, and excludes the gain on the deconsolidation of Trust III of $25,325. See Note 23 for additional information. |
(2) | Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average interest earning assets, and includes the goodwill impairment of $5,615. |
(3) | Includes $27,596 related tonon-controlling interest in consolidated subsidiaries. |
You should read the consolidated financial information below with the Consolidated Financial Statements and Notes thereto included in this report. As described therein, for the three months ended March 31, 2018, and the years ended December 31, 2017, 2016, 2015 and 2014, and 2013.the Company reported under Investment Company Accounting.
Year ended December 31, | Three Months Ended March 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2017 | 2016 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||
Statement of operations | ||||||||||||||||||||||||||||||||||||||||
Investment income | $ | 19,624 | $ | 25,088 | $ | 42,653 | $ | 41,068 | $ | 34,929 | $ | 4,033 | $ | 19,624 | $ | 25,088 | $ | 42,653 | $ | 41,068 | ||||||||||||||||||||
Interest expense | 13,770 | 12,638 | 9,422 | 8,543 | 8,361 | 3,551 | 13,770 | 12,638 | 9,422 | 8,543 | ||||||||||||||||||||||||||||||
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Net interest income | 5,854 | 12,450 | 33,231 | 32,525 | 26,568 | 482 | 5,854 | 12,450 | 33,231 | 32,525 | ||||||||||||||||||||||||||||||
Noninterest income | 107 | 408 | 319 | 509 | 1,282 | 60 | 107 | 408 | 319 | 509 | ||||||||||||||||||||||||||||||
Operating expenses | 13,810 | 22,786 | 16,724 | 17,889 | 15,661 | 4,108 | 13,810 | 22,786 | 16,724 | 17,889 | ||||||||||||||||||||||||||||||
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Net investment income (loss) before income taxes | (7,849 | ) | (9,928 | ) | 16,826 | 15,145 | 12,189 | (3,566 | ) | (7,849 | ) | (9,928 | ) | 16,826 | 15,145 | |||||||||||||||||||||||||
Income tax benefit | 728 | 10,047 | — | — | — | 336 | 728 | 10,047 | — | — | ||||||||||||||||||||||||||||||
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Net investment income (loss) after income taxes | (7,121 | ) | 119 | 16,826 | 15,145 | 12,189 | (3,230 | ) | (7,121 | ) | 119 | 16,826 | 15,145 | |||||||||||||||||||||||||||
Net realized gains (losses) on investments | (43,744 | ) | 457 | 7,636 | (5,607 | ) | 692 | (34,745 | ) | (43,744 | ) | 457 | 7,636 | (5,607 | ) | |||||||||||||||||||||||||
Net change in unrealized appreciation on Medallion Bank and other controlled subsidiaries(1) | 9,483 | 130,121 | 16,830 | 15,643 | 5,060 | 29,115 | 9,483 | 130,121 | 16,830 | 15,643 | ||||||||||||||||||||||||||||||
Net change in unrealized appreciation (depreciation) on investments(1) | 8,222 | (22,863 | ) | (2,295 | ) | 6,412 | 1,020 | (1,915 | ) | 8,222 | (22,863 | ) | (2,295 | ) | 6,412 | |||||||||||||||||||||||||
Net change in unrealized appreciation (depreciation) on investments other than securities | (2,060 | ) | (28,372 | ) | (9,621 | ) | (2,901 | ) | 6,815 | |||||||||||||||||||||||||||||||
Net change in unrealized depreciation on investments other than securities | (4,403 | ) | (2,060 | ) | (28,372 | ) | (9,621 | ) | (2,901 | ) | ||||||||||||||||||||||||||||||
Income tax (provision) benefit | 35,498 | (55,947 | ) | — | — | — | 304 | 35,498 | (55,947 | ) | — | — | ||||||||||||||||||||||||||||
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Net increase in net assets resulting from operations | $ | 278 | $ | 23,515 | $ | 29,376 | $ | 28,692 | $ | 25,776 | ||||||||||||||||||||||||||||||
Net increase (decrease) in net assets resulting from operations | ($ | 14,874 | ) | $ | 278 | $ | 23,515 | $ | 29,376 | $ | 28,692 | |||||||||||||||||||||||||||||
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Per share data | ||||||||||||||||||||||||||||||||||||||||
Net investment income (loss) | ($ | 0.33 | ) | ($ | 0.41 | ) | $ | 0.69 | $ | 0.60 | $ | 0.55 | ($ | 0.15 | ) | ($ | 0.33 | ) | ($ | 0.41 | ) | $ | 0.69 | $ | 0.60 | |||||||||||||||
Income tax (provision) benefit | 1.51 | (1.90 | ) | — | — | — | 0.03 | 1.51 | (1.90 | ) | — | — | ||||||||||||||||||||||||||||
Net realized gains (losses) on investments | (1.82 | ) | 0.02 | 0.31 | (0.22 | ) | 0.03 | (1.44 | ) | (1.82 | ) | 0.02 | 0.31 | (0.22 | ) | |||||||||||||||||||||||||
Net change in unrealized appreciation on investments(1) | 0.65 | 3.26 | 0.2 | 0.76 | 0.58 | 0.94 | 0.65 | 3.26 | 0.2 | 0.76 | ||||||||||||||||||||||||||||||
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Net increase in net assets resulting from operations | $ | 0.01 | $ | 0.97 | $ | 1.20 | $ | 1.14 | $ | 1.16 | ||||||||||||||||||||||||||||||
Net increase (decrease) in net assets resulting from operations | ($ | 0.62 | ) | $ | 0.01 | $ | 0.97 | $ | 1.20 | $ | 1.14 | |||||||||||||||||||||||||||||
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Distributions declared per share | $ | 0.00 | $ | 0.35 | $ | 1.00 | $ | 0.96 | $ | 0.90 | $ | 0.00 | $ | 0.00 | $ | 0.35 | $ | 1.00 | $ | 0.96 | ||||||||||||||||||||
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Weighted average common shares outstanding | ||||||||||||||||||||||||||||||||||||||||
Basic | 23,919,994 | 24,123,888 | 24,315,427 | 24,850,496 | 21,850,415 | |||||||||||||||||||||||||||||||||||
Diluted | 24,053,307 | 24,173,020 | 24,391,959 | 25,073,323 | 22,225,783 | |||||||||||||||||||||||||||||||||||
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Balance sheet data | ||||||||||||||||||||||||||||||||||||||||
Net investments | $ | 610,135 | $ | 652,278 | $ | 606,959 | $ | 527,601 | $ | 473,157 | ||||||||||||||||||||||||||||||
Total assets | 635,522 | 689,377 | 689,050 | 632,287 | 595,053 | |||||||||||||||||||||||||||||||||||
Total funds borrowed | 327,623 | 349,073 | 404,540 | 348,795 | 314,958 | |||||||||||||||||||||||||||||||||||
Total liabilities | 348,363 | 403,281 | 410,962 | 357,617 | 321,558 | |||||||||||||||||||||||||||||||||||
Total shareholders’ equity | 287,159 | 286,096 | 278,088 | 274,670 | 273,495 | |||||||||||||||||||||||||||||||||||
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Managed balance sheet data (2) | ||||||||||||||||||||||||||||||||||||||||
Net investments | $ | 1,380,054 | $ | 1,517,592 | $ | 1,501,555 | $ | 1,310,685 | $ | 1,144,596 | ||||||||||||||||||||||||||||||
Total assets | 1,565,889 | 1,605,435 | 1,631,118 | 1,469,751 | 1,305,809 | |||||||||||||||||||||||||||||||||||
Total funds borrowed | 1,234,371 | 1,257,515 | 1,313,436 | 1,156,735 | 997,295 | |||||||||||||||||||||||||||||||||||
Total liabilities | 1,278,730 | 1,319,340 | 1,353,030 | 1,195,081 | 1,032,314 |
Selected financial ratios and other data Return on average assets (ROA)(3) Net investment income (loss) after taxes Net increase in net assets resulting from operations Return on average equity (ROE)(4) Net investment income (loss) after taxes Net increase in net assets resulting from operations Weighted average yield Weighted average cost of funds Net interest margin(5) Noninterest income ratio(6) Total expense ratio(7) Operating expense ratio (8) As a percentage of net investment portfolio Medallion loans Commercial loans Investment in Medallion Bank and other controlled subsidiaries Equity investments Investment securities Investments to assets(9) Equity to assets(10) Debt to equity(11) Year ended December 31, 2017 2016 2015 2014 2013 (1.07 )% 0.02 % 2.59 % 2.51 % 2.19 % 0.04 3.48 4.53 4.75 4.64 (2.49 ) 0.04 6.08 5.48 5.40 0.10 8.49 10.61 10.39 11.42 3.12 % 4.17 % 7.74 % 8.25 % 7.60 % 2.19 2.10 1.71 1.71 1.82 0.93 2.07 6.03 6.54 5.78 0.02 0.07 0.06 0.10 0.28 (1.37 ) 13.5 4.75 5.31 5.23 2.20 3.78 3.04 3.60 3.41 34 % 41 % 51 % 59 % 63 % 15 13 14 14 13 49 45 26 26 23 2 1 1 1 1 — — 8 — — 96 % 95 % 88 % 83 % 80 % 45 42 40 43 46 114 122 145 127 115
Three Months Ended March 31, | Year Ended December 31, | |||||||||||||||||||
(Dollars in thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||||
Basic | 24,154,879 | 23,919,994 | 24,123,888 | 24,315,427 | 24,850,496 | |||||||||||||||
Diluted | 24,154,879 | 24,053,307 | 24,173,020 | 24,391,959 | 25,073,323 | |||||||||||||||
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Balance sheet data | ||||||||||||||||||||
Net investments | $ | 595,402 | $ | 610,135 | $ | 652,278 | $ | 606,959 | $ | 527,601 | ||||||||||
Total assets | 616,710 | 635,522 | 689,377 | 689,050 | 632,287 | |||||||||||||||
Total funds borrowed | 320,662 | 327,623 | 349,073 | 404,540 | 348,795 | |||||||||||||||
Total liabilities | 344,273 | 348,363 | 403,281 | 410,962 | 357,617 | |||||||||||||||
Total shareholders’ equity | 272,437 | 287,159 | 286,096 | 278,088 | 274,670 | |||||||||||||||
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Managed balance sheet data (2) | ||||||||||||||||||||
Net investments | $ | 1,386,136 | $ | 1,380,054 | $ | 1,517,592 | $ | 1,501,555 | $ | 1,310,685 | ||||||||||
Total assets | 1,479,826 | 1,565,889 | 1,605,435 | 1,631,118 | 1,469,751 | |||||||||||||||
Total funds borrowed | 1,167,888 | 1,234,371 | 1,257,515 | 1,313,436 | 1,156,735 | |||||||||||||||
Total liabilities | 1,207,389 | 1,278,730 | 1,319,340 | 1,353,030 | 1,195,081 | |||||||||||||||
Selected financial ratios and other data | ||||||||||||||||||||
Return on average assets (ROA)(3) | ||||||||||||||||||||
Net investment income (loss) after taxes | (2.08 | )% | (1.07 | )% | 0.02 | % | 2.59 | % | 2.51 | % | ||||||||||
Net increase in net assets resulting from operations | (9.55 | ) | 0.04 | 3.48 | 4.53 | 4.75 | ||||||||||||||
Return on average equity (ROE)(4) | ||||||||||||||||||||
Net investment income (loss) after taxes | (4.62 | ) | (2.49 | ) | 0.04 | 6.08 | 5.48 | |||||||||||||
Net increase (decrease) in net assets resulting from operations | (21.24 | ) | 0.10 | 8.49 | 10.61 | 10.39 | ||||||||||||||
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Weighted average yield | 2.70 | % | 3.12 | % | 4.17 | % | 7.74 | % | 8.25 | % | ||||||||||
Weighted average cost of funds | 2.38 | 2.19 | 2.10 | 1.71 | 1.71 | |||||||||||||||
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Net interest margin(5) | 0.32 | 0.93 | 2.07 | 6.03 | 6.54 | |||||||||||||||
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Noninterest income ratio(6) | 0.01 | 0.02 | 0.07 | 0.06 | 0.10 | |||||||||||||||
Total expense ratio(7) | 1.16 | (1.37 | ) | 13.5 | 4.75 | 5.31 | ||||||||||||||
Operating expense ratio(8) | 0.68 | 2.20 | 3.78 | 3.04 | 3.60 | |||||||||||||||
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As a percentage of net investment portfolio | ||||||||||||||||||||
Medallion loans | 27 | % | 34 | % | 41 | % | 51 | % | 59 | % | ||||||||||
Commercial loans | 15 | 15 | 13 | 14 | 14 | |||||||||||||||
Investment in Medallion Bank and other controlled subsidiaries | 56 | 49 | 45 | 26 | 26 | |||||||||||||||
Equity investments | 2 | 2 | 1 | 1 | 1 | |||||||||||||||
Investment securities | — | — | — | 8 | — | |||||||||||||||
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Investments to assets(9) | 97 | % | 96 | % | 95 | % | 88 | % | 83 | % | ||||||||||
Equity to assets(10) | 44 | 45 | 42 | 40 | 43 | |||||||||||||||
Debt to equity(11) | 118 | 114 | 122 | 145 | 127 |
(1) | Unrealized appreciation (depreciation) on investments represents the increase (decrease) for the year in the fair value of our investments, including the results of operations for Medallion Bank and other controlled subsidiaries, where applicable. |
(2) | Includes the balances of wholly-owned, unconsolidated portfolio companies, primarily Medallion Bank. |
(3) | ROA represents the net investment income after taxes or net increase in net assets resulting from operations, divided by average total assets, and includes the goodwill impairment of $5,099 in 2016. Excluding the impairment writeoff, the ratio was 0.77% in 2016. |
(4) | ROE represents the net investment income after taxes or net increase in net assets resulting from operations, divided by average shareholders’ equity, and includes the goodwill impairment of $5,099 in 2016. Excluding the impairment writeoff, the ratio was 1.88% in 2016. |
(5) | Net interest margin represents net interest income for the year divided by average interest earning assets, and included interest recoveries and bonuses of $0 for the three months ended March 31, 2018, $0 in 2017, $0 in 2016, $817 in 2015, and $4,160 in 2014, |
(6) | Noninterest income ratio represents noninterest income divided by average interest earning assets. |
(7) | Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average interest earning assets, and includes the goodwill impairment of $5,099 in 2016. Excluding the impairment writeoff, the ratio was 12.65% in 2016. |
(8) | Operating expense ratio represents operating expenses divided by average interest earning assets, and includes the goodwill impairment of $5,099 in 2016. Excluding the impairment writeoff, the ratio was 2.94% in 2016. |
(9) | Represents net investments divided by total assets as of December 31. |
(10) | Represents total shareholders’ equity divided by total assets as of December 31. |
(11) | Represents total funds borrowed divided by total shareholders’ equity as of December 31. |
ITEM 7. |
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The information contained in this section should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the years ended December 31, 2018, 2017, 2016, and 2015.2016. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors section on page 19.18. Additionally, more information about our business activities can be found in “Business”“Business.”
GENERAL
We are a finance company that has historically 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, which originates consumer loans for the purchase of RV’s, boats, motorcycles, 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 16% (19% if there had been no loan sales during 2016, 2017, and 2018). We are transitioning away from medallion lending and placing our strategic focus on our growing consumer finance business. As a result of our change in strategy, as of December 31, 2018, our consumer loans represented 77% of our loan portfolio, with medallion loans representing 16% and commercial loans representing 7%. Total assets under management and management of
our unconsolidated wholly-owned subsidiaries (prior to April 2, 2018), which includes our managed net investment portfolio, as well as assets serviced for third party investors and unconsolidated subsidiaries, were $1,522,000,000 as of December 31, 2018, and were $1,593,000,000 as of December 31, 2017, and have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996.
Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as revolving bank facilities, bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities.
We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Medallion Capital’s investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.
On March 7, 2018, a majority of the Company’s shareholders authorized the Company’s Board of Directors to withdraw the Company’s election to be regulated as a BDC under the 1940 Act, and we withdrew such election effective April 2, 2018. At that point, we were no longer a BDC or subject to the provisions of the 1940 Act applicable to BDCs. Historically, the composition of the Company’s assets caused it to meet the definition of an “investment company,” and the Company made a corresponding election to be treated as a BDC. Now that the Company hasde-elected BDC status, it operates so as to fall outside the definition of an “investment company” or within an applicable exception.
As a result of this change in status, commencing with the three months ended June 30, 2018:
we consolidated the results of Medallion Bank and our other subsidiaries in our financial statements, which, as an investment company, we were previously precluded from doing; and
with the consolidation of Medallion Bank, given its significance to our overall financial results, we now report as a bank holding company for accounting purposes under Article 9 and Guide 3 of RegulationS-X (but we are not a bank holding company for regulatory purposes).
As we made this change to our financial reporting prospectively, in this report we refer to both accounting in accordance with U.S. 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.
Our wholly-owned subsidiary, Medallion Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we have referred a portion of our taxicab medallion and commercial loans to Medallion Bank, which originated these loans, and have been serviced by MSC. However, at this time Medallion Bank is not originating any new taxi medallion loans and is working with MSC to service its existing portfolio. The FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, although it is less than one times Tier 1 capital as of December 31, 2018. MSC earns referral and servicing fees for these activities.
The assets of Taxi Medallion Loan Trust III (Trust III) were not available to pay obligations of its affiliates or any other party. Trust III’s loans are serviced by Medallion Funding LLC (MFC). On November 8, 2018, a limited guaranty in favor of DZ Bank was terminated in exchange for a $1.4 million note, payable in quarterly installments over five years. As a result of such restructuring, effective as of such date, Trust III is no longer consolidated in our financial statements, and a gain of $25,325,000 was recorded in the 2018 fourth quarter reflecting the deconsolidation.
CRITICAL ACCOUNTING POLICIES
The SEC has issued cautionary advice regarding disclosure about criticalWe follow financial accounting policies. The SEC defines criticaland reporting policies that are in accordance with U.S. generally accepted accounting principles (GAAP). Some of these significant accounting policies asrequire management to make difficult, subjective or complex judgments. The policies noted below, however, are deemed to be our “critical accounting policies” under the definition given to this term by the SEC: those policies that are both most important to the portrayalpresentation of a company’s financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertainuncertain.
The judgments used by management in applying the critical accounting policies may be affected by deterioration in the economic environment, which may result in changes to future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes to the allowance for loan losses in future periods, and the inability to collect on outstanding loans could result in increased loan losses.
Allowance for Loan Losses
In analyzing the adequacy of the allowance for loan losses, the Company uses historical delinquency and actual loss rates with a three-year look-back period for medallion loans and aone-year look-back period for recreation loans and home improvement loans. The allowance is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may change materiallyaffect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
Our methodology to calculate the general reserve portion of the allowance includes the use of quantitative and qualitative factors. We initially determine an allowance based on quantitative loss factors for loans evaluated collectively for impairment. The quantitative loss factors are based primarily on historical loss rates, after considering loan type, historical loss and delinquency experience. The quantitative loss factors applied in subsequent periods.the methodology are periodicallyre-evaluated and adjusted to reflect changes in historical loss levels or other risks. Qualitative loss factors are used to modify the reserve determined by the quantitative factors and are designed to account for losses that may not be included in the quantitative calculation according to management’s best judgment. Performing loans are recorded at book value and the general reserve maintained to absorb expected losses consistent with GAAP.
All medallion loans that reach 90 days or more delinquent require a specific allowance reserve for those loans, which is determined on an individual basis. The preparationallowance is then recorded so the net value of the loan is either equal to the market or collateral value of the loan.
Wecharge-off loans in the period that such loans are deemed uncollectible or when they reach 120 days delinquent regardless of whether the loan is a recreation, home improvement or medallion loan.
The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be responsive to changes in portfolio credit quality and inherent credit losses. The changes are
reflected in both the pooled formula reserve and in specific reserves as the collectability of larger classified loans is regularly recalculated with new information as it becomes available. Management is primarily responsible for the overall adequacy of the allowance.
Medallion Loan Collateral Valuation
Due to the low volume of market transfer activity the taxi medallion collateral fair value is derived quarterly for each jurisdiction using recent market transfer activity, to the extent it is available, and a discounted cash flow model. Recent market transfers published by the jurisdiction are averaged to derive the transfer activity value. When analyzing transfer activity, management does not consider transaction outliers in the average calculation nor transactions which are confirmed through third-party sources as not arms-length. For the discounted cash flow model value, significant inputs include the discount rate, taxi fare/lease revenue and associated expenses such as vehicle costs, fuel, credit card processing fees, repair costs, and insurance premiums. A higher discount rate, lower taxi fare/lease revenue and higher associated expenses each produce a lower fair value. At period end, the transfer activity and discounted cash flow values create the fair value range. A weight is ascribed to each value in order to determine the final market value.
Average Balances and Rates (Bank Holding Company Accounting)
The following table shows the Company’s consolidated average balance sheets, interest income and expense, and the average interest earning/bearing assets and liabilities for nine months ended December 31, 2018.
Nine Months Ended December 31, 2018 | ||||||||||||
(Dollars in thousands) | Average Balance | Interest | Average Yield/Cost | |||||||||
Interest-earning assets: | ||||||||||||
Interest-earning cash and cash equivalents | $ | 45,836 | $ | 508 | 1.47 | % | ||||||
Investment securities | 44,789 | 850 | 2.52 | |||||||||
Loans: | ||||||||||||
Recreation | 579,440 | 68,870 | 15.78 | |||||||||
Home improvement | 187,570 | 12,799 | 9.06 | |||||||||
Commercial loans | 78,501 | 7,459 | 12.61 | |||||||||
Medallion loans | 234,476 | 6,317 | 3.58 | |||||||||
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Total loans | 1,079,987 | 95,445 | 11.73 | |||||||||
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Total interest-earning assets | $ | 1,170,612 | $ | 96,803 | 10.98 | % | ||||||
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Non-interest-earning assets | ||||||||||||
Cash | $ | 12,131 | ||||||||||
Equity investments | 10,665 | |||||||||||
Loan collateral in process of foreclosure (1) | 56,397 | |||||||||||
Goodwill and intangible assets | 210,441 | |||||||||||
Other assets | 37,542 | |||||||||||
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Totalnon-interest-earning assets | 327,176 | |||||||||||
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Total assets | $ | 1,497,788 | ||||||||||
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Nine Months Ended December 31, 2018 | ||||||||||||
(Dollars in thousands) | Average Balance | Interest | Average Yield/Cost | |||||||||
Interest-bearing liabilities | ||||||||||||
Deposits | $ | 891,588 | $ | 14,230 | 2.12 | % | ||||||
DZ loan | 67,935 | 2,126 | 4.15 | |||||||||
SBA debentures and borrowings | 79,157 | 2,300 | 3.86 | |||||||||
Notes payable to banks | 67,732 | 2,305 | 4.52 | |||||||||
Retail notes | 33,625 | 2,625 | 10.36 | |||||||||
Preferred securities | 33,000 | 1,111 | 4.47 | |||||||||
Other borrowings | 8,286 | 119 | 1.91 | |||||||||
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Total interest-bearing liabilities | $ | 1,181,323 | $ | 24,816 | 2.79 | % | ||||||
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Non-interest-bearing liabilities | ||||||||||||
Deferred tax liability | $ | 1,549 | ||||||||||
Other liabilities | 22,743 | |||||||||||
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Totalnon-interest-bearing liabilities | 24,292 | |||||||||||
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Total liabilities | $ | 1,205,615 | ||||||||||
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Non-controlling interest | 27,318 | |||||||||||
Total stockholders’ equity | 264,855 | |||||||||||
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Total liabilities and stockholders’ equity | $ | 1,497,788 | ||||||||||
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Net interest income | $ | 71,987 | ||||||||||
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Net interest margin | 8.19 | % | ||||||||||
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(1) | Includes financed sales of this collateral to third parties reported separately from the loan portfolio, and that are conducted by the Bank of $3,134. |
During the nine months, our net loans receivable had a yield of 11.73%, which was driven by the recreation loans partly offset by the medallion loan yield driven by the market and the overall decline in the balance. The recreation loans are consumer loans used in large part to purchase recreational vehicles, boats and trailers and the recreation loan portfolio produces the majority of our interest income. Of our debt, we use certificates of deposit to provide the funding for our consumer loans (recreation and home improvement) and a portion of our medallion loans. In addition, due to the restructuring of the DZ loan, the overall borrowings declined, but the rate increased due to current market conditions.
Rate/Volume Analysis (Bank Holding Company Accounting)
The following table presents the change in interest income and expense due to changes in the average balances (volume) and average rates by calculated for the period indicated.
Nine Months Ended December 31, 2018 | ||||||||||||
(Dollars in thousands) | Increase (Decrease) In Volume | Increase (Decrease) In Rate | Net Change | |||||||||
Interest-earning assets | ||||||||||||
Interest-earning cash and cash equivalents | $ | 142 | $ | 18 | $ | 160 | ||||||
Investment securities | 30 | 12 | 42 | |||||||||
Loans | ||||||||||||
Recreation | 2,089 | (1,427 | ) | 662 | ||||||||
Home improvement | 28 | 160 | 188 | |||||||||
Commercial | (153 | ) | 314 | 161 | ||||||||
Medallion | (962 | ) | (1,460 | ) | (2,422 | ) | ||||||
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Total loans receivable | $ | 1,002 | ($ | 2,413 | ) | ($ | 1,411 | ) | ||||
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Total interest-earning assets | $ | 1,174 | ($ | 2,383 | ) | ($ | 1,209 | ) | ||||
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Interest-bearing liabilities | ||||||||||||
Deposits | $ | 218 | $ | 1,203 | $ | 1,421 | ||||||
DZ loan | (679 | ) | (41 | ) | (720 | ) | ||||||
SBA debentures and borrowings | 32 | (2 | ) | 30 | ||||||||
Notes payable to banks | (190 | ) | 108 | (82 | ) | |||||||
Retail notes | — | (19 | ) | (19 | ) | |||||||
Preferred securities | — | 79 | 79 | |||||||||
Other borrowings | 2 | 4 | 6 | |||||||||
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Total interest-bearing liabilities | ($ | 617 | ) | $ | 1,332 | $ | 715 | |||||
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Net | $ | 1,791 | ($ | 3,715 | ) | ($ | 1,924 | ) | ||||
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Our interest expense is driven by the interest rates payable on our bank certificates of deposit, short-term credit facilities with banks, fixed-rate, long-term debentures issued to the SBA, and other short-term notes payable. Medallion Bank issues brokered bank certificates of deposit, which are our lowest borrowing costs. Medallion Bank is able to bid on these deposits at a wide variety of maturity levels which allows for improved interest rate management strategies.
Our cost of funds is primarily driven by the rates paid on our various debt instruments and their relative mix, and changes in the levels of average borrowings outstanding. See Note 7 to the consolidated financial statements requires estimatesfor details on the terms of our outstanding debt. Our debentures issued to the SBA typically have terms of ten years.
We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities outstanding during the period. The following tables show the average borrowings and assumptions that affect amounts reportedrelated borrowing costs for the years ended December 31, 2018, 2017 and disclosed2016. Our average balances decreased during the current year, reflecting the contraction in the financial statements and related notes. Significant estimates made by us include valuationloan portfolios, mainly due to the deconsolidation of loans, equity investments, and investments in subsidiaries, evaluation of the recoverability of accounts receivable and income tax assets,Trust III and the assessmentconsumer loan sale in the third quarter of litigation2018. The increase in borrowing costs primarily reflected the repricing of term borrowings based upon the current market and other contingencies. The mattersincreased deposit balances reflecting a lengthening of their maturity profile.
(Dollars in thousands) | Interest Expense | Average Balance | Average Borrowing Costs | |||||||||
December 31, 2018(1) | ||||||||||||
Deposits | $ | 14,230 | $ | 891,588 | 2.14 | % | ||||||
DZ loan | 2,928 | 81,256 | 3.60 | |||||||||
SBA debentures and borrowings | 3,049 | 79,016 | 3.86 | |||||||||
Notes payable to banks | 3,118 | 71,353 | 4.37 | |||||||||
Retail notes | 3,500 | 33,625 | 10.41 | |||||||||
Preferred securities | 1,423 | 33,000 | 4.31 | |||||||||
Other borrowings | 119 | 8,286 | 1.93 | |||||||||
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Total borrowings | $ | 28,367 | $ | 1,198,124 | 2.37 | |||||||
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December 31, 2017 | ||||||||||||
DZ loan | $ | 2,892 | $ | 102,894 | 2.81 | % | ||||||
Notes payable to banks | 3,164 | 84,219 | 3.76 | |||||||||
SBA debentures and borrowings | 3,099 | 80,284 | 3.86 | |||||||||
Preferred securities | 1,111 | 33,000 | 3.37 | |||||||||
Retail notes | 3,504 | 33,625 | 10.42 | |||||||||
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Total | $ | 13,770 | $ | 334,022 | 4.12 | |||||||
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Medallion Bank borrowings | 13,869 | 913,072 | 1.52 | |||||||||
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Total managed borrowings | $ | 27,639 | $ | 1,247,094 | 2.22 | |||||||
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December 31, 2016 | ||||||||||||
DZ loan | $ | 2,670 | $ | 119,492 | 2.23 | % | ||||||
Notes payable to banks | 3,119 | 105,893 | 2.95 | |||||||||
SBA debentures | 3,134 | 79,175 | 3.96 | |||||||||
Preferred securities | 945 | 33,000 | 2.87 | |||||||||
Retail notes | 2,501 | 23,748 | 10.53 | |||||||||
Margin loans | 269 | 18,997 | 1.42 | |||||||||
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Total | $ | 12,638 | $ | 380,305 | 3.32 | |||||||
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Medallion Bank borrowings | 11,762 | 924,235 | 1.27 | |||||||||
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Total managed borrowings | $ | 24,400 | $ | 1,304,540 | 1.87 | |||||||
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(1) | Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and three months ended March 31, 2018 under Investment Company Accounting. |
We will continue to seek SBA funding through Medallion Capital to the extent it offers attractive rates. SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that give rise to such provisions are inherently uncertainqualify under the SBIA and may require complex and subjective judgments. Although weSBA regulations. We believe that estimates and assumptions usedfinancing operations primarily with short-term floating rate secured bank debt has generally decreased our interest expense, but has also increased our exposure to the risk of increases in determining the recorded amounts of net assets and liabilities atmarket interest rates, which we mitigate with certain interest rate strategies. At December 31, 2017 are reasonable, actual results could differ materially from the estimated amounts recorded in our financial statements.2018 short-term adjustable rate debt constituted 6% of total debt, and
GENERAL
We are a specialty finance company that has historically 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 a wholly-owned portfolio company of ours, Medallion Bank, which originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, 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 16%. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 2%, and our commercial loan portfolio at a compound annual growth rate of 4% (5% and 4%were 55% (15% on a managed basis when combined with Medallion Bank). 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 our management and the managementwhich included borrowings of our consolidated and unconsolidated wholly-owned subsidiaries, which includes oursubsidiaries) and 59% (16% on a managed net investment portfolio, as well as assets serviced for third party investors, were $1,593,000,000basis) as of December 31, 2017 and $1,632,000,0002016.
Provision and Allowance for Loan Loss (Bank Holding Company Accounting)
The below is based upon activity beginning on April 2, 2018. During the nine months ended December 31, 2018, the New York medallion value slightly decreased to a net realizable value of $181,000, from $183,500 at March 31, 2018 and in the 2018 fourth quarter, the net realizable value of the other markets declined as loans continue to age over 120 days. The provision was slightly improved by the deconsolidation of Trust III in the 2018 fourth quarter, leading to a reversal of $8,161,000 of provision. The provision also included $5,708,000 of a general reserve, for the Company, for current and performing medallion loans under 90 days past due, as an additional buffer against future losses. This figure excludes the general reserve of $17,351,000 at the Bank, which was netted against loan balances at consolidation on April 2, 2018.
(Dollars in thousands) | Nine Months Ended December 31, 2018 | |||
Allowance for loan losses – beginning balance(1) | $ | — | ||
Charge-offs | ||||
Recreation | (12,697 | ) | ||
Home improvement | (1,562 | ) | ||
Commercial | — | |||
Medallion | (14,277 | ) | ||
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Total charge-offs | (28,536 | ) | ||
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Recoveries | ||||
Recreation | 4,437 | |||
Home improvement | 905 | |||
Commercial | 4 | |||
Medallion | 577 | |||
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Total recoveries | 5,923 | |||
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Net charge-offs | (22,613 | )(2) | ||
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Provision for loan losses(3) | 59,008 | (4) | ||
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Allowance for loan losses – ending balance | $ | 36,395 | ||
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(1) | Beginning balance for the nine months December 31, 2018 ended 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) | As of December 31, 2018, cumulative charge-offs of loans and loans in process of foreclosure in the medallion portfolio were $215,789, representing collection opportunities for the Company. |
(3) | Includes $5,708 of a general reserve, for the Company, for current and performing medallion loans under 90 days past due, as an additional buffer against future losses, representing 16% of the total allowance, and 4% of the loans in question. This figure excludes the general reserve for the Bank, which was netted against loan balances at consolidation on April 2, 2018. |
(4) | Includes $8,161 of a reversal of provision for loan loss related to the deconsolidation of Trust III in the 2018 fourth quarter. |
The following table presents the allowance by segment as a percent of loans as of December 31, 2016 and have grown at a compound annual growth rate of 10% from $215,000,000 at2018 under Bank Holding Company Accounting.
(Dollars in thousands) | Amount | Percentage of Allowance | Allowance as a Percent of Loan Category | |||||||||
Recreation | $ | 6,856 | 19 | % | 1.17 | % | ||||||
Home improvement | 1,796 | 5 | 0.98 | |||||||||
Commercial | — | — | 0.00 | |||||||||
Medallion | 27,743 | 76 | 15.11 | |||||||||
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Total | $ | 36,395 | 100 | % | 3.58 | % | ||||||
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The following tables set forth the end of 1996.
Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as revolving bank facilities, bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, and bank term debt. Net interest income fluctuates withpre-tax changes in our unrealized appreciation (depreciation) on investments, for the yield on our loan portfoliothree months ended March 31, 2018 and changes infor the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities.
We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Medallion Capital’s investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.
We are aclosed-end,non-diversified management investment company, organized as a Delaware corporation, under the 1940 Act. We have elected to be treated as a BDC, under the 1940 Act. On March 7, 2018, a majority of the Company’s shareholders authorized the Company’s Board of Directors to withdraw the Company’s election to be regulated as a BDC under the 1940 Act and our Board of Directors approved the filing of the Company’s withdrawal form with the SEC to be made on or about April 1, 2018. At that point, we would no longer be a BDC or be subject to the provisions of the 1940 Act applicable to BDCs.
For our tax years ended December 31, 2017 and 2016 under Investment Company Accounting.
(Dollars in thousands) | Medallion Loans | Commercial Loans | Investments in Subsidiaries | Equity Investments | Investment Securities | Investments Other Than Securities | Total | |||||||||||||||||||||
Balance December 31, 2015 | $ | (3,438 | ) | $ | (2,239 | ) | $ | 18,640 | $ | 2,582 | $ | (18 | ) | $ | 28,956 | $ | 44,483 | |||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 133,805 | 2,979 | 7 | (28,372 | ) | 108,419 | ||||||||||||||||||||
Depreciation on investments | (28,028 | ) | 318 | 305 | — | 5 | — | (27,400 | ) | |||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (1,627 | ) | — | — | (1,627 | ) | |||||||||||||||||||
Losses on investments | 2,943 | 543 | — | — | 12 | — | 3,498 | |||||||||||||||||||||
Other | — | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||||||
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Balance December 31, 2016 | (28,523 | ) | (1,378 | ) | 152,750 | 3,934 | — | 584 | 127,367 | |||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 6,170 | 2,060 | — | (821 | ) | 7,409 | ||||||||||||||||||||
Depreciation on investments | (37,335 | ) | (410 | ) | — | (277 | ) | — | (1,253 | ) | (39,275 | ) | ||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (3,082 | ) | — | — | (3,082 | ) | |||||||||||||||||||
Losses on investments | 45,520 | 1,275 | — | 486 | — | — | 47,281 | |||||||||||||||||||||
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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 | ||||||||||||||||||||||
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Balance March 31, 2018 | ($ | 23,761 | ) | ($ | 495 | ) | $ | 197,715 | $ | 2,123 | $ | — | ($ | 3,405 | ) | $ | 172,177 | |||||||||||
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Under both Bank Holding Company Accounting and Investment Company Accounting, we didgenerally follow a practice of discontinuing the accrual of interest income on our loans that are in arrears as to payments for a
period of 90 days or more. We deliver a default notice and begin foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the most appropriate course of action under the circumstances. A loan is considered to be delinquent if the borrower fails to make a payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment terms of the loan with a borrower that cannot make payments in accordance with the original loan agreement. For loan modifications, the loan will only be returned to accrual status if all past due interest and principal payments are brought fully current. For credit that is collateral based, we evaluate the anticipated net residual value we would receive upon foreclosure of such loans, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequate in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install a new operator to run the business and reduce the debt.
For the consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not qualifylocated and the account reaches 120 days delinquent, the account ischarged-off to realized losses. If the collateral is repossessed, a realized loss is recorded to write the collateral down to its net realizable value, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code,realized loss, and therefore we became subject to taxationany excess proceeds are recorded as a corporation under Subchapter C of the Code. We had in previous years qualifiedrealized gain. Proceeds collected oncharged-off accounts are recorded as realized gains. All collection, repossession, and elected to be treated for federal income tax purposes as a RIC. As a RIC, we generally did not have to pay corporate-level federal income taxesrecovery efforts are handled on any net ordinary income or capital gains that we distributed to our shareholders as dividends, if we met certainsource-of-income and asset diversification requirements. Medallion Bank is not a RIC and must pay corporate-level US federal and state income taxes. See Note 5 for more information.
Our wholly-owned portfolio company, Medallion Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we have referred a portion of our taxicab medallion and commercial loans to Medallion Bank, who originated these loans, and have been serviced by MSC. However, at this time Medallion Bank is not originating any new taxi medallion loans and is working with MSC to service its existing portfolio. The FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, or $491,391,000 as of December 31, 2017. MSC earns referral and servicing fees for these activities. As anon-investment company, Medallion Bank is not consolidated with the Company.
If the Company withdraws its election to be regulated as a BDC, as expected, commencing with the second quarter of 2018, the Company would no longer be subject to FASB Accounting Standards Codification Topic 946, Financial Services – Investment Companies, which would result in a significant change in our accounting and financial reporting requirements. Our financial statements are currently presented and accounted for under the specialized method of accounting applicable to investment companies, which requires us to recognize our investments, including controlled investments, at fair value. As a BDC, we are currently precluded from consolidating any entity other than another investment company that acts as an extension of our investment operations and facilitates the execution of our investment strategy or an investment in a controlled operating company that provides substantially all of its services to us. Our financial statements currently consolidate the accounts of the Company and its wholly-owned investment company subsidiaries, except for Medallion Bank and other portfolio investments. Our financial statements reflect our investment in Medallion Bank and other portfolio investments at fair value, as determined in good faith by our Board of Directors. Medallion Bank’s financial statements are separately provided as a significant unconsolidated wholly-owned subsidiary. If the Company withdraws its election to be regulated as a BDC, the Company will consolidate the financial statementsbehalf of Medallion Bank and controlledby the servicer.
The following table shows the trend in loans 90 days or majority-owned portfolio investments together with thosemore past due as of the Company.dates indicated.
Realized gains or losses
Bank Holding Company Accounting | Investment Company Accounting | |||||||||||||||||||||||
December 31, 2018 | December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||
(Dollars in thousands) | Amount | % (1) | Amount | % (1) | Amount | % (1) | ||||||||||||||||||
Recreation | $ | 4,020 | 0.4 | % | N/A | N/A | N/A | N/A | ||||||||||||||||
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Home improvement | 135 | 0.0 | N/A | N/A | N/A | N/A | ||||||||||||||||||
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Commercial | 279 | 0.0 | 749 | 0.2 | 2,124 | 0.6 | ||||||||||||||||||
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Medallion | 15,720 | 1.6 | 59,701 | 18.7 | 71,976 | 18.9 | ||||||||||||||||||
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Total loans 90 days or more past due | $ | 20,154 | 2.0 | % | $ | 60,450 | 18.9 | % | $ | 74,100 | 19.5 | % | ||||||||||||
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Total Medallion Bank loans(2) | N/A | N/A | $ | 16,115 | 1.8 | % | $ | 42,269 | 4.2 | % | ||||||||||||||
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Total managed loans 90 days or more past due | N/A | N/A | $ | 76,565 | 6.2 | % | $ | 116,369 | 8.4 | % | ||||||||||||||
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(1) | Percentages are calculated against the total or managed loan portfolio, as appropriate. |
(2) | Includes medallion and consumer loans held at Medallion Bank. |
The following table presents the credit-related information for the investment portfolios as of the dates shown under Investment Company Accounting.
(Dollars in thousands) | December 31, 2017 | December 31, 2016 | ||||||
Total loans | ||||||||
Medallion loans | $ | 208,279 | $ | 266,816 | ||||
Commercial loans | 90,188 | 83,634 | ||||||
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Total loans | 298,467 | 350,450 | ||||||
Investments in Medallion Bank and other controlled subsidiaries | 302,147 | 293,360 | ||||||
Equity investments(1) | 9,521 | 8,468 | ||||||
Investment securities | — | — | ||||||
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Net investments | $ | 610,135 | $ | 652,278 | ||||
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Net investments in Medallion Bank and other controlled subsidiaries | $ | 908,297 | $ | 1,001,940 | ||||
Managed net investments | $ | 1,380,054 | $ | 1,517,592 | ||||
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Unrealized appreciation (depreciation) on investments | ||||||||
Medallion loans | ($ | 20,338 | ) | ($ | 28,523 | ) | ||
Commercial loans | (513 | ) | (1,378 | ) | ||||
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Total loans | (20,851 | ) | (29,901 | ) | ||||
Investments in Medallion Bank and other controlled subsidiaries | 158,920 | 152,750 | ||||||
Equity investments | 3,121 | 3,934 | ||||||
Investment securities | — | — | ||||||
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Total unrealized appreciation on investments | $ | 141,190 | $ | 126,783 | ||||
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Net unrealized depreciation on investments at Medallion Bank and other controlled subsidiaries | ($ | 63,785 | ) | ($ | 55,616 | ) | ||
Managed total unrealized appreciation (depreciation) on investments | $ | 77,405 | $ | 71,167 | ||||
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Unrealized appreciation (depreciation) as a % of balances outstanding(2) | ||||||||
Medallion loans | (8.90 | %) | (9.67 | %) | ||||
Commercial loans | (0.57 | ) | (1.62 | ) | ||||
Total loans | (6.53 | ) | (7.87 | ) | ||||
Investments in Medallion Bank and other controlled subsidiaries | 110.96 | 108.63 | ||||||
Equity investments | 48.77 | 86.77 | ||||||
Investment securities | — | — | ||||||
Net investments | 30.11 | 24.13 | ||||||
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Net investments at Medallion Bank and other controlled subsidiaries | (6.64 | %) | (5.32 | %) | ||||
Managed net investments | 5.99 | % | 4.96 | % | ||||
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(1) | Represents common stock, warrants, preferred stock, and limited partnership interests held as investments. |
(2) | Unlike other lending institutions, we were not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio was adjusted quarterly to reflect estimates of the current realizable value of the investment portfolio. These percentages represent the discount or premium that investments were carried on the books at, relative to their par or gross value. |
The following table presents the gain/loss experience on investments are recognized when the investments are sold or written off. investment portfolio for the three months ended March 31, 2018 and for the years ended December 31, 2017 and 2016 under Investment Company Accounting.
(Dollars in thousands) | March 31, 2018 | December 31, 2017 | December 31, 2016 | |||||||||
Realized gains (losses) on loans and equity investments | ||||||||||||
Medallion loans | ($ | 34,747 | ) | ($ | 49,609 | ) | ($ | 2,938 | ) | |||
Commercial loans (1) | 2 | (1,412 | ) | 1,284 | ||||||||
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Total loans | (34,745 | ) | (51,021 | ) | (1,654 | ) | ||||||
Investments in Medallion Bank and other controlled subsidiaries | — | — | 214 | |||||||||
Equity investments | — | 7,277 | 1,884 | |||||||||
Investment securities | — | — | 13 | |||||||||
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Total realized gains (losses) on loans and equity investments | ($ | 34,745 | ) | ($ | 43,744 | ) | $ | 457 | ||||
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Net realized losses on investments at Medallion Bank and other controlled subsidiaries | ($ | 23,073 | ) | (43,256 | ) | (35,341 | ) | |||||
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Total managed realized gains (losses) on loans and equity investments | ($ | 57,818 | ) | ($ | 87,000 | ) | ($ | 34,884 | ) | |||
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Realized gains (losses) as a % of average balances outstanding | ||||||||||||
Medallion loans | (65.74 | %) | (17.76 | %) | (0.97 | %) | ||||||
Commercial loans | 0.01 | (1.71 | ) | 1.49 | ||||||||
Total loans | (45.96 | ) | (14.10 | ) | (0.42 | ) | ||||||
Investments in Medallion Bank and other controlled subsidiaries | — | — | 0.14 | |||||||||
Equity investments | — | 119.20 | 41.15 | |||||||||
Investment securities | — | — | 0.01 | |||||||||
Net investments | (30.89 | ) | (8.50 | ) | 0.08 | |||||||
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Net investments at Medallion Bank and other controlled subsidiaries | (9.66 | %) | (4.19 | %) | (3.33 | %) | ||||||
Managed net investments | (18.22 | %) | (6.19 | %) | (2.34 | %) | ||||||
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(1) | Includes $2,056 of gain recognized on the sale of the asset based lending portfolio in 2016. |
The following table sets forth thepre-tax changes in our unrealized and realized gains orand losses represent the difference between the proceeds received from the disposition of portfolio assets, if any, and the cost of such portfolio assets. In addition, changes in unrealized appreciation or depreciation on investments are recorded and represent the net change in the estimated fair valuesinvestment portfolio, for the three months ended March 31, 2018 and years ended December 31, 2017 and 2016 under Investment Company Accounting.
(Dollars in thousands) | March 31, 2018 | December 31, 2017 | December 31, 2016 | |||||||||
Net change in unrealized appreciation (depreciation) on investments | ||||||||||||
Unrealized appreciation | ($ | 998 | ) | $ | 2,060 | $ | 2,986 | |||||
Unrealized depreciation | (38,152 | ) | (38,022 | ) | (27,705 | ) | ||||||
Net unrealized appreciation on investments in Medallion Bank and other controlled subsidiaries | 29,115 | 9,483 | 130,121 | |||||||||
Realized gains | — | (3,082 | ) | (1,627 | ) | |||||||
Realized losses | 34,747 | 47,281 | 3,498 | |||||||||
Net unrealized losses on investments other than securities and other assets | (1,915 | ) | (2,075 | ) | (28,387 | ) | ||||||
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Total | $ | 22,797 | $ | 15,645 | $ | 78,886 | ||||||
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Net realized gains (losses) on investments | ||||||||||||
Realized gains | $ | — | $ | 3,082 | $ | — | ||||||
Realized losses | (34,747 | ) | (47,281 | ) | (3,486 | ) | ||||||
Other gains | — | 4,684 | 4,140 | |||||||||
Direct recoveries (charge-offs) | 2 | (4,229 | ) | (197 | ) | |||||||
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Total | ($ | 34,745 | ) | ($ | 43,744 | ) | $ | 457 | ||||
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SEGMENT RESULTS
We manage our financial results under four operating segments and report like a bank holding company. The segments are recreation lending, home improvement lending, commercial lending, and medallion lending. We also show results for twonon-operating segments; RPAC and corporate and other investments. Prior to April 2, 2018, we operated as one segment. All results are for the nine months ended December 31, 2018.
Recreation Lending
The recreation lending segment is a high-growth prime andnon-prime consumer finance business which is a significant source of income for us, accounting for 71% of our interest income for the nine months ended December 31, 2018. In September 2018, we sold of $55,979,000 of recreation loans for a gain of $3,093,000, included innon-interest income (expense). Recreation loans are secured primarily by RVs and boats, with RV loans making up 59% of the portfolio assetsand boat loans making up 18% of the portfolio at the end of the periodperiod. Recreation loans are made to borrowers residing in all fifty states, with the highest concentrations in Texas, California, and Florida, at 18%, 11%, and 10% of loans outstanding, respectively, and with no other states over 10%.
The following table presents as comparedof and for the nine months ended December 31, 2018.
(Dollars in thousands) | Recreation | |||
Selected Earnings Data | ||||
Total interest income | $ | 68,870 | ||
Total interest expense | 6,986 | |||
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Net interest income | 61,884 | |||
Provision for loan losses | 15,118 | |||
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Net interest income after loss provision | 46,766 | |||
Totalnon-interest income (expense) | (14,242 | ) | ||
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Net income before taxes | 32,524 | |||
Income tax (provision) | (8,579 | ) | ||
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Net income | $ | 23,945 | ||
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Balance Sheet Data | ||||
Total loans, gross | $ | 587,038 | ||
Total loan allowance | 6,856 | |||
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Total loans, net | 580,182 | |||
Total assets | 590,746 | |||
Total borrowings | 434,527 | |||
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Selected Financial Ratios | ||||
Return on average assets | 5.48 | % | ||
Return on average equity | 22.60 | |||
Interest yield | 15.78 | |||
Net interest margin | 14.18 | |||
Reserve coverage | 1.17 | |||
Delinquency status(1) | 0.69 | |||
Charge-off% | 1.89 | |||
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(1) | Loans 90 days or more past due. |
Home Improvement Lending
The home improvement lending segment works with their estimated fair valuescontractors and financial service providers to finance residential home improvements and is concentrated in swimming pools, solar panels, roofs, and windows at 31%, 16%, 15%, and 11% of total loans outstanding, with no other collateral types over 10%. Home improvement loans are made to borrowers residing in all fifty states, with the beginninghighest concentrations in Texas, Florida, Ohio, and California at 15%, 11%, 9%, and 9% of loans outstanding, respectively, and with no other states over 10%. In September 2018, we sold $44,909,000 of home improvement loans for a gain of $2,079,000, included innon-interest income (expense).
The following table presents as of and for the nine months ended December 31, 2018.
(Dollars in thousands) | Home Improvement | |||
Selected Earnings Data | ||||
Total interest income | $ | 12,799 | ||
Total interest expense | 2,290 | |||
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Net interest income | 10,509 | |||
Provision for loan losses | 2,453 | |||
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Net interest income after loss provision | 8,056 | |||
Totalnon-interest income (expense) | (3,093 | ) | ||
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Net income before taxes | 4,963 | |||
Income tax (provision) | (1,319 | ) | ||
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Net income | $ | 3,644 | ||
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Balance Sheet Data | ||||
Total loans, gross | $ | 183,155 | ||
Total loan allowance | 1,796 | |||
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Total loans, net | 181,359 | |||
Total assets | 188,892 | |||
Total borrowings | 143,815 | |||
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Selected Financial Ratios | ||||
Return on average assets | 2.56 | % | ||
Return on average equity | 11.30 | |||
Interest yield | 9.06 | |||
Net interest margin | 7.44 | |||
Reserve coverage | 0.98 | |||
Delinquency status(1) | 0.07 | |||
Charge-off% | 0.46 | |||
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(1) | Loans 90 days or more past due. |
Commercial Lending
We originate both senior and subordinated loans nationwide to businesses in a variety of industries, more than 51% of which are located in the Midwest and Northeast regions, with the rest scattered across the country. These mezzanine loans are primarily secured by a second position on all assets of the period. Generally, realized gains (losses)businesses and generally range in amount from $1,000,000 to $5,000,000 at origination, and typically included an equity component as part of the financing. The commercial lending business has concentrations in manufacturing; professional, scientific, and technical services; and transportation and warehousing; and wholesale trade making up 48%, 14%, 9% and 9% of total business.
The following table presents as of and for the nine months ended December 31, 2018.
(Dollars in thousands) | Commercial | |||
Selected Earnings Data | ||||
Total interest income | $ | 7,459 | ||
Total interest expense | 2,037 | |||
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Net interest income | 5,422 | |||
Provision for loan losses | — | |||
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Net interest income after loss provision | 5,422 | |||
Totalnon-interest income (expense) | (1,917 | ) | ||
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Net income before taxes | 3,505 | |||
Income tax (provision) | (808 | ) | ||
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Net income | $ | 2,697 | ||
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Balance Sheet Data | ||||
Total loans, gross | $ | 64,083 | ||
Total loan allowance | — | |||
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Total loans, net | 64,083 | |||
Total assets | 90,264 | |||
Total borrowings | 51,266 | |||
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Selected Financial Ratios | ||||
Return on average assets | 3.59 | % | ||
Return on average equity | 7.52 | |||
Interest yield | 12.61 | |||
Net interest margin | 9.17 | |||
Reserve coverage | 0.00 | |||
Delinquency status(1) | 0.44 | |||
Charge-off% | 0.00 | |||
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(1) | Loans 90 days or more past due. |
Geographic Concentrations | Total Gross Loans | % of Market | ||||||
Colorado | $ | 6,900 | 11 | % | ||||
Minnesota | 6,503 | 10 | % | |||||
Illinois | 5,467 | 9 | % | |||||
Delaware | 5,460 | 9 | % | |||||
California | 4,983 | 8 | % | |||||
Other(1) | 34,770 | 53 | % | |||||
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Total | $ | 64,083 | 100 | % | ||||
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(1) | Includes 12 other states with none greater than 7%. |
Medallion Lending
The medallion lending segment operates mainly in the New York, Newark, and Chicago markets. We have a long history of owning, managing, and financing taxicab fleets, taxicab medallions, and corporate car services. For the nine months ended December 31, 2018, we have seen a leveling off in the medallion values of the New York market, while in the other markets there has been a decline in values. Additionally, we have also continued to see a decline in interest income due to loans aging greater than 90 days and being placed on investments and changes in unrealized appreciation (depreciation) on investments are inversely related. When an appreciated asset is soldnonaccrual. During the 2018 fourth quarter,
we deconsolidated Trust III which led to realize a gain a decreaseof $25,325,000. Additionally, we continued removing underperforming loans from the portfolio by transferring to loan collateral in process of foreclosure, or charge-offs. All the previously recorded unrealized appreciation occurs. Conversely, when a loss previously recorded as unrealized depreciation is realizedloans are secured by the sale or other disposition of a depreciated portfolio asset, the reclassificationmedallions and enhanced by personal guarantees of the loss from unrealizedshareholders and owners.
The following table presents as of and for the nine months ended December 31, 2018.
(Dollars in thousands) | Medallion | |||
Selected Earnings Data | ||||
Total interest income | $ | 6,317 | ||
Total interest expense | 10,125 | |||
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Net interest loss | (3,808 | ) | ||
Provision for loan losses | 41,437 | |||
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Net interest loss after loss provision | (45,245 | ) | ||
Totalnon-interest income (expense) | 9,742 | |||
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Net loss before taxes | (35,503 | ) | ||
Income tax benefit | 7,938 | |||
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Net loss | $ | (27,565 | ) | |
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Balance Sheet Data | ||||
Total loans, gross | $ | 183,606 | ||
Total loan allowance | 27,743 | |||
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Total loans, net | 155,863 | |||
Total assets | 273,501 | |||
Total borrowings | 294,465 | |||
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Selected Financial Ratios | ||||
Return on average assets | (10.13 | %) | ||
Return on average equity | NM | |||
Interest yield | 3.58 | |||
Net interest margin | (2.16 | ) | ||
Reserve coverage | 15.11 | |||
Delinquency status(1) | 8.89 | |||
Charge-off% | 7.76 | |||
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(1) | Loans 90 days or more past due. |
Geographic Concentration | Total Gross Loans | % of Market | ||||||
New York City | $ | 160,313 | 87 | % | ||||
Newark | 18,455 | 10 | ||||||
Chicago | 4,021 | 2 | ||||||
All Other | 817 | 1 | ||||||
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Total | $ | 183,606 | 100 | % | ||||
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RPAC
We are the majority owner and managing member of RPAC Racing, LLC, a performance and marketing company for NASCAR. Revenues are mainly earned through sponsorships and race winning activity over the nine month race season (February through November) during the year.
The following table presents as of and for the nine months ended December 31, 2018.
(Dollars in thousands) | RPAC | |||
Selected Earnings Data | ||||
Sponsorship, race winnings, and other income | $ | 14,368 | ||
Race and other expenses | 18,597 | |||
Interest expense | 121 | |||
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Total expenses | 18,718 | |||
Net loss before taxes | (4,350 | ) | ||
Income tax benefit | 1,108 | |||
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Net loss | ($ | 3,242 | ) | |
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Balance Sheet Data | ||||
Total assets | $ | 29,925 | ||
Total borrowings | 7,649 | |||
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Selected Financial Ratios | ||||
Return on average assets | (11.69 | %) | ||
Return on average equity | NM | |||
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Corporate and Other Investments
Thisnon-operating segment relates to realized causes a decrease in net unrealized depreciationour equity and an increase in realized loss.investment securities as well as other assets, liabilities, revenues, and expenses not allocated to the other main operating segments. This activity also includes the elimination of all intercompany activity amongst the entities.
Our investment in Medallion Bank,The following table presents as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as discussed previously, and determine whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, byfor the FDIC and State of Utah, and also by additional marketplace restrictions, such as the ability to transfer industrial bank charters. Because of these restrictions and other factors, our Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, we 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 second quarter of 2015, we 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 through 2016 and 2017. We incorporated these new factors in the Medallion Bank 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 third quarter of 2016 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. We also engaged a valuation specialist to assist the Board of Directors in its 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 and $7,849,000 was recorded in 2017. See Note 3 for additional information about Medallion Bank.
(Dollars in thousands) | Corporate and Other | |||
Selected Earnings Data | ||||
Interest income | $ | 1,358 | ||
Interest expense | 3,257 | |||
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Net interest loss | (1,899 | ) | ||
Totalnon-interest income (expense), net | (6,396 | ) | ||
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Net loss before taxes | (8,295 | ) | ||
Income tax benefit | 951 | |||
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Net loss | ($ | 7,344 | ) | |
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Balance Sheet Data | ||||
Total assets | $ | 208,522 | ||
Total borrowings | 130,306 | |||
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Selected Financial Ratios | ||||
Return on average assets | (4.13 | %) | ||
Return on average equity | (13.18 | ) | ||
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Trends in Investment Portfolio under Investment Company Accounting
Our investment income is driven by the principal amount of and yields on our investment portfolio. To identify trends in the balances and yields, the following table illustrates our investments at fair value, grouped by
medallion loans, commercial loans, equity investments, and investment securities, and also presents the portfolio information for Medallion Bank, at the dates indicated.
December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||||||||||||||||||
Interest | Investment | Interest | Investment | Interest | Investment | December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | Rate(1) | Balances | Rate(1) | Balances | Rate(1) | Balances | Interest Rate (1) | Investment Balances | Interest Rate (1) | Investment Balances | ||||||||||||||||||||||||||||||
Medallion loans | ||||||||||||||||||||||||||||||||||||||||
New York | 4.23 | % | $ | 167,226 | 3.67 | % | $ | 202,469 | 3.72 | % | $ | 213,356 | 4.23 | % | $ | 167,226 | 3.67 | % | $ | 202,469 | ||||||||||||||||||||
Newark | 5.34 | 21,935 | 5.27 | 23,267 | 5.26 | 24,585 | 5.34 | 21,935 | 5.27 | 23,267 | ||||||||||||||||||||||||||||||
Chicago | 4.74 | 19,436 | 4.54 | 38,091 | 4.87 | 39,406 | 4.74 | 19,436 | 4.45 | 38,091 | ||||||||||||||||||||||||||||||
Boston | 4.51 | 18,564 | 4.52 | 25,857 | 4.63 | 26,436 | 4.51 | 18,564 | 4.52 | 25,857 | ||||||||||||||||||||||||||||||
Cambridge | 4.55 | 773 | 4.47 | 4,401 | 4.64 | 6,607 | 4.55 | 773 | 4.47 | 4,401 | ||||||||||||||||||||||||||||||
Other | 7.95 | 482 | 7.26 | 965 | 7.27 | 1,043 | 7.95 | 482 | 7.26 | 965 | ||||||||||||||||||||||||||||||
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Total medallion loans | 4.41 | 228,416 | 4.01 | 295,050 | 4.09 | 311,433 | 4.41 | 228,416 | 4.01 | 295,050 | ||||||||||||||||||||||||||||||
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Deferred loan acquisition costs | 201 | 289 | 413 | 201 | 289 | |||||||||||||||||||||||||||||||||||
Unrealized depreciation on loans | (20,338 | ) | (28,523 | ) | (3,438 | ) | (20,338 | ) | (28,523 | ) | ||||||||||||||||||||||||||||||
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Net medallion loans | $ | 208,279 | $ | 266,816 | $ | 308,408 | $ | 208,279 | $ | 266,816 | ||||||||||||||||||||||||||||||
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Commercial loans | ||||||||||||||||||||||||||||||||||||||||
Secured mezzanine | 12.09 | % | $ | 88,334 | 13.47 | % | $ | 76,469 | 13.59 | % | $ | 67,849 | 12.09 | % | $ | 88,334 | 13.47 | % | $ | 76,469 | ||||||||||||||||||||
Asset based | — | — | — | — | 5.82 | 3,750 | ||||||||||||||||||||||||||||||||||
Other secured commercial | 9.39 | 2,477 | 9.33 | 8,657 | 10.68 | 12,622 | 9.39 | 2,477 | 9.33 | 8,657 | ||||||||||||||||||||||||||||||
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Total commercial loans | 12.02 | 90,811 | 13.05 | 85,126 | 12.80 | 84,221 | 12.02 | 90,811 | 13.05 | 85,126 | ||||||||||||||||||||||||||||||
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Deferred loan acquisition income | (110 | ) | (114 | ) | (87 | ) | (110 | ) | (114 | ) | ||||||||||||||||||||||||||||||
Unrealized depreciation on loans | (513 | ) | (1,378 | ) | (2,239 | ) | (513 | ) | (1,378 | ) | ||||||||||||||||||||||||||||||
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Net commercial loans | $ | 90,188 | $ | 83,634 | $ | 81,895 | $ | 90,188 | $ | 83,634 | ||||||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries | 0.83 | % | $ | 143,227 | 2.13 | % | $ | 140,610 | 12.74 | % | $ | 141,273 | 0.83 | % | $ | 143,227 | 2.13 | % | $ | 140,610 | ||||||||||||||||||||
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Unrealized appreciation on subsidiary investments | 158,920 | 152,750 | 18,640 | 158,920 | 152,750 | |||||||||||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries | $ | 302,147 | $ | 293,360 | $ | 159,913 | ||||||||||||||||||||||||||||||||||
Investment in Medallion Bank and other controlled subsidiaries, net | $ | 302,147 | $ | 293,360 | ||||||||||||||||||||||||||||||||||||
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Equity investments | 0.00 | % | $ | 6,400 | 0.00 | % | $ | 4,534 | 0.72 | % | $ | 4,277 | 0.00 | % | $ | 6,400 | 0.00 | % | $ | 4,534 | ||||||||||||||||||||
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Unrealized appreciation on equities | 3,121 | 3,934 | 2,582 | 3,121 | 3,934 | |||||||||||||||||||||||||||||||||||
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Net equity investments | $ | 9,521 | $ | 8,468 | $ | 6,859 | $ | 9,521 | $ | 8,468 | ||||||||||||||||||||||||||||||
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Investment securities | — | % | $ | — | — | % | $ | — | 0.35 | % | $ | 49,902 | — | % | $ | — | — | % | $ | — | ||||||||||||||||||||
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Unrealized depreciation on investment securities | — | — | (18 | ) | — | — | ||||||||||||||||||||||||||||||||||
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Net investment securities | $ | — | $ | — | $ | 49,884 | $ | — | $ | — | ||||||||||||||||||||||||||||||
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Investments at cost(2) | 4.73 | % | $ | 468,854 | 4.94 | % | $ | 525,320 | 7.06 | % | $ | 591,106 | 4.73 | % | $ | 468,854 | 4.94 | % | $ | 525,320 | ||||||||||||||||||||
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Deferred loan acquisition costs | 91 | 175 | 326 | 91 | 175 | |||||||||||||||||||||||||||||||||||
Unrealized appreciation on controlled subsidiaries, equity investments, and investment securities | 162,041 | 156,684 | 21,204 | 162,041 | 156,684 | |||||||||||||||||||||||||||||||||||
Unrealized depreciation on loans | (20,851 | ) | (29,901 | ) | (5,677 | ) | (20,851 | ) | (29,901 | ) | ||||||||||||||||||||||||||||||
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Net investments | $ | 610,135 | $ | 652,278 | $ | 606,959 | $ | 610,135 | $ | 652,278 | ||||||||||||||||||||||||||||||
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Medallion Bank investments | ||||||||||||||||||||||||||||||||||||||||
Consumer loans | 15.02 | % | $ | 693,289 | 14.27 | % | $ | 708,524 | 14.06 | % | $ | 626,132 | ||||||||||||||||||||||||||||
Medallion loans | 4.30 | 222,252 | 3.75 | 296,436 | 3.84 | 338,285 | ||||||||||||||||||||||||||||||||||
Commercial loans | 2.28 | 1,598 | 3.40 | 2,567 | 5.23 | 44,634 | ||||||||||||||||||||||||||||||||||
Investment securities | 2.40 | 43,582 | 2.27 | 37,420 | 2.30 | 35,713 | ||||||||||||||||||||||||||||||||||
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Medallion Bank investments at cost(2) | 11.94 | 960,721 | 10.83 | 1,044,947 | 9.97 | 1,044,764 | ||||||||||||||||||||||||||||||||||
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Deferred loan acquisition costs | 11,097 | 12,371 | 11,400 | |||||||||||||||||||||||||||||||||||||
Unrealized depreciation on investment securities | (368 | ) | (797 | ) | (501 | ) | ||||||||||||||||||||||||||||||||||
Premiums paid on purchased securities | 265 | 238 | 311 | |||||||||||||||||||||||||||||||||||||
Unrealized depreciation on loans | (63,417 | ) | (54,819 | ) | (24,081 | ) | ||||||||||||||||||||||||||||||||||
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Medallion Bank net investments | $ | 908,298 | $ | 1,001,940 | $ | 1,031,893 | ||||||||||||||||||||||||||||||||||
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December 31, 2017 | December 31, 2016 | |||||||||||||||
(Dollars in thousands) | Interest Rate (1) | Investment Balances | Interest Rate (1) | Investment Balances | ||||||||||||
Medallion Bank investments | ||||||||||||||||
Consumer loans | 15.02 | % | $ | 693,289 | 14.27 | % | $ | 708,524 | ||||||||
Medallion loans | 4.30 | 222,252 | 3.75 | 296,436 | ||||||||||||
Commercial loans | 2.28 | 1,598 | 3.40 | 2,567 | ||||||||||||
Investment securities | 2.40 | 43,582 | 2.27 | 37,420 | ||||||||||||
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Medallion Bank investments at cost(2) | 11.94 | 960,721 | 10.83 | 1,044,947 | ||||||||||||
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Deferred loan acquisition costs | 11,097 | 12,371 | ||||||||||||||
Unrealized depreciation on investment securities | (368 | ) | (797 | ) | ||||||||||||
Premiums paid on purchased securities | 265 | 238 | ||||||||||||||
Unrealized depreciation on loans | (63,417 | ) | (54,819 | ) | ||||||||||||
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Medallion Bank net investments | $ | 908,298 | $ | 1,001,940 | ||||||||||||
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(1) | Represents the weighted average interest or dividend rate of the respective portfolio as of the date indicated. |
(2) | The weighted average interest rate for the entire managed loan portfolio (medallion, commercial, and consumer loans) was 10.89% |
PORTFOLIO SUMMARY (Investment Company Accounting)
Total Portfolio Yield
The weighted average yield (which is calculated by dividing the aggregate yield of each investment in the portfolio by the aggregate portfolio balance and does not include expenses and sales load for any offering) of the total managed portfolio under Investment Company Accounting at March 31, 2018 was 10.96%, an increase of 35 basis points from 10.61% at December 31, 2017 was 4.73% (6.58% for the loan portfolio), a decrease of 24 basis points from 4.97% at December 31, 2016, which was a decrease of 209 basis points from 7.06% at December 31, 2015. The decreased yield from 2015 was primarily attributable to the decreased yield in our investment in Medallion Bank and other controlled subsidiaries. The weighted average yield of the total managed portfolio at December 31, 2017 was 10.61% (10.89% for the loan portfolio), an increase of 111146 basis points from 9.50% at December 31, 2016, which was an increase of 97 basis points from 8.53% at December 31, 2015. The increased yield of the total managed portfolio was mainly due to the higher yield of the total managed commercial portfolio, driven by our exit from the asset-based lending business which had a lower average yield in comparison to our mezzanine and other secured commercial loans, and the higher yield of our consumer loans.2016.
Medallion Loan Portfolio
Our medallion loans comprised 34% of the net portfolio of $610,135,000 at December 31, 2017, compared to 41% of the net portfolio of $652,278,000 at December 31, 2016, and 51% of $606,959,000 at December 31, 2015. Our managed medallion loans of $388,001,000$318,864,000 comprised 23% of the net managed portfolio of $1,386,136,000 at March 31, 2018, compared to 28% of the net managed portfolio of $1,380,054,000 at December 31, 2017 compared toand 35% the net managed portfolio of $1,517,592,000 at December 31, 2016, and 43% of $1,501,555,000 at December 31, 2015.2016. The medallion loan portfolio decreased by $58,537,000$69,137,000 or 22% in 2017 (and decreased by $140,642,000 or 27%18% on a managed basis). The decreases in outstandings werebasis from December 31, 2017 to March 31, 2018 primarily concentrated in the New York and Chicago markets, although all markets declined, and reflectedreflecting increased realized and unrealized losses and net amortization of loan principal. Total medallion loans serviced for third parties were $26,349,000, $24,796,000,principal, especially in the New York, Boston, and $26,959,000 at December 31, 2017, 2016, and 2015.Chicago markets.
The weighted average yield of the medallion loan portfolio at December 31, 2017 was 4.41%, an increase of 40 basis points from 4.01% at December 31, 2016, which was a decrease of 8 basis points from 4.09% at December 31, 2015. The weighted average yield of the managed medallion loan portfolio at March 31, 2018 was 4.42%, an increase of 6 basis points from 4.36% at December 31, 2017, was 4.36%,and an increase of 48 basis points from 3.88% at December 31, 2016, which was a decrease of 8 basis points from 3.96% at December 31, 2015.2016. The fluctuation in yield primarily reflected the repricing of the existing portfolio to current market interest rates. At DecemberMarch 31, 2017, 27% of the medallion loan portfolio represented loans outside New York, compared to 31% atyear-end 2016 and 2015. At December 31, 2017, 19%2018, 15% of the managed medallion loan portfolio represented loans outside New York, compared to 19% and 24% at December 31, 2017 and 26% atyear-end 2016 and 2015.2016.
Commercial Loan Portfolio
Our commercial loans represented 15%7%, 7% and 6% of the net managed investment portfolio as of March 31, 2018 and December 31, 2017 compared to 13% and 14% at December 31, 2016 and 2015, and were 7%, 6%, and 8% on a managed basis.2016. Commercial loans increased by $6,554,000$4,986,000 or 8% during 2017 (increased by $5,583,000 or 6%5% on a managed basis),basis from December 31, 2017 to March 31, 2018 primarily reflecting the growth in the mezzanine loan portfolio. Net commercial loans serviced for third parties were $747,000 at December 31, 2017 and $1,644,000 at December 31, 2016, and serviced by third parties were $3,419,000 at December 31, 2015.
The weighted average yield of the commercial loan portfolio at December 31, 2017 was 12.02%, a decrease of 103 basis points from 13.05% at December 31, 2016, which was an increase of 25 basis points from 12.80% at December 31, 2015. The weighted average yield of the managed commercial loan portfolio at DecemberMarch 31, 20172018 was 11.85%11.76%, a decrease of 919 basis points from 11.85% at December 31, 2017, and a decrease of 100 basis points from 12.76% at December 31, 2016, which was an increase of 258 basis points from 10.18% at December 31, 2015.2016. The decreases primarily reflected the recent lower rates on certain of the mezzanine loans. At December 31, 2017, variable-rate loans represented 0% of the commercial portfolio, compared to 7% and 9% at December 31, 2016 and 2015, and were 0%, 7%, and 38% on a managed basis.
Consumer Loan Portfolio
Our managed consumer loans, all of which are held in the portfolio managed by Medallion Bank, represented 49% of the managed net investment portfolio as of December 31, 2017, compared to 46% and 41% at December 31, 2016 and 2015. Medallion Bank originates fixed rate consumer loans secured by recreational vehicles, boats, trailers, and home improvements located in all 50 states. The portfolio is serviced by a third party subsidiary.
TheOur managed consumer loans, declined by $17,183,000 or 2% duringrepresented 52%, 49% and 46% of the managed net investment portfolio as of March 31, 2018 and December 31, 2017 reflecting the sale of $221,000,000 of consumer loans to a third party investor in 2017, partially offset by strong origination growth during the year.and 2016.
The weighted average gross yield of the managed consumer loan portfolio was 14.86% at March 31, 2018, compared to 15.02% at December 31, 2017 compared toand 14.27% and 14.06% at December 31, 2016 and 2015.2016. The increasechange in yield primarily reflectedreflects the sales in 2017 of $221,000,000 of mostly lower-yielding home improvement loans. Adjustable rate loans represented 7% of the managed consumer portfolio at December 31, 2017, compared to 12% and 20% at December 31, 2016 and 2015, reflecting Medallion Bank no longer offering variable rate recreation loans since January 2014.
Delinquency and Loan Loss Experience
We generally follow a practice of discontinuing the accrual of interest income on our loans that are in arrears as to payments for a period of 90 days or more. We deliver a default notice and begin foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the most appropriate course of action under the circumstances. A loan is considered to be delinquent if the borrower fails to make a payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment terms of the loan with a borrower that cannot make payments in accordance with the original loan agreement. For loan modifications, the loan will only be returned to accrual status if all past due interest and principal payments are brought fully current. For credit that is collateral based, we evaluate the anticipated net residual value we would receive upon foreclosure of such loans, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequatechanges in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install a new operator to run the business and reduce the debt.
For the consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged off to realized losses. If the collateral is repossessed, a realized loss is recorded to write the collateral down to its net realizable value, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off as a realized loss, and any excess proceeds are recorded as a realized gain. Proceeds collected on charged off accounts are recorded as realized gains. All collection, repossession, and recovery efforts are handled on behalf of Medallion Bank by the servicer.
The following table shows the trend in loans 90 days or more past due as of December 31.originated.
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(Dollars in thousands) | Amount | %(1) | Amount | %(1) | Amount | %(1) | ||||||||||||||||||
Medallion loans | $ | 59,701 | 18.7 | % | $ | 71,976 | 18.9 | % | $ | 11,880 | 3.0 | % | ||||||||||||
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Secured mezzanine | — | 0.0 | 1,390 | 0.4 | 1,390 | 0.4 | ||||||||||||||||||
Other secured commercial | 749 | 0.2 | 734 | 0.2 | 945 | 0.2 | ||||||||||||||||||
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Total commercial loans | 749 | 0.2 | 2,124 | 0.6 | 2,335 | 0.6 | ||||||||||||||||||
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Total loans 90 days or more past due | $ | 60,450 | 18.9 | % | $ | 74,100 | 19.5 | % | $ | 14,215 | 3.6 | % | ||||||||||||
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Total Medallion Bank loans | $ | 16,115 | 1.8 | % | $ | 42,269 | 4.2 | % | $ | 17,154 | 1.7 | % | ||||||||||||
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Total managed loans 90 days or more past due | $ | 76,565 | 6.2 | % | $ | 116,369 | 8.4 | % | $ | 31,369 | 2.2 | % | ||||||||||||
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A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount was divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company’s liquidation. In May 2013, the bankruptcy court presiding over the third party finance company’s case entered an order converting the involuntary chapter 7 case to a chapter 11 case. We and Medallion Bank have placed these loans on nonaccrual, and reversed interest income. In addition, we have established valuation allowances against the outstanding balances. On May 31, 2013, we commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the third party finance company’s assets. The third party finance company and bank lenders are contesting our position. In April 2014, we and Medallion Bank received a decision from the court granting summary judgment in our favor with respect to the issue of whether our loan participations are true participations. In
March 2015, we and Medallion Bank received a decision from the court finding that the bank lenders generally held a first lien on our and Medallion Bank’s loan participations subject to, among other things, defenses still pending prosecution by the parties and adjudication by the court. We and Medallion Bank are appealing the decision. The remaining issues are still being litigated. Although we believe the claims raised by the third party finance company and the bank lenders are without merit and will vigorously defend against them, we cannot at this time predict the outcome of this litigation or determine our potential exposure. At December 31, 2017, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. In September 2015, one loan was sold at a discount to a third party, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. One loan was charged off in September 2014. The balances related to the paid off loans have been reclassified to other assets on the consolidated balance sheet. The table below summarizes these receivables and their status with the Company and Medallion Bank.
(Dollars in thousands) | The Company | Medallion Bank | Total | |||||||||
Loans outstanding | $ | 258 | $ | 1,953 | $ | 2,211 | ||||||
Loans charged off(1) | (258 | ) | (1,953 | ) | (2,211 | ) | ||||||
Valuation allowance | — | — | — | |||||||||
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Net loans outstanding | — | — | — | |||||||||
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Other receivables | 590 | 11,062 | 11,652 | |||||||||
Valuation allowance | (251 | ) | (5,901 | ) | (6,152 | ) | ||||||
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Net other receivables | 339 | 5,161 | 5,500 | |||||||||
Total net outstanding | 339 | 5,161 | 5,500 | |||||||||
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Income foregone in 2017 | — | — | — | |||||||||
Total income foregone | $ | 74 | $ | 108 | $ | 182 | ||||||
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The recent increases in medallion delinquencies reflected our borrowers experiencing declining cash flows due to competitive internet ride hailing services and decreases in medallion values putting stress on certain of our borrowers, all of whom we continue to work with. We have vigorously pursued strategies to offset these declines which have included adding personnel to the collection staff, receiving principal reductions as loans renew, and requiring additional collateral so as to offer temporary solutions until cash flows improve. Additionally, we have had some success in assisting delinquent customers in selling their medallions to new owners putting a reasonable amount of cash equity into the sale so as to reduce our exposure on the collateral. This in turn has improved the overall cash flow to debt service ratio. Medallion Bank delinquencies have declined during 2017 due to an increase in medallion loan charge-offs during the year.
We monitor delinquent loans for possible exposure to loss by analyzing various factors, including the value of the collateral securing the loan and the borrower’s prior payment history. Under the 1940 Act, our loan portfolio must be recorded at fair value or“marked-to-market.” Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio is adjusted quarterly to reflect our estimate of the current realizable value of our loan portfolio. Since no ready market exists for this portfolio, fair value is subject to the good faith determination of our Board of Directors. Because of the subjectivity of these estimates, there can be no assurance that in the event of a foreclosure or the sale of portfolio loans we would be able to recover the amounts reflected on our balance sheet.
In determining the value of our portfolio, the Board of Directors may take into consideration various factors such as the financial condition of the borrower and the adequacy of the collateral. For example, in a period of sustained increases in market interest rates, the Board of Directors could decrease its valuation of the portfolio if the portfolio consists primarily of long-term, fixed-rate loans. Our valuation procedures are designed to generate values that approximate that which would have been established by market forces, and are therefore subject to uncertainties and variations from reported results. Based upon these factors, net unrealized appreciation or depreciation on investments is determined, based on the fluctuations of our estimate of the current realizable value of our portfolio from our cost basis.
The following table sets forth the pretax changes in our unrealized appreciation (depreciation) on investments, for the years ended December 31, 2017, 2016, and 2015.
(Dollars in thousands) Balance December 31, 2014 Net change in unrealized Appreciation on investments Depreciation on investments Reversal of unrealized appreciation (depreciation) related to realized Gains on investments Losses on investments Other (1) Balance December 31, 2015 Net change in unrealized Appreciation on investments Depreciation on investments Reversal of unrealized appreciation (depreciation) related to realized Gains on investments Losses on investments Other Balance December 31, 2016 Net change in unrealized Appreciation on investments Depreciation on investments Reversal of unrealized appreciation (depreciation) related to realized Gains on investments Losses on investments Other Balance December 31, 2017 Medallion
Loans Commercial
Loans Investments
in
Subsidiaries Equity
Investments Investment
Securities Investments
Other Than
Securities Total $ — ($ 2,949 ) $ 5,698 $ 1,608 $ — $ 38,645 $ 43,002 — — 18,132 1,141 — (9,621 ) 9,652 (3,568 ) (176 ) 586 (1,426 ) (18 ) (68 ) (4,670 ) — — (4,809 ) (9 ) — — (4,818 ) 130 886 — 301 — 1,317 — — (967 ) 967 — — — (3,438 ) (2,239 ) 18,640 2,582 (18 ) 28,956 44,483 — — 133,805 2,979 7 (28,372 ) 108,419 (28,028 ) 318 305 — 5 — (27,400 ) — — — (1,627 ) — — (1,627 ) 2,943 543 — — 12 — 3,498 — — — — (6 ) — (6 ) (28,523 ) (1,378 ) 152,750 3,934 — 584 127,367 — — 6,170 2,060 — (821 ) 7,409 (37,335 ) (410 ) — (277 ) — (1,253 ) (39,275 ) — — — (3,082 ) — — (3,082 ) 45,520 1,275 — 486 — — 47,281 — — — — — — — ($ 20,338 ) ($ 513 ) $ 158,920 $ 3,121 $ — ($ 1,490 ) $ 139,700
The following table presents credit-related information for the investment portfolios as of December 31.
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Total loans | ||||||||||||
Medallion loans | $ | 208,279 | $ | 266,816 | $ | 308,408 | ||||||
Commercial loans | 90,188 | 83,634 | 81,895 | |||||||||
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Total loans | 298,467 | 350,450 | 390,303 | |||||||||
Investments in Medallion Bank and other controlled subsidiaries | 302,147 | 293,360 | 159,913 | |||||||||
Equity investments(1) | 9,521 | 8,468 | 6,859 | |||||||||
Investment securities | — | — | 49,884 | |||||||||
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Net investments | $ | 610,135 | $ | 652,278 | $ | 606,959 | ||||||
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Net investments at Medallion Bank and other controlled subsidiaries | $ | 908,297 | $ | 1,001,940 | $ | 1,031,893 | ||||||
Managed net investments | $ | 1,380,054 | $ | 1,517,592 | $ | 1,501,555 | ||||||
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Unrealized appreciation (depreciation) on investments | ||||||||||||
Medallion loans | ($ | 20,338 | ) | ($ | 28,523 | ) | ($ | 3,438 | ) | |||
Commercial loans | (513 | ) | (1,378 | ) | (2,239 | ) | ||||||
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Total loans | (20,851 | ) | (29,901 | ) | (5,677 | ) | ||||||
Investments in Medallion Bank and other controlled subsidiaries | 158,920 | 152,750 | 18,640 | |||||||||
Equity investments | 3,121 | 3,934 | 2,582 | |||||||||
Investment securities | — | — | (18 | ) | ||||||||
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Total unrealized appreciation (depreciation) on investments | $ | 141,190 | $ | 126,783 | $ | 15,527 | ||||||
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Net unrealized depreciation on investments at Medallion Bank and other controlled subsidiaries | ($ | 63,785 | ) | ($ | 55,616 | ) | ($ | 24,582 | ) | |||
Managed total unrealized depreciation on investments | $ | 77,405 | $ | 71,167 | ($ | 9,055 | ) | |||||
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Unrealized appreciation (depreciation) as a % of balances outstanding(2) | ||||||||||||
Medallion loans | (8.90 | %) | (9.67 | %) | (1.10 | %) | ||||||
Commercial loans | (0.57 | ) | (1.62 | ) | (2.66 | ) | ||||||
Total loans | (6.53 | ) | (7.87 | ) | (1.43 | ) | ||||||
Investments in Medallion Bank and other controlled subsidiaries | 110.96 | 108.63 | 13.19 | |||||||||
Equity investments | 48.77 | 86.77 | 60.39 | |||||||||
Investment securities | — | — | — | |||||||||
Net investments | 30.11 | 24.13 | 2.63 | |||||||||
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Net investments at Medallion Bank and other controlled subsidiaries | (6.64 | %) | (5.32 | %) | (2.35 | %) | ||||||
Managed net investments | 5.99 | % | 4.96 | % | (0.60 | %) |
The following table presents the gain/loss experience on the investment portfolio for the years ended December 31, 2017, 2016, and 2015.
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Realized gains (losses) on loans and equity investments | ||||||||||||
Medallion loans | ($ | 49,609 | ) | ($ | 2,938 | ) | ($ | 140 | ) | |||
Commercial loans(1) | (1,412 | ) | 1,284 | (946 | ) | |||||||
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Total loans | (51,021 | ) | (1,654 | ) | (1,086 | ) | ||||||
Investments in Medallion Bank and other controlled subsidiaries | — | 214 | 8,108 | |||||||||
Equity investments | 7,277 | 1,884 | 614 | |||||||||
Investment securities | — | 13 | — | |||||||||
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Total realized gains (losses) on loans and equity investments | ($ | 43,744 | ) | $ | 457 | $ | 7,636 | |||||
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Net realized losses on investments at Medallion Bank and other controlled subsidiaries | (43,256 | ) | (35,341 | ) | (10,388 | ) | ||||||
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Total managed realized gains (losses) on loans and equity investments | ($ | 87,000 | ) | ($ | 34,884 | ) | ($ | 2,752 | ) | |||
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Realized gains (losses) as a % of average balances outstanding | ||||||||||||
Medallion loans | (17.76 | %) | (0.97 | %) | (0.04 | %) | ||||||
Commercial loans | (1.71 | ) | 1.49 | (1.23 | ) | |||||||
Total loans | (14.10 | ) | (0.42 | ) | (0.28 | ) | ||||||
Investments in Medallion Bank and other controlled subsidiaries | — | 0.14 | 6.07 | |||||||||
Equity investments | 119.20 | 41.15 | 10.87 | |||||||||
Investment securities | — | 0.01 | — | |||||||||
Net investments | (8.50 | ) | 0.08 | 1.40 | ||||||||
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Net investments at Medallion Bank and other controlled subsidiaries | (4.19 | %) | (3.33 | %) | (1.06 | %) | ||||||
Managed net investments | (6.19 | %) | (2.34 | %) | (0.20 | %) |
The table below summarizespre-tax components of unrealized and realized gains and losses in the investment portfolio for the years ended December 31, 2017, 2016, and 2015.
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Net change in unrealized appreciation (depreciation) on investments | ||||||||||||
Unrealized appreciation | $ | 2,060 | $ | 2,986 | $ | 288 | ||||||
Unrealized depreciation | (38,022 | ) | (27,705 | ) | (3,822 | ) | ||||||
Net unrealized appreciation on investments in Medallion Bank and other controlled subsidiaries | 9,483 | 130,121 | 21,638 | |||||||||
Realized gains | (3,082 | ) | (1,627 | ) | (4,818 | ) | ||||||
Realized losses | 47,281 | 3,498 | 1,317 | |||||||||
Net unrealized losses on investments other than securities and other assets | (2,075 | ) | (28,387 | ) | (9,689 | ) | ||||||
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Total | $ | 15,645 | $ | 78,886 | $ | 4,914 | ||||||
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Net realized gains (losses) on investments | ||||||||||||
Realized gains | $ | 3,082 | $ | — | $ | 4,818 | ||||||
Realized losses | (47,281 | ) | (3,486 | ) | (1,317 | ) | ||||||
Other gains | 4,684 | 4,140 | 4,261 | |||||||||
Direct chargeoffs | (4,229 | ) | (197 | ) | (126 | ) | ||||||
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Total | ($ | 43,744 | ) | $ | 457 | $ | 7,636 | |||||
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Investment in Medallion Bank and Other Controlled Subsidiaries
Investment in Medallion Bank and other controlled subsidiaries were 49%, 45%, and 26% of our total portfolio at December 31, 2017, 2016, and 2015. The portfolioAs an investment company investments primarily represent the wholly-owned unconsolidated subsidiaries of ours, substantially all of which is represented byprior to April 2, 2018, our investment in Medallion Bank. In addition, to facilitate maintenance of Medallion Bank’s capital ratio requirement and to provide the necessary capital for continued growth, we periodically make capital contributions to Medallion Bank including $3,000,000 in 2016 and $8,000,000 in 2015. Separately, Medallion Bank declared dividends to us of $3,000,000 in 2016 and $18,000,000 in 2015. See Note 3 of the consolidated financial statements for additional information about these investments.
Equity Investments
Equity investments were 2% of our total portfolio at December 31, 2017, and were 1% as of December 31, 2016 and 2015. Equity investments were 1%, 1%, and less than 1% of our total managed portfolio at December 31, 2017, 2016, and 2015. Equity investments are comprised of common stock, warrants, preferred stock, and limited partnership interests.
Investment Securities
Investment securities were 0%, 0%, and 8% of our total portfolio at December 31, 2017, 2016, and 2015. Investment securities were 3%, 2%, and 6% of our total managed portfolio at December 31, 2017, 2016, and 2015. The investment securities are primarily U.S. Treasury bills and adjustable-rate mortgage-backed securities purchased by us and Medallion Bank to better utilize required cash liquidity.
Trend in Interest Expense
Our interest expense is driven by the interest rates payable on our short-term credit facilities with banks, bank certificates of deposit, fixed-rate, long-term debentures issued to the SBA, and other short-term notes payable. We established a medallion lending relationship with DZ Bank in December 2008 that provided for growth in the portfolio at generally lower rates than under prior facilities. In addition, Medallion Bank began raising brokered bank certificates of deposit during 2004, which were at our lowest borrowing costs. As a result of Medallion Bank raising funds through certificates of deposit aswas previously noted, we were able to transfer certain of our medallion loans and related assets to Medallion Bank allowing us and our subsidiaries to use cash generated through these transactions to retire debt with higher interest rates. In addition, Medallion Bank is able to bid on these deposits at a wide variety of maturity levels which allows for improved interest rate management strategies.
Our cost of funds is primarily driven by the rates paid on our various debt instruments and their relative mix, and changes in the levels of average borrowings outstanding. See Note 4 to the consolidated financial statements for details on the terms of all outstanding debt. Our debentures issued to the SBA typically have terms of ten years.
We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities outstanding during the period. The following table shows the average borrowings and related borrowing costs for the years ended December 31, 2017, 2016, and 2015. Our average balances decreased during the year reflecting the fluctuations in the investment portfolio and Medallions Bank’s average decreased, mainly reflecting the sale of $221,000,000 of consumer loans to a third party, offset by strong growth in the consumer loan portfolio. The increase in borrowing costs reflected the increase of interest rates and changes in our borrowing mix, and Medallion Bank’s lengthening of the maturity profile of its certificates of deposit.
(Dollars in thousands) | Interest Expense | Average Balance | Average Borrowing Costs | |||||||||
December 31, 2017 | ||||||||||||
DZ loan | $ | 2,892 | $ | 102,894 | 2.81 | % | ||||||
Notes payable to banks | 3,164 | 84,219 | 3.76 | |||||||||
SBA debentures and borrowings | 3,099 | 80,284 | 3.86 | |||||||||
Preferred securities | 1,111 | 33,000 | 3.37 | |||||||||
Retail notes | 3,504 | 33,625 | 10.42 | |||||||||
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Total | $ | 13,770 | $ | 334,022 | 4.12 | |||||||
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Medallion Bank borrowings | 13,869 | 913,072 | 1.52 | |||||||||
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Total managed borrowings | $ | 27,639 | $ | 1,247,094 | 2.22 | |||||||
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December 31, 2016 | ||||||||||||
DZ loan | $ | 2,670 | $ | 119,492 | 2.23 | % | ||||||
Notes payable to banks | 3,119 | 105,893 | 2.95 | |||||||||
SBA debentures | 3,134 | 79,175 | 3.96 | |||||||||
Preferred securities | 945 | 33,000 | 2.87 | |||||||||
Retail notes | 2,501 | 23,748 | 10.53 | |||||||||
Margin loans | 269 | 18,997 | 1.42 | |||||||||
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Total | $ | 12,638 | $ | 380,305 | 3.32 | |||||||
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Medallion Bank borrowings | 11,762 | 924,235 | 1.27 | |||||||||
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Total managed borrowings | $ | 24,400 | $ | 1,304,540 | 1.87 | |||||||
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December 31, 2015 | ||||||||||||
Revolving lines of credit | $ | 2,413 | $ | 122,482 | 1.97 | % | ||||||
Notes payable to banks | 3,247 | 124,666 | 2.60 | |||||||||
SBA debentures | 2,776 | 68,018 | 4.08 | |||||||||
Preferred securities | 812 | 33,000 | 2.46 | |||||||||
Margin loans | 174 | 13,572 | 1.28 | |||||||||
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Total | $ | 9,422 | $ | 361,738 | 2.60 | |||||||
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Medallion Bank borrowings | 9,205 | 851,474 | 1.08 | |||||||||
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Total managed borrowings | $ | 18,627 | $ | 1,213,212 | 1.54 | |||||||
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We will continue to seek SBA funding through Medallion Capital to the extent it offers attractive rates. SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the SBIA and SBA regulations. We believe that financing operations primarily with short-term floating rate secured bank debt has generally decreased our interest expense, but has also increased our exposure to the risk of increases in market interest rates, which we mitigate with certain interest rate strategies. At December 31, 2017, 2016, and 2015, short-term adjustable rate debt constituted 55%, 59%, and 75% of total debt, and was 15%, 16%, and 23% on a fully managed basis including the borrowings of Medallion Bank.
Factors Affecting Net Assets
Factors that affect our net assets include net realized gain or loss on investments and change in net unrealized appreciation or depreciation on investments. Net realized gain or loss on investments is the difference between the proceeds derived upon sale or foreclosure of a loan or an equity investment and the cost basis of such loan or equity investment. Change in net unrealized appreciation or depreciation on investments is the amount, if any, by which our estimate of the fair value of our investment portfolio is above or below the previously established fair value or the cost basis of the portfolio. Under the 1940 Act, our loan portfolio and other investments must be recorded at fair value.
Unlike certain lending institutions, we are not permitted to establish reserves for loan losses, but adjust quarterly the valuation of the investment portfolio to reflect our estimate of the current value of the total investment portfolio. Since no ready market exists for our investments, fair value is subject to our Board of Directors’ good faith determination. In determining such fair value, our Board of Directors considers factors such as the financial condition of our borrowers and the adequacy of their collateral. Any change in the fair value of portfolio investments or other investments as determined by our Board of Directors is reflected in net unrealized depreciation or appreciation on investments and affects net increase in net assets resulting from operations, but has no impact on net investment income or distributable income.
Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of fair value. We conductconducted a thorough valuation analysis, as described previously, and also receive an opinion regarding thedetermined whether any factors give rise to a valuation from an independent third party to assist the Board of Directors in its determination of the fairdifferent than recorded book value, of Medallion Bank on at least an annual basis. Our analysis includes factors such asincluding various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatorymarketplace restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of anability to transfer industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from nonfinancial activities) which expired in July 2013 and the lack of any new charter issuances since the moratorium’s expiration.charters. Because of these restrictions and other factors, our Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, we 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, we 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 through 2016 and 2017.continued. We 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 we believe heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. We also engaged a valuation specialist to assist the Board of Directors in its 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, and $7,849,000 was recorded in 2017. See Note 3 for additional information about Medallion Bank.2017, and $39,826,000 was recorded in the first quarter of 2018.
Consolidated Results of Operations
For the Nine Months Ended December 31, 2018 under Bank Holding Company Accounting
Net loss attributable to shareholders was $10,172,000 or $0.42 per diluted common share for the nine months ended December 31, 2018.
Total interest income was $96,803,000 in for the nine months. The yield on interest earning assets was 10.98% for the nine months. Average interest earning assets were $1,170,612,000 for the nine months.
Loans before allowance for loan losses were $1,017,882,000 as of December 31, 2018, and were comprised of recreation ($587,038,000), home improvement ($183,155,000), medallion ($183,606,000) and commercial ($64,083,000) loans. The Company had an allowance for loan losses as of the end of the year 2018 of $36,395,000, which was attributable to the medallion (76%), recreation (19%), and home improvement (5%) loan portfolios. Loans declined from $1,095,780,000 at April 2, 2018 primarily due to the deconsolidation of Trust III of $53,545,740 in medallion loans, along with continued charge-offs, reserve increases, and principal repayments. These decreases were partially offset by net loan originations in which a majority related to the recreation segment. The provision for loan losses was $59,008,000 for the nine months ended December 31, 2018, reflecting losses throughout the entire loan portfolio and included anon-specific general reserve for medallion loans of $5,708,000. See Note 4 for additional information on loans and the allowance for loan losses.
Interest expense was $24,816,000 for the nine months and the cost of borrowed funds was 2.79%. Average debt outstanding was $1,181,323,000. See page 47 for a table which shows average balances and cost of funds for our funding sources.
Net interest income was $71,987,000 and the net interest margin was 8.19% for the nine months ended.
Noninterest income, which is mainly comprised of sponsorship and race winnings at RPAC, late charges, write-downs of loan collateral, impairment of equity investments and other miscellaneous income, was $41,946,000 for the nine months. The activity also included the gain on the deconsolidation of Trust III of $25,325,000.
Operating expenses were $62,081,000 for the nine months. Salaries and benefits expense was $19,357,000 for the period, professional fees were $8,609,000, primarily reflecting legal costs for a variety of corporate and investment-related matters, race team costs were $7,121,000, loan servicing costs were $3,470,000, primarily reflecting the cost of servicing the recreation and home improvement consumer loans, and occupancy and other operating expenses were $17,909,000. In addition, impairment on goodwill of $5,615,000 was recorded in the nine months.
Total income tax expense was $709,000 for the nine months. See Note 8 for more information.
Loan collateral in process of foreclosure was $49,495,000 at December 31, 2018, an increase from $21,749,000 at April 2, 2018. The increase primarily reflected there-classification of $31,099,000 from nonperforming loans shown as investments in the 2018 first quarter and the net increase in loans that reached 120 days past due and were charged down to collateral value and reclassified to loans in process of foreclosure, partially offset by the deconsolidation of Trust III, the writedowns of collateral values and the cash received in settlement of these assets.
Goodwill and intangible assets were $204,785,000 at December 31, 2018, which arose as a result of election to no longer report as a BDC as of April 2, 2018 and was in connection with the consolidation of Medallion Bank and RPAC. See Note 2 for further information regarding goodwill and intangible assets.
2018 First Quarter under Investment Company Accounting
Net decrease in net assets resulting from operations was $14,874,000 or $0.62 per diluted common share in the 2018 first quarter primarily reflecting an increase in net realized/unrealized losses on the investment portfolio, increased operating expenses and higher income taxes. Net investment loss after income taxes was $3,230,000 or $0.13 per share in the 2018 quarter.
Investment income was $4,033,000 in the 2018 first quarter and included $1,643,000 of interest reversals related to nonaccrual loans in 2018. The yield on the investment portfolio was 2.69% in the 2018 quarter.
Interest expense was $3,551,000 in the 2018 first quarter. The increase in interest expense was primarily due to increased borrowing costs. The cost of borrowed funds was 4.44% in 2018 reflecting the continuing increase in market interest rates. Average debt outstanding was $324,322,000 for the 2018 quarter primarily reflecting decreased borrowings required to fund the contracting loan portfolio.
Net interest income was $482,000 and the net interest margin was 0.32% for the 2018 quarter.
Noninterest income, which is comprised of prepayment fees, servicing fee income, late charges, and other miscellaneous income, was $60,000 in the 2018 quarter primarily reflecting the reversal of a previously earned management fee due from a portfolio company in the prior year quarter.
Operating expenses were $4,108,000 in the 2018 first quarter. Salaries and benefits expense was $2,349,000 in the 2018 quarter primarily due to executive and employee bonus accrual. Professional fees were $723,000 in 2018 primarily reflecting higher legal expenses for a variety of corporate and investment-related matters. Occupancy and other operating expenses of $1,036,000 in 2018 primarily reflecting higher road or miscellaneous taxes, collection costs related to the medallion loan portfolio and directors’ fees.
Total income tax benefit was $640,000 in 2018, and was comprised of three components, a $336,000 benefit related to the net investment loss, an $8,426,000 benefit related to realized losses, and a provision of $8,122,000 related to net unrealized gains on investments.
Net change in unrealized appreciation (depreciation) on investments before income tax was appreciation of $22,797,000 in the 2018 first quarter. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries, was depreciation of $6,318,000 in 2018, resulting in decreased depreciation of $2,205,000 and related almost entirely to the medallion portfolio. Unrealized appreciation (depreciation) arises when we make valuation adjustments to the investment portfolio. When investments are sold or written off, any resulting realized gain (loss) is grossed up to reflect previously recorded unrealized components. As a result, movement between periods can appear distorted. The current quarter activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $29,115,000 and by reversals of unrealized depreciation on loans which werecharged-off of $34,747,000, offset by unrealized depreciation on loans and other investments of $40,067,000 mainly due to the continuing declining values of the medallions.
Our net realized losses on investments before taxes were $34,745,000 in the 2018 quarter. The 2018 activity reflected the realized losses in the loan portfolio.
Our net realized/unrealized loss on investments before income taxes was $11,948,000 in the 2018 first quarter reflecting the above.
For the Years Ended December 31, 2017 and 2016 under Investment Company Accounting
Net increase in net assets resulting from operations was $278,000 or $0.01 per diluted common share in 2017, down $23,237,000 or 99% from $23,515,000 or $0.97 per share in 2016, primarily reflecting an increase in net realized/unrealized losses on the investment portfolio and lower net interest income, partially offset by an increased income tax benefit and lower operating expenses. Net investment loss after income taxes was $7,121,000 or $0.30 per share in 2017, down $7,240,000 from income of $119,000 or less than $0.01 in 2016.
Investment income was $19,624,000 in 2017, down $5,464,000 or 22% from $25,088,000 a year ago, and included in 2017 and 2016 were $1,278,000 and $3,000,000 in dividends from Medallion Bank and other controlled subsidiaries. The decrease was also due to $5,514,000 of interest forgone in 2017, compared to $2,634,000 in 2016. The yield on the investment portfolio was 3.12% in 2017, down 25% from was 4.17% in 2016. Excluding the dividends, the 2017 yield was down 20% to 2.92% from 3.67% in 2016, reflecting the above. Average investments outstanding were $629,089,000 in 2017, up 4% from $602,349,000 in the prior year primarily reflecting growth in the commercial portfolio and subsidiary investments.
Medallion loans were $208,279,000 at year end, down $58,537,000 or 22% from $266,816,000 a year ago, representing 34% of the investment portfolio, compared to 41% a year ago, and were yielding 4.41% compared to 4.01% a year ago. The decrease in outstandings was primarily concentrated in the New York and Chicago markets, although all markets declined, and was primarily attributable to realized losses recognized and net amortization of loan principal. The managed medallion portfolio, which includes loans at Medallion Bank and those serviced for third parties, was $414,350,000 at year end, down $139,089,000 or 25% from $553,439,000 a year ago, reflecting the above, and realized losses taken and principal amortization at Medallion Bank. The commercial loan portfolio was $90,188,000 at year end, compared to $83,634,000 a year ago, an increase of $6,554,000 or 8%, and represented 15% of the investment portfolio compared to 13% a year ago. The increase was primarily attributable to increases in the secured mezzanine portfolio, partially offset by decreases in other secured commercial loans. Commercial loans yielded 12.02% at year end, down 8% from 13.05% a year ago, reflecting lower yields on certain recent loans. The net managed commercial loan portfolio, which includes loans at Medallion Bank and those serviced for or by third parties, was $92,530,000 at year end, up
$4,686,000 $4,686,000 or 5% from $87,844,000 a year ago, reflecting the above. Investments in Medallion Bank and other controlled
subsidiaries were $302,147,000 at year end, up $8,787,000 or 3% from $293,360,000 a year ago, primarily reflecting the appreciation and equity in the earnings of Medallion Bank other portfolio company investments, capital contributions made, dividends paid, portfolio sales, and the net valuation adjustment, and which represented 49% of the investment portfolio at the end of 2017 and 45% in the prior year, and which yielded 0.83% at year end, compared to 2.13% a year ago, primarily reflecting reduced dividends from Medallion Bank. See Notes 3 and 11 of the consolidated financial statements for additional information about Medallion Bank and the other controlled subsidiaries. Equity investments were $9,521,000 at year end, up $1,053,000 or 12% from $8,468,000 a year ago, primarily reflecting increase in investments held, and which represented 2% of the investment portfolio at the end of 2017 and 1% in the prior year, and had a dividend yield of 0% in both years.
Interest expense was $13,770,000 in 2017, up $1,132,000 or 9% from $12,638,000 in 2016. The increase in interest expense was primarily due to increased borrowing costs on floating rate borrowings. The cost of borrowed funds was 4.12% in 2017, compared to 3.32% a year ago, an increase of 24%, reflecting the recent increases in market interest rates. Average debt outstanding was $334,022,000 in 2017, compared to $380,305,000 a year ago, down 12%, primarily reflecting decreased borrowings required to fund the contracting medallion loan portfolio. See page 4847 for a table that shows average balances and cost of funds for our funding sources.
Net interest income was $5,854,000 and the net interest margin was 0.93% in 2017, down $6,596,000 or 53% from $12,450,000 a year ago, which represented a net interest margin of 2.07%, all reflecting the items discussed above.
Noninterest income, which is comprised of prepayment fees, management fees, servicing fee income, late charges, and other miscellaneous income was $107,000 in 2017, down $301,000 or 74% from $408,000 a year ago, primarily reflecting lower management and other fees generated from the portfolios.
Operating expenses were $13,810,000 in 2017, down $8,976,000 or 39% from $22,786,000 in 2016 which included a $5,099,000 goodwill write off. Salaries and benefits expense was $7,508,000 in the year, down $4,262,000 or 36% from $11,770,000 in 2016 primarily due to a reduction in bonus costs recorded in the current period and lower salary expenses due to the sale of its asset-based lending division in the prior year. Professional fees were $2,619,000 in 2017, up $272,000 or 12% from $2,347,000 a year ago, primarily reflecting higher legal and other professional fee expenses for a variety of corporate and investment-related matters. Occupancy expense was $1,069,000 in 2017, up $103,000 or 11% from $966,000 in 2016, primarily reflecting annual increases in rent expense at various locations. Other operating expenses of $2,614,000 in 2017 were down $10,000 from $2,604,000 a year ago reflecting decreased travel and entertainment expenses, directors’ fees, miscellaneous taxes and reduced expense reimbursements, partially offset by increases in collection and other expenses.
Total income tax benefit was $36,226,000 in 2017 compared to income tax expense of $45,900,000 in 2016, a change of $82,126,000. Total taxes were comprised of three components, a $728,000 benefit related net investment loss compared to $10,047,000 in 2016, benefits related to realized losses and unrealized appreciation on investments of $15,955,000 and $19,543,000, compared to provisions of $384,000 and $55,563,000 in 2016. The tax benefit recorded in 2017 reflected the $17,279,000 for adjustment to implement the change in USU.S. tax law rates on the net tax liabilities. See Note 58 for more information.
Net change in unrealized appreciation on investments was $15,645,000 in 2017, compared to $78,886,000 in 2016, a decrease in appreciation of $63,241,000. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries, was appreciation of $6,162,000 in 2017 compared to a depreciation of $51,235,000 in 2016, resulting in increased appreciation of $57,397,000 in 2017. Unrealized appreciation (depreciation) arises when we make valuation adjustments to the investment portfolio. When investments are sold or written off, any resulting realized gain (loss) is grossed up to reflect previously recorded unrealized components. As a result, movement between periods can appear distorted. The 2017 activity resulted from a net appreciation on Medallion Bank and other controlled subsidiaries of $9,483,000, reversals of
unrealized depreciation associated with charged offcharged-off loans of $46,795,000, partially offset by unrealized depreciation on loans of $37,745,000, the reversal of unrealized appreciation on investments that were exited with a realized gain of $3,082,000, unrealized depreciation on investments other than securities and other assets of $2,075,000, and net unrealized appreciation on equity investments of $2,269,000. The 2016 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $130,121,000 and by reversals of unrealized depreciation associated with charged offcharged-off loans of $3,486,000, partially offset by unrealized depreciation on loans of $27,710,000, investments other than securities of $28,372,000, and net unrealized appreciation on investment securities of $1,367,000. The net appreciation on Medallion Bank and other controlled subsidiaries described above is net of the dividends declared by them to us of $1,278,000 in 2017 and $3,000,000 in 2016.
Our net realized losses on investments were $43,744,000 in 2017 compared to gains of $457,000 in 2016, an increase in realized losses of $44,201,000 in 2017. The 2017 activity reflected the reversals described in the unrealized paragraph above, other gain on the liquidation of other investment securities of $4,684,000, and net loan chargeoffscharge-offs of $4,715,000, inclusive of losses on equity investments. The 2016 activity reflected the reversals described in the unrealized paragraph above, and other net loan chargeoffscharge-offs of $224,000, partially offset by gains of $2,111,000 from the sale of investment securities and $2,057,000 from the sale of the asset-based lending portfolio.
Our net realized/unrealized gains on investments were $7,399,000 in 2017, compared to $23,396,000 in 2016, a decrease of $15,997,000 or 68% of net gains in the year, reflecting the above.
For the Years Ended December 31, 2016 and 2015
Net increase in net assets resulting from operations was $23,515,000 or $0.97 per diluted common share in 2016, down $5,861,000 or 20% from $29,376,000 or $1.20 per share in 2015, primarily reflecting an initial income tax provision that resulted from our not qualifying to elect RIC status for 2016, lower net interest income, and higher operating expenses, partially offset by higher net realized/unrealized gains and noninterest income. Net investment income after income taxes was $119,000 or $0.00 per share in 2016, down $16,707,000 or 99% from $16,826,000 or $0.69 in 2015.
Investment income was $25,088,000 in 2016, down $17,565,000 or 41% from $42,653,000 a year ago, and included in 2016 and 2015 were $3,000,000 and $18,889,000 in dividends from Medallion Bank and other controlled subsidiaries. Excluding those items, investment income decreased $1,676,000 or 7%, primarily reflecting a $1,317,000 increase in foregone interest income on nonaccrual loans, and a $851,000 reduction in lease revenue from our owned Chicago medallions, in both cases, reflecting the poor performance of a number of our borrowers and lessees as business conditions have worsened. The yield on the investment portfolio was 4.17% in 2016, down 46% from 7.74% in 2015. Excluding the dividends, the 2016 yield was down 6% to 3.67% from 4.31% in 2015, reflecting the above. Average investments outstanding were $602,349,000 in 2016, up 9% from $550,763,000 a year ago, primarily reflecting the appreciation on Medallion Bank, partially offset by increased reserves and paydowns in the medallion portfolio.
Medallion loans were $266,816,000 at year end, down $41,592,000 or 13% from $308,408,000 a year ago, representing 41% of the investment portfolio, compared to 51% a year ago, and were yielding 4.01% compared to 4.09% a year ago. The decrease in outstandings was primarily concentrated in the New York market, although all markets declined, and reflected increased realized and unrealized losses and net amortization of loan principal. The managed medallion portfolio, which includes loans at Medallion Bank and those serviced for third parties, was $553,439,000 at year end, down $114,582,000 or 17% from $667,863,000 a year ago, reflecting the above. The commercial loan portfolio was $83,634,000 at year end, compared to $81,895,000 a year ago, an increase of $1,739,000 or 2%, and represented 13% of the investment portfolio compared to 14% a year ago. The increase primarily reflected growth in the high-yield mezzanine portfolio, partially offset by a decrease in the other secured commercial loan portfolio and the sale of the asset-based portfolio. Commercial loans yielded 13.05% at year end, up 2% from 12.80% a year ago, reflecting the change in portfolio mix and higher yields on the mezzanine portfolio. The net managed commercial loan portfolio, which includes loans at Medallion Bank and those serviced for or by third parties, was $87,844,000 at year end, down $34,619,000 or 28% from $122,463,000 a year ago, primarily reflecting the sale of the asset-based portfolio as well as the changes described above. Approximately $11,652,000 of managed asset-based loans ($6,991,000 after valuation adjustments) has been reclassified to other assets awaiting the outcome of legal proceedings as described further on page 43. Investments in Medallion Bank and other controlled subsidiaries were $293,360,000 at year end, up $133,447,000 or 83% from $159,913,000 a year ago, primarily reflecting the appreciation and our equity in the earnings of Medallion Bank’s other portfolio company investments, capital contributions made, dividends paid, portfolio sales, and the net valuation adjustments, and which represented 45% of the investment portfolio at the end of 2016 and 26% in the prior year, and which yielded 2.13% at year end, compared to 12.74% a year ago, primarily reflecting reduced dividends from Medallion Bank. See Notes 3 and 10 of the consolidated financial statements for additional information about Medallion Bank and the other controlled subsidiaries. Equity investments were $8,468,000 at year end, up $1,609,000 or 23% from $6,859,000 a year ago, primarily reflecting increased net appreciation on investment, and which represented 1% of the investment portfolio at both year ends, and had a dividend yield of 0%, compared to 0.72% a year ago.
Interest expense was $12,638,000 in 2016, up $3,216,000 or 34% from $9,422,000 in 2015. The increase in interest expense was primarily due to increased borrowing costs and higher borrowing levels. The cost of borrowed funds was 3.32% in 2016, compared to 2.60% a year ago, an increase of 28%, reflecting increases of interest rates and changes in our borrowing mix. Average debt outstanding was $380,305,000 in 2016, compared to $361,738,000 a year ago, up 5%, primarily reflecting increased borrowings required to fund operating and investment activity. See page 48 for a table that shows average balances and cost of funds for our funding sources.
Net interest income was $12,450,000 and the net interest margin was 2.07% in 2016, down $20,781,000 or 63% from $33,231,000 a year ago, which represented a net interest margin of 6.03%, all reflecting the items discussed above.
Noninterest income, which is comprised of management fees, prepayment fees, servicing fee income, late charges, and other miscellaneous income was $408,000 in 2016, up $89,000 or 28% from $319,000 a year ago, primarily reflecting higher servicing and other fees generated from the subsidiaries of Medallion Financial Corp.
Operating expenses were $22,786,000 in 2016, up $6,062,000 or 36% from $16,724,000 in 2015, and which included a $5,099,000 goodwill impairment writeoff in 2016. Excluding the goodwill writedown, operating expenses increased 6%. Salaries and benefits expense was $11,770,000 in the year, up $126,000 or 1% from $11,644,000 in 2015, reflecting higher executive bonuses and executive salary expenses in the current year, partially offset by lower salaries related to the exiting of the asset-based lending business in late 2016. Professional fees were $2,347,000 in 2016, up $861,000 or 58% from $1,486,000 a year ago, primarily reflecting higher legal expenses for a variety of corporate and investment-related matters. Occupancy expense was $966,000 in 2016, up $89,000 or 10% from $877,000 in 2015. Other operating expenses of $2,604,000 in 2016 were down $113,000 or 4% from $2,717,000 a year ago, primarily reflecting lower advertising expense.
Total income tax expense was $45,900,000 in 2016 compared to $0 in 2015, and was comprised of three components, a $10,047,000 benefit related net investment loss, and provisions of $384,000 and $55,563,000 related to realized and unrealized gains on investments. These provisions included amounts relevant to prior years’ unrealized gains and losses, and were recorded in 2016 as a result of our failure to qualify for RIC tax treatment. See note 5 for more information.
Net change in unrealized appreciation on investments before taxes was $78,886,000 in 2016, compared to $4,914,000 in 2015, an increase in appreciation of $73,972,000. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries, was depreciation of $51,235,000 in 2016 compared to $11,916,000 in 2015, resulting in increased depreciation of $39,319,000 in 2016. Unrealized appreciation (depreciation) arises when we make valuation adjustments to the investment portfolio. When investments are sold or written off, any resulting realized gain (loss) is grossed up to reflect previously recorded unrealized components. As a result, movement between periods can appear distorted. The 2016 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $130,121,000 and by reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $3,486,000, partially offset by unrealized depreciation on loans of $27,710,000, investments other than securities of $28,372,000, and net unrealized appreciation on investment securities of $1,367,000. The 2015 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $16,830,000 reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $1,015,000, net reversals of unrealized depreciation associated with equity investments which were sold of $292,000 and net unrealized appreciation on other investments of $209,000, partially offset by net depreciation on investments other than securities of $9,621,000, net unrealized depreciation on loans of $3,743,000, net depreciation on other assets of $68,000. The net appreciation on Medallion Bank and other controlled subsidiaries described above is net of the dividends declared by them to us of $3,000,000 in 2016 and $18,889,000 in 2015.
Our net realized gains on investments before taxes were $457,000 in 2016, compared to gains of $7,636,000 in 2015, a decrease in realized gains of $7,179,000 in 2016. The 2016 activity reflected the reversals described in the unrealized paragraph above, and other net loan chargeoffs of $224,000, partially offset by gains of $2,111,000 from the sale of investment securities and $2,057,000 from the sale of the asset-based lending portfolio. The 2015 activity reflected the reversals described in the unrealized paragraph above, and reversals of $4,809,000 of unrealized appreciation related to sales of other controlled subsidiaries, $3,296,000 of other gains from the other controlled subsidiaries sales, and other gains on equity investments of $913,000, partially offset by net direct chargeoffs of loans and equity investments of $75,000.
Our net realized/unrealized gains on investments were $23,396,000 in 2016, compared to $12,550,000 in 2015, an increase of $10,846,000 or 86% of net gains in the year, reflecting the above.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of medallion, commercial, and consumer loans;loans, and investment securities) reprice on a different basis over time in comparison to our interest-bearing liabilities (consisting primarily of credit facilities with banks and other lenders, bank certificates of deposit, and SBA debentures).
Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Abrupt increases in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at the higher prevailing interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning assets and interest-bearing liabilities results in interest rate risk.
The effect of changes in interest rates is mitigated by regular turnover of the portfolio. Based on past experience, we anticipate that approximately 40% of the taxicab medallion portfolio will mature or be prepaid each year. We believe that the average life of our loan portfolio varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment. However, borrowers may prepay for a variety of other reasons, such as to monetize increases in the underlying collateral values, particularly in the medallion loan portfolio.
In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years. We had outstanding SBA debentures of $79,564,000$80,099,000 with a weighted
average interest rate of 3.39%3.40%, constituting 24%7% of our total indebtedness, and retail notes of $33,625,000, with a weighted average interest rate of 9.00%, constituting 10%3% of total indebtedness as of December 31, 2017.2018. Also, as of December 31, 2017,2018, certain of the certificates of deposit were for terms of up to 5755 months, further mitigating the immediate impact of changes in market interest rates.
A relative measure of interest rate risk can be derived from our interest rate sensitivity gap. The interest rate sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities, and negative when repriceable liabilities exceed repriceable assets. A relative measure of interest rate sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets.
The following table presents our interest rate sensitivity gap at December 31, 2017, compared to the respective positions at the end of 2016 and 2015.2018. The principal amounts of interest earning assets are assigned to the time frames in which such principal amounts are contractually obligated to be repriced. We have not reflected an assumed annual prepayment rate for such assets in this table.
December 31, 2017 Cumulative Rate Gap (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 Cumulative Rate Gap(1) | December 31, 2018 Cumulative Rate Gap(1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Less Than 1 Year | More Than 1 and Less Than 2 Years | More Than 2 and Less Than 3 Years | More Than 3 and Less Than 4 Years | More Than 4 and Less Than 5 Years | More Than 5 and Less Than 6 Years | Thereafter | Total | Less Than 1 Year | More Than 1 and Less Than 2 Years | More Than 2 and Less Than 3 Years | More Than 3 and Less Than 4 Years | More Than 4 and Less Than 5 Years | More Than 5 and Less Than 6 Years | Thereafter | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Floating-rate | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 33,995 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 33,995 | ||||||||||||||||||||||||||||||||
Adjustable rate | 25,728 | — | — | — | — | — | — | 25,728 | 41,145 | 16,796 | 9,312 | 6,603 | 15,187 | 270 | 2,388 | 91,701 | ||||||||||||||||||||||||||||||||||||||||||||||||
Fixed-rate | 161,928 | 38,013 | 36,387 | 15,189 | 21,585 | 9,775 | 10,623 | 293,500 | 80,454 | 33,557 | 45,051 | 54,741 | 65,073 | 50,541 | 643,030 | 972,447 | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash | 12,690 | — | — | — | — | — | — | 12,690 | 23,718 | — | — | — | — | — | — | 23,718 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total earning | $ | 200,346 | $ | 38,013 | $ | 36,387 | $ | 15,189 | $ | 21,585 | $ | 9,775 | $ | 10,623 | $ | 331,918 | $ | 179,312 | $ | 50,353 | $ | 54,363 | $ | 61,344 | $ | 80,260 | $ | 50,811 | $ | 645,418 | $ | 1,121,861 | ||||||||||||||||||||||||||||||||
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Interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
DZ loan | $ | 99,984 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 99,984 | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 325,890 | $ | 191,054 | $ | 158,846 | $ | 136,508 | $ | 35,742 | $ | — | $ | — | $ | 848,040 | ||||||||||||||||||||||||||||||||||||||||||||||||
Notes payable to banks | 81,450 | — | — | — | — | — | — | 81,450 | 50,995 | — | 7,220 | — | 1,400 | — | — | 59,615 | ||||||||||||||||||||||||||||||||||||||||||||||||
SBA debentures and borrowings | — | — | 31,064 | 8,500 | — | 5,000 | 35,000 | 79,564 | 1,250 | 29,099 | 8,500 | — | 5,000 | 5,000 | 31,250 | 80,099 | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail notes | — | — | — | 33,625 | — | — | — | 33,625 | — | — | 33,625 | — | — | — | — | 33,625 | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred securities | 33,000 | — | — | — | — | — | — | 33,000 | 33,000 | — | — | — | — | — | — | 33,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowings | 500 | 7,149 | — | — | — | — | — | 7,649 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total liabilities | $ | 214,434 | $ | — | $ | 31,064 | $ | 42,125 | $ | — | $ | 5,000 | $ | 35,000 | $ | 327,623 | $ | 411,635 | $ | 227,302 | $ | 208,191 | $ | 136,508 | $ | 42,142 | $ | 5,000 | $ | 31,250 | $ | 1,062,028 | ||||||||||||||||||||||||||||||||
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Interest rate gap | ($ | 14,088 | ) | $ | 38,013 | $ | 5,323 | ($ | 26,936 | ) | $ | 21,585 | $ | 4,775 | ($ | 24,377 | ) | $ | 4,295 | ($ | 232,323 | ) | ($ | 176,949 | ) | ($ | 153,828 | ) | ($ | 75,164 | ) | $ | 38,118 | $ | 45,811 | $ | 614,168 | $ | 59,833 | |||||||||||||||||||||||||
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Cumulative interest rate gap (2) | ($ | 14,088 | ) | $ | 23,925 | $ | 29,248 | $ | 2,312 | $ | 23,897 | $ | 28,672 | $ | 4,295 | — | ($ | 232,323 | ) | ($ | 409,272 | ) | ($ | 563,100 | ) | ($ | 638,264 | ) | ($ | 600,146 | ) | ($ | 554,335 | ) | $ | 59,833 | — | |||||||||||||||||||||||||||
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December 31, 2016 (2) | ($ | 4,542 | ) | $ | 89,283 | $ | 111,777 | $ | 130,757 | $ | 99,275 | $ | 102,533 | $ | 52,065 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2015 (2) | ($ | 114,848 | ) | $ | 19,834 | $ | 86,273 | $ | 102,726 | $ | 125,935 | $ | 114,139 | $ | 71,928 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017(3) | ($ | 172,208 | ) | ($ | 324,049 | ) | ($ | 361,494 | ) | ($ | 425,785 | ) | ($ | 411,672 | ) | ($ | 379,286 | ) | $ | 168,501 | — | |||||||||||||||||||||||||||||||||||||||||||
December 31, 2016(3) | ($ | 160,931 | ) | ($ | 229,981 | ) | ($ | 304,974 | ) | ($ | 301,658 | ) | ($ | 334,577 | ) | ($ | 301,596 | ) | $ | 219,452 | — | |||||||||||||||||||||||||||||||||||||||||||
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(1) | The ratio of the cumulative one year gap to total interest rate sensitive assets was |
(2) | Adjusted for the medallion loan 40% prepayment assumption results in a cumulative one year |
(3) | Represents the cumulative rate gap |
Our interest rate sensitive assets were $331,918,000$1,121,861,000 and interest rate sensitive liabilities were $327,623,000$1,062,028,000 at December 31, 2017.2018. Theone-year cumulative interest rate gap was a negative $14,088,000$232,323,000 or 4%21% of interest rate sensitive assets, compared to a negative $4,542,000 or 1% at December 31, 2016 and $114,848,000 or 24% at December 31, 2015.assets. However, using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a positivenegative gap of $5,303,000$210,284,000 or 2%19% at December 31, 2017.2018. We seek to manage interest rate risk by originating adjustable-rate loans, by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, and by other options consistent with managing interest rate risk.
On a combined basis with Medallion Bank, our interest rate sensitive assets were $1,402,872,000 and interest rate sensitive liabilities were $1,234,371,000 at December 31, 2017. Theone-year cumulative interest rate gap was a negative $172,208,000 or 12% of interest rate sensitive assets, compared to a negative $160,931,000 or 11% and $220,686,000 or 14% at December 31, 2016 and 2015. Using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of $125,265,000 or 9% at December 31, 2017.
Interest Rate Cap Agreements
We manage our exposure to increases in market rates of interest by periodically purchasing interest rate caps to lock in the cost of funds of our variable-rate debt in the event of a rapid run up in interest rates. We entered into contracts to purchase interest rate caps on $70,000,000 of notional value of principal from various multinational banks, with termination dates ranging to December 2018. The caps provide for payments to us if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases were generally fully expensed when paid, including $19,000, $20,000, and $81,000 in 2017, 2016, and 2015, and all are carried at $0 on the balance sheet at December 31, 2017.
Liquidity and Capital Resources
Our sources of liquidity are with a variety of local and regional banking institutions, unfunded commitments to sell debentures to the SBA, loan amortization and prepayments, private issuances of debt securities, participations or sales of loans to third parties, the disposition of other assets of the Company, and dividends from Medallion Bank, although we have not received any since 2016 and are subject to compliance with regulatory ratios, and Medallion Capital. As a RIC, we were required to distribute at least 90% of our investment company taxable income; consequently, we primarily relied upon external sources of funds to finance growth. However, as of December 31, 2016 and subsequent quarters, we did not qualify for the RIC election, and therefore became subject to taxation as a corporation under Subchapter C of the Code. Additionally, there were $5,500,000$3,000,000 of unfunded commitments from the SBA.SBA as of December 31, 2018.
Additionally, Medallion Bank our wholly-owned, unconsolidated portfolio company has access to independent sources of funds for our business originated there, primarily through brokered certificates of deposit. Medallion Bank has $25,000,000$45,000,000 available under Fed Funds lines with several commercial banks. In addition, Medallion Bank is allowed tocan retain all earnings in theits business to fund future growth.
The components of our debt were as follows at December 31, 2017.2018. See Note 47 to the consolidated financial statements on page F-19 for details of the contractual terms of our borrowings.
(Dollars in thousands) | Balance | Percentage | Rate (1) | Balance | Percentage | Rate (1) | ||||||||||||||||||
DZ loan | $ | 99,984 | 31 | % | 3.02 | % | ||||||||||||||||||
Deposits | $ | 848,040 | 80 | % | 2.14 | % | ||||||||||||||||||
SBA debentures and borrowings | 80,099 | 7 | 3.40 | |||||||||||||||||||||
Notes payable to banks | 81,450 | 25 | 3.94 | 59,615 | 6 | 4.55 | ||||||||||||||||||
SBA debentures and borrowings | 79,564 | 24 | 3.39 | |||||||||||||||||||||
Retail notes | 33,625 | 10 | 9.00 | 33,625 | 3 | 9.00 | ||||||||||||||||||
Preferred securities | 33,000 | 10 | 3.63 | 33,000 | 3 | 4.86 | ||||||||||||||||||
Other borrowings | 7,649 | 1 | 2.00 | |||||||||||||||||||||
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Total outstanding debt | $ | 327,623 | 100 | % | 4.01 | % | $ | 1,062,028 | 100 | % | 2.67 | % | ||||||||||||
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Deposits and other borrowings at Medallion Bank | 906,748 | — | 1.51 | |||||||||||||||||||||
Total outstanding debt, including Medallion Bank | $ | 1,234,371 | — | 2.18 | % | |||||||||||||||||||
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(1) | Weighted average contractual rate as of December 31, |
Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all contractual obligations at December 31, 2017.2018.
Payments due by period | Payments due by period | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Less than 1 year | 1 – 2 years | 2 – 3 years | 3 – 4 years | 4 – 5 years | More than 5 years | Total | Less than 1 year | 1 – 2 years | 2 – 3 years | 3 – 4 years | 4 – 5 years | More than 5 years | Total | ||||||||||||||||||||||||||||||||||||||||||
DZ loan | $ | 99,984 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 99,984 | ||||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 325,890 | $ | 191,054 | $ | 158,846 | $ | 136,508 | $ | 35,742 | $ | — | $ | 848,040 | ||||||||||||||||||||||||||||||||||||||||||
SBA debentures and borrowings | 3,226 | 25,873 | 8,500 | — | 5,000 | 37,500 | 80,099 | |||||||||||||||||||||||||||||||||||||||||||||||||
Notes payable to banks | 81,450 | — | — | — | — | — | 81,450 | 51,452 | 458 | 7,145 | 280 | 280 | — | 59,615 | ||||||||||||||||||||||||||||||||||||||||||
SBA debentures and borrowings | 1,655 | 3,044 | 26,365 | 8,500 | — | 40,000 | 79,564 | |||||||||||||||||||||||||||||||||||||||||||||||||
Retail notes | — | — | — | 33,625 | — | — | 33,625 | — | — | 33,625 | — | — | — | 33,625 | ||||||||||||||||||||||||||||||||||||||||||
Preferred securities | — | — | — | — | — | 33,000 | 33,000 | — | — | — | — | — | 33,000 | 33,000 | ||||||||||||||||||||||||||||||||||||||||||
Other borrowings | 500 | 7,149 | — | — | — | — | 7,649 | |||||||||||||||||||||||||||||||||||||||||||||||||
Operating lease obligations | 2,357 | 2,380 | 2,278 | 2,216 | 2,136 | 6,048 | 17,415 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Total | $ | 183,089 | $ | 3,044 | $ | 26,365 | $ | 42,125 | $ | — | $ | 73,000 | $ | 327,623 | $ | 383,425 | $ | 226,914 | $ | 210,394 | $ | 139,004 | $ | 43,158 | $ | 76,548 | $ | 1,079,443 | ||||||||||||||||||||||||||||
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Deposits and other borrowings at Medallion Bank | 424,115 | 260,872 | 91,136 | 76,884 | 53,741 | — | 906,748 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Total, including Medallion Bank | $ | 607,204 | $ | 263,916 | $ | 117,501 | $ | 119,009 | $ | 53,741 | $ | 73,000 | $ | 1,234,371 | ||||||||||||||||||||||||||||||||||||||||||
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Most of our borrowing relationships have maturity dates during 2018.2019 through 2021. We have been in active and ongoing discussions with each of these lenders and have extended each of the facilities as they matured except as set forth in the following paragraph.matured. The lenders have worked with us to extend and change the terms of the borrowing agreements. We have arranged for changes to the terms of the notes and payment and borrowing base calculations which we anticipate will facilitate our operations for the foreseeable future.
We and our subsidiaries obtain financing under lending facilities extended by various banks and other financial institutions, some of which are secured by loans, taxi medallions and other assets. Where these facilities are extended to our subsidiaries, we and others of our subsidiaries may guarantee the obligations of the relevant borrower. Five of our smallest subsidiaries are borrowers under promissory notes extended to them by a bank that total $8.8 million that came due on October 17, 2016. These loans are secured by Chicago taxi medallions owned by our subsidiaries. These notes are guaranteed by Medallion Funding, not by Medallion Financial Corp. These subsidiaries have not repaid the amounts due under the notes and the bank has filed a suit seeking payment of these amounts. This failure to pay would constitute an event of default under certain loan agreements under which we or our subsidiaries are borrowers, but the lenders under those agreements have waived the default. If judgment is entered against us in the suit brought by the bank or entered and not satisfied within specified periods of time, these outcomes may constitute an additional event of default under these other agreements. If waivers are required and not granted for this additional event of default, it would lead to events of default under other of our financing arrangements.
We value our portfolio at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy. Unlike certain lending institutions, we are not permitted to establish reserves for loan losses. Instead, we must value each individual investment and portfolio loan on a quarterly basis. We record unrealized depreciation on investments and loans when we believe that an asset has been impaired and full collection is unlikely. We record unrealized appreciation on equities if we have a clear indication that the underlying portfolio company has appreciated in value and, therefore, our equity investment has also appreciated in value. Without a readily ascertainable market value, the estimated value of our portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. We adjust the valuation of the portfolio quarterly to reflect our Board of Directors’ estimate of the current fair value of each investment in the portfolio. Any changes in estimated fair value are recorded in our statement of operations as net unrealized appreciation (depreciation) on investments. Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of its fair value. We conduct a thorough valuation analysis, and also receive 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. We determine whether any factors give rise to valuation different than recorded book value. As a result of this valuation process, we 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, we 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 through 2016 and 2017.We 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 we believe heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. We also engaged a valuation specialist to assist the Board of Directors in its 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 and $7,849,000 was recorded in 2016 and 2017. See Note 3 for additional information about Medallion Bank. For more information, see “Risk Factors – Risks Relating to Our Business and Structure – Our investment portfolio is, and will continue to be, recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is, and will continue to be, uncertainty as to the value of our portfolio investments which could adversely affect our net asset value.”
In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of loansthem at times when it may be advantageous for us to liquidate such portfolio or investments. In
addition, if we were required to liquidate some or all of the investments in theour portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains.interest income. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item “net increase in net assets resulting from operations”income as of December 31, 20172018 by $1,778,000$549,000 on an annualized basis, compared to a positive impact of $1,100,000 at December 31, 2016, and the impact of such an immediate increase of 1% over a one year period would have been ($984,000)1,012,000) at December 31, 2017, compared to ($792,000) at December 31, 2016.2018. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net increase in net assets resultingincome from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.
We continue to work with investment banking firms and other financial intermediaries to investigate the viability of a number of other financing options which include, among others, the sale or spinoff of certain assets or divisions, the development of a securitization conduit program, and other independent financing for certain subsidiaries or asset classes. These financing options would also provide additional sources of funds for both external expansion and continuation of internal growth.
The following table illustrates sources of available funds for us and each of our subsidiaries, and amounts outstanding under credit facilities and their respective end of period weighted average interest rates at December 31, 2017.2018. See Note 47 to the consolidated financial statements for additional information about each credit facility.
Bank Holding Company Accounting | Managed | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | The Company | MFC | MCI | FSVC | MB | 12/31/2017 | 12/31/2016 | The Company | MFC | MCI | FSVC | MB | RPAC and Other | December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||
Cash | $ | 1,483 | $ | 1,460 | $ | 8,013 | $ | 1,734 | $ | — | $ | 12,690 | $ | 20,962 | $ | 1,110 | $ | 1,118 | $ | 20,230 | $ | 693 | $ | 33,895 | $ | 667 | (1) | $ | 57,713 | $ | 122,923 | |||||||||||||||||||||||||||||
Bank loans | 59,360 | 22,090 | — | — | — | 81,450 | 94,219 | 38,870 | 20,745 | — | — | — | — | 59,615 | 81,450 | |||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | 4.17 | % | 3.34 | % | — | — | — | 3.94 | % | 3.22 | % | 5.09 | % | 3.53 | % | — | — | — | — | 4.55 | % | 3.94 | % | |||||||||||||||||||||||||||||||||||||
Maturity | 1/18-11/18 | (1) | 10/16-6/18 | — | — | — | 10/16-11/18 | 10/16-12/20 | 3/19-7/19 | 6/19-12/23 | — | — | — | — | 3/19-12/23 | 10/16-11/18 | ||||||||||||||||||||||||||||||||||||||||||||
Preferred securities | 33,000 | — | — | — | — | 33,000 | 33,000 | 33,000 | — | — | — | — | — | 33,000 | 33,000 | |||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | 3.63 | % | — | — | — | — | 3.63 | % | 3.07 | % | 4.86 | % | — | — | — | — | — | 4.86 | % | 3.63 | % | |||||||||||||||||||||||||||||||||||||||
Maturity | 9/37 | — | — | — | — | 9/37 | 9/37 | 9/37 | — | — | — | — | — | 9/37 | 9/37 | |||||||||||||||||||||||||||||||||||||||||||||
Retail notes | 33,625 | — | — | — | — | 33,625 | 33,625 | 33,625 | — | — | — | — | — | 33,625 | 33,625 | |||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | 9.00 | % | 9.00 | % | 9.00 | % | 9.00 | % | 9.00 | % | 9.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Maturity | 4/21 | 4/21 | 4/21 | 4/21 | 4/21 | 4/21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
DZ loan | — | 99,984 | — | — | — | 99,984 | 106,244 | — | — | — | — | — | — | — | 99,984 | |||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | — | 3.02 | % | — | — | — | 3.02 | % | 2.36 | % | — | — | — | — | — | — | — | 3.02 | % | |||||||||||||||||||||||||||||||||||||||||
Maturity | — | 3/18 | (2) | — | — | — | 3/18 | 6/17 | — | — | — | — | — | — | — | 3/18 | ||||||||||||||||||||||||||||||||||||||||||||
SBA debentures and borrowings | — | — | 54,000 | 31,064 | — | 85,064 | 87,485 | — | — | 54,000 | 29,099 | — | — | 83,099 | 85,064 | |||||||||||||||||||||||||||||||||||||||||||||
Amounts undisbursed | — | — | 5,500 | — | — | 5,500 | 5,500 | — | — | 3,000 | — | — | — | 3,000 | 5,500 | |||||||||||||||||||||||||||||||||||||||||||||
Amounts outstanding | — | — | 48,500 | 31,064 | — | 79,564 | 81,985 | — | — | 51,000 | 29,099 | — | — | 80,099 | 79,564 | |||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | — | — | 3.48 | % | 3.25 | % | — | 3.39 | % | 3.63 | % | — | — | 3.48 | % | 3.25 | % | — | — | 3.40 | % | 3.39 | % | |||||||||||||||||||||||||||||||||||||
Maturity | — | — | 3/21-3/27 | 2/20 | — | 2/20-3/27 | 3/19-3/27 | — | — | 3/21-3/29 | 2/20 | — | — | 2/20-3/29 | 2/20-3/27 | |||||||||||||||||||||||||||||||||||||||||||||
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Total debt outstanding | $ | 125,985 | $ | 122,074 | $ | 48,500 | $ | 31,064 | $ | — | $ | 327,623 | $ | 349,073 | ||||||||||||||||||||||||||||||||||||||||||||||
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Cash | — | — | — | — | $ | 110,233 | $ | 110,233 | $ | 30,881 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits and other borrowings | — | — | — | — | 906,748 | 906,748 | 908,442 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Brokered CDs & other funds borrowed | 848,040 | — | 848,040 | 906,748 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | — | — | — | — | 2.14 | % | — | 2.14 | % | 1.51 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Maturity | — | — | — | — | 01/19-07/23 | — | 1/19-07/23 | 1/18-10/22 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowings | — | — | — | — | — | 7,649 | 7,649 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | — | — | — | — | 1.51 | % | 1.51 | % | 1.22 | % | — | — | — | — | — | 2.00 | % | 2.00 | % | — | % | |||||||||||||||||||||||||||||||||||||||
Maturity | — | — | — | — | 1/18-10/22 | 1/18-10/22 | 1/17-12/21 | — | — | — | — | — | 12/19-3/20 | 12/19-3/20 | — | |||||||||||||||||||||||||||||||||||||||||||||
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Total cash | $ | 1,483 | $ | 1,460 | $ | 8,013 | $ | 1,734 | $ | 110,233 | $ | 122,923 | $ | 51,843 | $ | 1,110 | $ | 1,118 | $ | 20,230 | $ | 693 | $ | 33,895 | $ | 667 | $ | 57,713 | $ | 122,923 | ||||||||||||||||||||||||||||||
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Total debt outstanding | $ | 125,985 | $ | 122,074 | $ | 48,500 | $ | 31,064 | $ | 906,748 | $ | 1,234,371 | $ | 1,257,515 | $ | 105,495 | $ | 20,745 | $ | 51,000 | $ | 29,099 | $ | 848,040 | $ | 7,649 | $ | 1,062,028 | $ | 1,234,371 | ||||||||||||||||||||||||||||||
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(1) | Includes $90,000 of |
Loan amortization, prepayments, and sales also provide a source of funding for us. Prepayments on loans are influenced significantly by general interest rates, medallion loan market values, economic conditions, and competition.
We also generate liquidity through deposits generated at Medallion Bank, borrowing arrangements with other banks, and through the issuance of SBA debentures, as well as from cash flow from operations. In addition, we may choose to participate a greater portion of our loan portfolio to third parties. We are actively seeking additional sources of liquidity, however, given current market conditions, we cannot assure you that we will be able to secure additional liquidity on terms favorable to us or at all. If that occurs, we may decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become more favorable; or we may be required to dispose of assets when we would not otherwise do so, and at prices which may be below the net book value of such assets in order for us to repay indebtedness on a timely basis. Also, Medallion Bank is not a RIC, and therefore is able to retain earnings to finance growth.
Recently Issued Accounting Standards
In May 2017,August 2018, the Financial Accounting Standard Board (FASB)FASB issued Accounting Standards Update (ASU)ASU2017-09,2018-13 Compensation – Stock CompensationFair Value Measurement (Topic 718)820): Scope of Modification Accounting.Disclosure Framework-Changes to the Disclosure Requirements for Fair Value. The objective of this update is to provide claritymodify the disclosure requirements as it relates to the fair value of assets and reduce both diversity in practice and cost and complexity when applying the guidance of Topic 718.liabilities. The amendments in this update are
effective for annual periods beginning after December 15, 2017,2019, and interim periods within those fiscal years. Early adoption is permitted. We have assessed the impact of thedo not believe this update and have determined that it will not have a material effectimpact on our financial condition and results of operations.condition.
In January 2017, the FASB issued ASU2017-04, “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. We do not believe this update will have a material impact on our financial condition.
In AugustJune 2016, the FASB issuedASU2016-15, 2016-13, “Financial “StatementInstruments—Credit Losses (Topic 326): Measurement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.Credit Losses on Financial Instruments.” The update clarifies howmain 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 should classify certain cash receiptsto account for credit losses on financial instruments will fundamentally change. The existing “probable” and cash payments“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 statement of cash flows withallowance for credit losses modeling have been universally referred to as the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We have assessed the impact of the update and have determined that it will not have a material effect on our financial condition and results of operations.
In February 2016, the FASB issued CECL (current expected credit loss) model.ASU2016-02, 2016-13 applies “Leases (Topic 842)”. ASU2016-02 requires the recognition of lease assets and lease liabilities by lessees for leases classified as operating under current GAAP. ASU2016-02 applies to all entities and is effective for fiscal years beginning after December 15, 20182019 for public entities and is effective for fiscal years beginning after December 15, 2020 for all other entities, with early adoption permitted. We are assessing the impact the update will have on our financial conditionstatements and results of operations.expects the update to have a significant impact on how we will account for estimated credit losses on our loans.
In JanuaryFebruary 2016, the FASB issuedASU2016-01, 2016-02, Leases “Financial Instruments – Overall (Topic 842).825-10):ASU 2016-02 requires Recognitionthe recognition of lease assets and Measurement of Financial Assetslease liabilities by lessees for leases classified as operating under GAAP.ASU 2016-02 applies to all entities and Financial Liabilities.” The main objective of this Update is to enhance the reporting model for financial instruments and provide users of financial statements with more decision-useful information. ASU2016-01 requires equity investments to be measured at fair value, simplifies the impairment assessment of equity investment without readily determinable fair value, eliminates the requirements to disclose the fair value of financial instruments measured at amortized cost, and requires public business entities to use the exit price notion when measuring the fair value of financial instruments. The update, as amended, is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017.2018 for public entities. We have assessed the impact of the update andwill have determined that it will not have a material effect on our financial condition and resultsdetermined that effective January 1, 2019 a right-of-use asset and a lease liability each of operations.$13,997,000 would be recorded, and accrued/amortized over the remaining lease life terms. See Note 12 for additional information.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our business activities contain elements of risk. We consider the principal types of risk to be fluctuations in interest rates and portfolio valuations. We consider the management of risk essential to conducting our businesses. Accordingly, our risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits, and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.
We value our portfolio at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy. Unlike certain lending institutions, we are not permitted to establish reserves for loan losses. Instead, we must value each individual investment and portfolio loan on a quarterly basis. We record unrealized depreciation on investments and loans when we believe that an asset has been impaired and full collection is unlikely. We record unrealized appreciation on equities if we have a clear indication that the underlying portfolio company has appreciated in value and, therefore, our equity investment has also appreciated in value. Without a readily ascertainable market value, the estimated value of our portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. We adjust the valuation of the portfolio quarterly to reflect our Board of Directors’ estimate of the current fair value of each investment in the portfolio. Any changes in estimated fair value are recorded in our statement of operations as net unrealized appreciation (depreciation) on investments. Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of its fair value. We conduct a thorough valuation analysis, and also receive 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. We determine whether any factors give rise to valuation different than recorded book value. As a result of this valuation process, we 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, we 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 through 2016 and 2017. We 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. We 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 and $7,849,000 was recorded in 2017. For more information, see “Risk Factors – Risks Relating to Our Business and Structure – Our investment portfolio is, and will continue to be, recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is, and will continue to be, uncertainty as to the value of our portfolio investments which could adversely affect our net asset value.”
In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of loansthem at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in theour portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains.interest income. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent
by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item “net increase in net assets resulting from operations”income as of December 31, 20172018 by $1,778,000$549,000 on an annualized basis, compared to a positive impact of $1,100,000 at December 31, 2016, and the impact of such an immediate increase of 1% over a one year period would have been ($984,000)1,012,000) at December 31, 2017, compared to ($792,000) at December 31, 2016.2018. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net increase in net assets resultingincome from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Reference is made to the financial statements set forth under Item 15 (A) (1) in this Annual Report on Form10-K, which financial statements are incorporated herein by reference in response to this Item 8.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As required by Rule13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this annual report. As a result of this evaluation, we have concluded that our disclosure controls and procedures were effective as of December 31, 2017.2018.
Changes in Internal Control over Financial Reporting
As required by Rule13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our internal control over financial reporting to determine whether any changes occurred during the 20172018 fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, and have concluded that there have been no changes that occurred during the 20172018 fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule13a-15(f) and15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on its assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of December 31, 2017.2018.
We believe that the consolidated financial statements included in this report fairly represent our consolidated financial position and consolidated results of operations for all periods presented.
Our Independent Registered Public Accounting Firm, Mazars USA LLP, has audited and issued a report on management’s assessment of our internal control over financial reporting. The report of Mazars USA LLP appears below.
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and Board of Directors of Medallion Financial Corp.
Opinion on Internal Control over Financial Reporting
We have audited Medallion Financial Corp. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017,2018, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2018, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the CompanyMedallion Financial Corp. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, including the consolidated summary schedule of investments, as of December 31, 2017, and 2016, and the related consolidated statements of operations, other comprehensive income (loss), changes in stockholders’ equity and changes in net assets, and cash flows for each of the three years in the three-year period ended December 31, 2017,2018, and the related notes and schedules listed in the index to the financial statements and in Item 15(A)3 as Exhibit 99.1, and the selected financial ratios and other data (see note 16) for each of the fivefour years in the five-yearfour-year period ended December 31, 2017 of the Company, and our report dated March 14, 201813, 2019 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
/s/ Mazars USA LLP
New York, New York
March 14, 201813, 2019
ITEM 9B. | OTHER INFORMATION |
None.
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 20182019 for our fiscal year 20182019 Annual Meeting of Shareholders under the captions “Our Directors and Executive Officers”Officers,” “Corporate Governance,” and “Corporate Governance.“Section 16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11. | EXECUTIVE COMPENSATION |
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 20182019 for our fiscal year 20182019 Annual Meeting of Shareholders under the caption “Executive Compensation.Compensation” and “Compensation Committee Interlocks and Insider Participation.”
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 20182019 for our fiscal year 20182019 Annual Meeting of Shareholders under the captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 20182019 for our fiscal year 20182019 Annual Meeting of Shareholders under the captions “Certain Relationships and Related Party Transactions”, “Our Directors and Executive Officers,” and “Corporate Governance.”
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 20182019 for our fiscal year 20182019 Annual Meeting of Shareholders under the caption “Principal Accountant Fees and Services.”
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements of Medallion Financial Corp. and the Report of Independent Public Accountants thereon are included as set forth on the Index to Financial Statements onF-1.
2. FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements onF-1.
3. EXHIBITS
* | Compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this Annual Report on Form10-K. |
ITEM 16. | FORM10-K SUMMARY |
Not applicable.
IMPORTANT INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain forward-looking statements contained in this Form10-K and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward-looking statements contained in this Form10-K were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict, and many of which are beyond control of the Company. Accordingly, there can be no assurance that the forward-looking statements contained in this Form10-K will be realized or that actual results will not be significantly higher or lower. The statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form10-K should consider these facts in evaluating the information contained herein. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form10-K. The inclusion of the forward-looking statements contained in this Form10-K should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form10-K will be achieved. In light of the foregoing, readers of this Form10-K are cautioned not to place undue reliance on the forward-looking statements contained herein. These risks and others that are detailed in this Form10-K and other documents that the Company files from time to time with the Securities and Exchange Commission, including quarterly reports on Form10-Q and any current reports on Form8-K, must be considered by any investor or potential investor in the Company.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange of Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEDALLION FINANCIAL CORP.
Date: March | ||||
By: | /s/ Alvin Murstein | |||
Alvin Murstein | ||||
Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures | Title | Date | ||
/s/ Alvin Murstein Alvin Murstein | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | March | ||
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/s/ Larry D. Hall Larry D. Hall | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | March | ||
Andrew M. Murstein | President and Director | March 13, 2019 | ||
/s/ Henry L. Aaron | Director | March | ||
John Everets | Director | March 13, 2019 | ||
/s/ Frederick A. Menowitz | Director | March | ||
David L. Rudnick | Director | March 13, 2019 | ||
/s/ Allan J. Tanenbaum | Director | March | ||
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/s/ Lowell P. Weicker, Jr. | ||||
Lowell P. Weicker, Jr. | Director | March 13, 2019 |
MEDALLION FINANCIAL CORP.
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and Board of Directors of Medallion Financial Corp.
Opinion on the Consolidated Financial Statements and Selected Financial Ratios and Other Data
We have audited the accompanying consolidated balance sheets of Medallion Financial Corp. and subsidiaries (the “Company”), as of December 31, 2018 and 2017, including the consolidated summary schedule of investments, as of December 31, 2017, and 2016, the related consolidated statements of operations, other comprehensive income (loss), changes in stockholders’ equity and changes in net assets, and cash flows for each of the three years in the three-year period ended December 31, 2017,2018, and the related notes and schedules listed in the index to the financial statements and in Item 15(A)3 as Exhibit 99.1, and selected financial ratios and other data (see note 14)16) for each of the fivefour years in the five-yearfour-year period ended December 31, 2017 (collectively referred to as the “consolidated financial statements and selected financial ratios and other data”). In our opinion, the consolidated financial statements and selected financial ratios and other data present fairly, in all material respects, the financial position of the Company as of December 31, 20172018 and 2016,2017, and the results of its operations, changes in stockholders’ equity and net assets, and cash flows for each of the three years in the three-year period ended December 31, 2017,2018, and the selected financial ratios and other data for each of the fivefour years in the five-yearfour-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017,2018, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 201813, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As further described in Note 2 to the consolidated financial statements and selected financial ratios and other data, the Company withdrew its previous election to be regulated as a business development company under the Investment Company Act of 1940, effective April 2, 2018. The Company is not deemed to be an investment company under generally accepted accounting principles as of April 2, 2018, and therefore the Company no longer follows Financial Accounting Standards Board Accounting Standard Codification Topic 946,Financial Services – Investment Companies, and applies other generally accepted accounting principles for finance companies since that date.
Basis for Opinion
These consolidated financial statements and selected financial ratios and other data are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements and selected financial ratios and other data based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangesExchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and selected financial ratios and other data are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements and selected financial ratios and other data, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements and selected financial ratios and other data. Our procedures included physical inspection or confirmation of securities owned as of December 31, 2017, and 2016, or by other appropriate auditing procedures where replies were not received. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and selected financial ratios and other data. We believe that our audits provide a reasonable basis for our opinion.
/s/ Mazars USA LLP
We have served as the Company’s auditor since 2005.
New York, New York
March 14, 201813, 2019
MEDALLION FINANCIAL CORP.
Bank Holding Company Accounting | Investment Company Accounting | |||||||
(Dollars in thousands, except share and per share data) | December 31, 2018 | December 31, 2017 | ||||||
Assets | ||||||||
Cash(1) | $ | 23,842 | $ | 12,690 | ||||
Federal funds sold | 33,871 | — | ||||||
Equity investments | 9,197 | — | ||||||
Equity investments, at fair value | — | 5,213 | ||||||
Equity investments in affiliated entities, at fair value | — | 4,308 | ||||||
Investment securities | 45,324 | — | ||||||
Investments in Medallion Bank and other controlled subsidiaries, at fair value | — | 302,147 | ||||||
Loans | 1,017,882 | — | ||||||
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 | (36,395 | ) | — | |||||
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Net loans receivable | 981,487 | — | ||||||
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Net investments(1) | — | 610,135 | ||||||
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Accrued interest receivable(1) | 7,413 | 547 | ||||||
Property and equipment, net | 1,222 | 235 | ||||||
Loan collateral in process of foreclosure(1) (2) | 49,495 | — | ||||||
Goodwill | 150,803 | — | ||||||
Intangible assets, net | 53,982 | — | ||||||
Investments other than securities | — | 7,450 | ||||||
Other assets | 25,210 | 4,465 | ||||||
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Total assets | $ | 1,381,846 | $ | 635,522 | ||||
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Liabilities | ||||||||
Accounts payable and accrued expenses(1) | $ | 18,789 | $ | 4,373 | ||||
Accrued interest payable(1) | 3,852 | 3,831 | ||||||
Deposits | 848,040 | — | ||||||
Short-term borrowings | 55,178 | — | ||||||
Deferred tax liabilities and other tax payables | 6,973 | 12,536 | ||||||
Long-term debt | 158,810 | — | ||||||
Funds borrowed(1) | — | 327,623 | ||||||
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Total liabilities | 1,091,642 | 348,363 | ||||||
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Commitments and contingencies | — | — | ||||||
Stockholders’ equity | ||||||||
Preferred stock (1,000,000 shares of $0.01 par value stockauthorized-none outstanding) | — | — | ||||||
Common stock (50,000,000 shares of $0.01 par value stockauthorized-27,385,600 shares at December 31, 2018 and 27,294,327 shares at December 31, 2017 issued) | 274 | 273 | ||||||
Additional paid in capital | 274,292 | 273,716 | ||||||
Treasury stock (2,951,243 shares at December 31, 2018 and December 31, 2017) | (24,919 | ) | (24,919 | ) | ||||
Accumulated other comprehensive loss | (82 | ) | — | |||||
Retained earnings | 13,043 | — | ||||||
Accumulated undistributed net investment loss | — | (65,592 | ) | |||||
Net unrealized appreciation on investments, net of tax | — | 103,681 | ||||||
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Total stockholders’ equity | 262,608 | 287,159 | ||||||
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Non-controlling interest in consolidated subsidiaries | 27,596 | — | ||||||
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Total equity | 290,204 | 287,159 | ||||||
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Total liabilities and equity | $ | 1,381,846 | $ | 635,522 | ||||
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Number of shares outstanding | 24,434,357 | 24,343,084 | ||||||
Book value per share/net asset value per share | $ | 10.75 | $ | 11.80 | ||||
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(1) | See Note 23 for details of balances related to a consolidated variable interest entity. |
(2) | Includes financed sales of this collateral to third parties that are reported separately from the loan portfolio, and that are conducted by the Bank of $3,134. |
The accompanying notes should be read in conjunction with these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data) | 2017 | 2016 | 2015 | |||||||||
Interest income on investments | $ | 14,564 | $ | 17,654 | $ | 19,638 | ||||||
Dividend income from controlled subsidiaries | 1,278 | 3,000 | 18,889 | |||||||||
Interest income from affiliated investments | 2,541 | 3,018 | 1,748 | |||||||||
Medallion lease income | 198 | 538 | 1,388 | |||||||||
Interest income from controlled subsidiaries | 165 | 596 | 944 | |||||||||
Dividend income from affiliated investments | — | 201 | — | |||||||||
Dividends and interest income on short-term investments | 878 | 81 | 46 | |||||||||
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Total investment income(1) | 19,624 | 25,088 | 42,653 | |||||||||
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Total interest expense(2) | 13,770 | 12,638 | 9,422 | |||||||||
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Net interest income | 5,854 | 12,450 | 33,231 | |||||||||
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Total noninterest income | 107 | 408 | 319 | |||||||||
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Salaries and benefits | 7,508 | 11,770 | 11,644 | |||||||||
Professional fees | 2,619 | 2,347 | 1,486 | |||||||||
Occupancy expense | 1,069 | 966 | 877 | |||||||||
Goodwill impairment | — | 5,099 | — | |||||||||
Other operating expenses(3) | 2,614 | 2,604 | 2,717 | |||||||||
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Total operating expenses | 13,810 | 22,786 | 16,724 | |||||||||
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Net investment income (loss) before income taxes(4) | (7,849 | ) | (9,928 | ) | 16,826 | |||||||
Income tax benefit | 728 | 10,047 | — | |||||||||
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Net investment income (loss) after income taxes | (7,121 | ) | 119 | 16,826 | ||||||||
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Net realized gains (losses) on investments(5) | (43,744 | ) | 457 | 7,636 | ||||||||
Income tax benefit (provision) | 15,955 | (384 | ) | — | ||||||||
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Total net realized gains (losses) on investments(5) | (27,789 | ) | 73 | 7,636 | ||||||||
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Net change in unrealized appreciation on Medallion Bank and other controlled subsidiaries | 9,483 | 130,121 | 16,830 | |||||||||
Net change in unrealized depreciation on investments other than securities | (2,060 | ) | (28,372 | ) | (9,621 | ) | ||||||
Net change in unrealized appreciation (depreciation) on investments | 8,222 | (22,863 | ) | (2,295 | ) | |||||||
Income tax benefit (provision) | 19,543 | (55,563 | ) | — | ||||||||
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Net unrealized appreciation on investments | 35,188 | 23,323 | 4,914 | |||||||||
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Net realized/unrealized gains on investments | 7,399 | 23,396 | 12,550 | |||||||||
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Net increase in net assets resulting from operations | $ | 278 | $ | 23,515 | $ | 29,376 | ||||||
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Net increase in net assets resulting from operations per common share | ||||||||||||
Basic | $ | 0.01 | $ | 0.97 | $ | 1.21 | ||||||
Diluted | $ | 0.01 | $ | 0.97 | $ | 1.20 | ||||||
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Distributions declared per share | $ | — | $ | 0.35 | $ | 1.00 | ||||||
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Weighted average common shares outstanding | ||||||||||||
Basic | 23,919,994 | 24,123,888 | 24,315,427 | |||||||||
Diluted | 24,053,307 | 24,173,020 | 24,391,959 | |||||||||
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Combined(1) | Investment Company Accounting | |||||||||||
For the Years Ended | ||||||||||||
(Dollars in thousands, except per share data) | December 31, 2018 | December 31, 2017 | December 31, 2016 | |||||||||
Interest and fees on loans | $ | 95,080 | $ | — | $ | — | ||||||
Interest income on investments | 3,287 | 14,564 | 17,654 | |||||||||
Dividend income from controlled subsidiaries | 28 | 1,278 | 3,000 | |||||||||
Interest income from affiliated investments | 654 | 2,541 | 3,018 | |||||||||
Interest income from controlled subsidiaries | 10 | 165 | 596 | |||||||||
Medallion lease income | 133 | 198 | 538 | |||||||||
Interest and dividends on investment securities | 1,644 | — | — | |||||||||
Dividend income from affiliated investments | — | — | 201 | |||||||||
Dividends and interest income on short-term investments | — | 878 | 81 | |||||||||
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|
|
|
|
| |||||||
Total interest income (2)/total investment income (2) | 100,836 | 19,624 | 25,088 | |||||||||
|
|
|
|
|
| |||||||
Interest on deposits | 14,230 | — | — | |||||||||
Interest on short-term borrowings | 4,441 | — | — | |||||||||
Interest on long-term debt | 6,145 | — | — | |||||||||
Interest expense | 3,551 | 13,770 | 12,638 | |||||||||
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|
|
|
|
| |||||||
Total interest expense (3) | 28,367 | 13,770 | 12,638 | |||||||||
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|
|
|
|
| |||||||
Net interest income/net investment income | 72,469 | 5,854 | 12,450 | |||||||||
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|
|
| |||||||
Provision for loan losses | 59,008 | — | — | |||||||||
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|
|
|
|
| |||||||
Net interest income after provision for loan losses | 13,461 | 5,854 | 12,450 | |||||||||
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|
|
|
| |||||||
Other income (loss) | ||||||||||||
Gain on deconsolidation of Trust III | 25,325 | — | — | |||||||||
Sponsorship and race winnings | 14,368 | — | — | |||||||||
Gain on sale of loans | 4,946 | — | — | |||||||||
Writedown of loan collateral in process of foreclosure | (2,188 | ) | — | — | ||||||||
Impairment of equity investments | (939 | ) | — | — | ||||||||
Other income | 494 | 107 | 408 | |||||||||
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|
|
|
|
| |||||||
Total other income | 42,006 | 107 | 408 | |||||||||
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|
|
| |||||||
Other expenses | ||||||||||||
Salaries and employee benefits | 21,706 | 7,508 | 11,770 | |||||||||
Professional fees | 9,332 | 2,619 | 2,347 | |||||||||
Race team related expenses | 7,121 | — | — | |||||||||
Intangible asset impairment | 5,615 | — | 5,099 | |||||||||
Collection costs | 5,207 | 316 | 94 | |||||||||
Loan servicing fees | 3,470 | — | — | |||||||||
Rent expense | 2,040 | 1,069 | 966 | |||||||||
Travel, meals, and entertainment | 1,448 | 750 | 964 | |||||||||
Regulatory fees | 1,703 | — | — | |||||||||
Amortization of intangible assets | 1,083 | — | — | |||||||||
Other expenses (4) | 7,464 | 1,548 | 1,546 | |||||||||
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|
|
| |||||||
Total other expenses (5) | 66,189 | 13,810 | 22,786 | |||||||||
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|
|
|
Combined(1) | Investment Company Accounting | |||||||||||
For the Years Ended | ||||||||||||
(Dollars in thousands, except per share data) | December 31, 2018 | December 31, 2017 | December 31, 2016 | |||||||||
Loss before income taxes/net investment loss before taxes (5) | (10,722 | ) | (7,849 | ) | (9,928 | ) | ||||||
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|
|
| |||||||
Income tax benefit (provision) | (373 | ) | 728 | 10,047 | ||||||||
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|
|
|
|
| |||||||
Net loss after taxes/net investment income (loss) after taxes | (11,095 | ) | (7,121 | ) | 119 | |||||||
Net realized gains (losses) on investments (6) | (34,745 | ) | (43,744 | ) | 457 | |||||||
Income tax benefit (provision) | 8,426 | 15,955 | (384 | ) | ||||||||
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|
|
|
|
| |||||||
Total net realized gains (losses) on investments | (26,319 | ) | (27,789 | ) | 73 | |||||||
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|
|
| |||||||
Net change in unrealized appreciation on Medallion Bank and other controlled subsidiaries | 29,115 | 9,483 | 130,121 | |||||||||
Net change in unrealized depreciation on investments other than securities | (1,915 | ) | (2,060 | ) | (28,372 | ) | ||||||
Net change in unrealized appreciation (depreciation) on investments | (4,403 | ) | 8,222 | (22,863 | ) | |||||||
Income tax (provision) benefit | (8,122 | ) | 19,543 | (55,563 | ) | |||||||
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|
|
| |||||||
Net unrealized appreciation on investments | 14,675 | 35,188 | 23,323 | |||||||||
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|
|
|
| |||||||
Net realized/unrealized gains (losses) on investments | (11,644 | ) | 7,399 | 23,396 | ||||||||
|
|
|
|
|
| |||||||
Net loss after taxes/net increase (decrease) on net assets resulting from operations | (22,739 | ) | 278 | 23,515 | ||||||||
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|
| |||||||
Less: income attributable to thenon-controlling interest | 2,307 | — | — | |||||||||
|
|
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|
|
| |||||||
Total net income (loss) attributable to Medallion Financial Corp./net increase (decrease) on net assets resulting from operations | $ | (25,046 | ) | $ | 278 | $ | 23,515 | |||||
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|
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| |||||||
Basic net income (loss) per share | $ | (1.03 | ) | $ | 0.01 | $ | 0.97 | |||||
Diluted net income (loss) per share | $ | (1.03 | ) | $ | 0.01 | $ | 0.97 | |||||
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| |||||||
Distributions declared per share | $ | — | — | $ | 0.35 | |||||||
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| |||||||
Weighted average common shares outstanding | ||||||||||||
Basic | 24,214,978 | 23,919,994 | 24,123,888 | |||||||||
Diluted | 24,214,978 | 24,053,307 | 24,173,020 | |||||||||
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|
(1) | Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under Investment Company Accounting. |
(2) | Included in interest and investment income |
Average borrowings outstanding were $1,198,124, $334,022, |
See Note |
Includes $256, $870, |
There were no net losses on investment securities of affiliated issuers for the years ended December 31, 2018, 2017, |
The accompanying notes should be read in conjunction with these consolidated financial statements.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share data) | December 31, 2017 | December 31, 2016 | ||||||
Assets | ||||||||
Medallion loans, at fair value | $ | 208,279 | $ | 266,816 | ||||
Commercial loans, at fair value | 53,737 | 53,120 | ||||||
Commercial loans to affiliated entities, at fair value | 35,452 | 27,355 | ||||||
Commercial loans to controlled subsidiaries, at fair value | 999 | 3,159 | ||||||
Investment in Medallion Bank and other controlled subsidiaries, at fair value | 302,147 | 293,360 | ||||||
Equity investments, at fair value | 5,213 | 4,891 | ||||||
Equity investments in affiliated entities, at fair value | 4,308 | 3,577 | ||||||
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| |||||
Net investments ($183,529 at December 31, 2017 and $231,494 at December 31, 2016 pledged as collateral under borrowing arrangements) | 610,135 | 652,278 | ||||||
Cash and cash equivalents($0 at December 31, 2017 and $7,840 at | 12,690 | 20,962 | ||||||
Accrued interest receivable | 547 | 769 | ||||||
Fixed assets, net | 235 | 267 | ||||||
Investments other than securities(2) | 7,450 | 9,510 | ||||||
Other assets, net | 4,465 | 5,591 | ||||||
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| |||||
Total assets | $ | 635,522 | $ | 689,377 | ||||
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Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 4,373 | $ | 5,425 | ||||
Accrued interest payable | 3,831 | 2,883 | ||||||
Deferred and other tax liabilities, net(3) | 12,536 | 45,900 | ||||||
Funds borrowed | 327,623 | 349,073 | ||||||
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| |||||
Total liabilities | 348,363 | 403,281 | ||||||
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| |||||
Commitments and contingencies(4) | — | — | ||||||
Shareholders’ equity (net assets) | ||||||||
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 – 27,294,327 sharesat December 31, 2017 and 26,976,064 shares at December 31, 2016 issued) | 273 | 270 | ||||||
Treasury stock at cost(2,951,243 shares at December 31, 2017 and 2016) | (24,919 | ) | (24,919 | ) | ||||
Capital in excess of par value | 273,716 | 272,934 | ||||||
Accumulated undistributed net investment loss | (65,592 | ) | (33,993 | ) | ||||
Accumulated undistributed net realized gains on investments | — | — | ||||||
Net unrealized appreciation on investments, net of tax | 103,681 | 71,804 | ||||||
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| |||||
Total shareholders’ equity (net assets) | 287,159 | 286,096 | ||||||
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| |||||
Total liabilities and shareholders’ equity | $ | 635,522 | $ | 689,377 | ||||
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| |||||
Number of common shares outstanding | 24,343,084 | 24,024,821 | ||||||
Net asset value per share | $ | 11.80 | $ | 11.91 | ||||
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Combined(1) | Investment Company Accounting | |||||||||||
For the Years Ended | ||||||||||||
(Dollars in thousands) | December 31, 2018 | December 31, 2017 | December 31, 2016 | |||||||||
Net loss after taxes/net increase on net assets resulting from operations | $ | (22,739 | ) | $ | 278 | $ | 23,515 | |||||
Other comprehensive loss, net of tax | (82 | ) | — | — | ||||||||
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| |||||||
Total comprehensive income (loss) | (22,821 | ) | 278 | 23,515 | ||||||||
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| |||||||
Less: comprehensive income attributable to thenon-controlling interest | 2,307 | — | — | |||||||||
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| |||||||
Total comprehensive income (loss) attributable to Medallion Financial Corp. | $ | (25,128 | ) | $ | 278 | $ | 23,515 | |||||
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(1) |
Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under Investment Company Accounting. |
The accompanying notes should be read in conjunction with these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND CHANGES IN NET ASSETS
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 | Non-controlling 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 increase (decrease) in net assets resulting from | — | — | — | — | — | — | ( 38,299 | ) | — | 23,425 | — | — | (14,874 | ) | — | (14,874 | ) | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | 1 | — | 151 | — | — | — | — | — | — | — | 152 | — | 152 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock, net | 95,726 | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
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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 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
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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 | — | — | — | — | — | — | — | — | — | (10,172 | ) | — | (10,172 | ) | 2,307 | (7,865 | ) | |||||||||||||||||||||||||||||||||||||||
Distributions tonon-controlling interest | — | — | — | — | — | — | — | — | — | — | — | — | (1,776 | ) | (1,776 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 425 | — | — | — | — | — | — | — | 425 | — | 425 | |||||||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock, net | (4,453 | ) | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Net change in unrealized losses on investments, net of tax | — | — | — | — | — | — | — | — | — | — | (82 | ) | (82 | ) | — | (82 | ) | |||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2018 | 27,385,600 | $ | 274 | — | $ | 274,292 | (2,951,243 | ) | $ | (24,919 | ) | $ | — | $ | — | $ | — | $ | 13,043 | $ | (82 | ) | $ | 262,608 | $ | 27,596 | $ | 290,204 | ||||||||||||||||||||||||||||
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The accompanying notes should be read in conjunction with these consolidated financial statements.
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31, | Investment Company Accounting | |||||||||||||||||||
(Dollars in thousands, except per share data) | 2017 | 2016 | 2015 | Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||
Net investment income (loss) after income taxes | ($ | 7,121 | ) | $ | 119 | $ | 16,826 | $ | (7,121 | ) | $ | 119 | ||||||||
Net realized gains (losses) on investments, net of tax | (27,789 | ) | 73 | 7,636 | (27,789 | ) | 73 | |||||||||||||
Net unrealized appreciation on investments, net of tax | 35,188 | 23,323 | 4,914 | |||||||||||||||||
Net unrealized depreciation on investments, net of tax | 35,188 | 23,323 | ||||||||||||||||||
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| ||||||||||||||||
Net increase in net assets resulting from operations | 278 | 23,515 | 29,376 | 278 | 23,515 | |||||||||||||||
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| ||||||||||||||||
Investment income, net | — | (14,570 | ) | (20,042 | ) | — | (14,570 | ) | ||||||||||||
Return of capital | — | — | (4,330 | ) | — | — | ||||||||||||||
Realized gains from investment transactions, net | — | — | ||||||||||||||||||
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Distributions to shareholders(1) | — | (14,570 | ) | (24,372 | ) | — | (14,570 | ) | ||||||||||||
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| ||||||||||||||||
Stock – based compensation expense | 785 | 568 | 1,294 | |||||||||||||||||
Stock-based compensation expense | 785 | 568 | ||||||||||||||||||
Exercise of stock options | — | 19 | 281 | — | 19 | |||||||||||||||
Treasury stock acquired | — | (1,524 | ) | (3,212 | ) | — | (1,524 | ) | ||||||||||||
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Capital share transactions | 785 | (937 | ) | (1,637 | ) | 785 | (937 | ) | ||||||||||||
Other, distributions not paid on forfeited restricted stock grants | — | — | 51 | |||||||||||||||||
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| ||||||||||||||||
Total increase in net assets | 1,063 | 8,008 | 3,418 | 1,063 | 8,008 | |||||||||||||||
Net assets at the beginning of the year | 286,096 | 278,088 | 274,670 | |||||||||||||||||
Net assets at the beginning of the period | 286,096 | 278,088 | ||||||||||||||||||
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Net assets at the end of the year(2) | $ | 287,159 | $ | 286,096 | $ | 278,088 | ||||||||||||||
Net assets at the end of the period (2) | $ | 287,159 | $ | 286,096 | ||||||||||||||||
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Capital share activity | ||||||||||||||||||||
Common stock issued, beginning of year | 26,976,064 | 26,936,762 | 26,797,499 | |||||||||||||||||
Common stock issued, beginning of period | 26,976,064 | 26,936,762 | ||||||||||||||||||
Exercise of stock options | — | 2,100 | 30,449 | — | 2,100 | |||||||||||||||
Issuance of restricted stock, net | 318,263 | 37,202 | 108,814 | 318,263 | 37,202 | |||||||||||||||
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Common stock issued, end of year | 27,294,327 | 26,976,064 | 26,936,762 | |||||||||||||||||
Common stock issued, end of period | 27,294,327 | 26,976,064 | ||||||||||||||||||
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Treasury stock, beginning of year | (2,951,243 | ) | (2,590,069 | ) | (2,176,876 | ) | ||||||||||||||
Treasury stock, beginning of period | (2,951,243 | ) | (2,590,069 | ) | ||||||||||||||||
Treasury stock acquired | — | (361,174 | ) | (413,193 | ) | — | (361,174 | ) | ||||||||||||
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Treasury stock, end of year | (2,951,243 | ) | (2,951,243 | ) | (2,590,069 | ) | ||||||||||||||
Treasury stock, end of period | (2,951,243 | ) | (2,951,243 | ) | ||||||||||||||||
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Common stock outstanding | 24,343,084 | 24,024,821 | 24,346,693 | 24,343,084 | 24,024,821 | |||||||||||||||
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(1) | Distributions declared were $0.00 |
(2) | Includes |
The accompanying notes should be read in conjunction with these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, | ||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net increase in net assets resulting from operations | $ | 278 | $ | 23,515 | $ | 29,376 | ||||||
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used for) operating activities: | ||||||||||||
Investments originated(1) | (29,131 | ) | (324,753 | ) | (117,540 | ) | ||||||
Proceeds from principal receipts, sales, and maturities of investments(1) | 46,755 | 393,104 | 59,215 | |||||||||
Paid-in-kind interest | (2,268 | ) | (2,580 | ) | (2,189 | ) | ||||||
(Investment in) capital returned by Medallion Bank and other controlled subsidiaries, net | 696 | (3,326 | ) | (8,525 | ) | |||||||
Net cash received on disposition of other controlled subsidiaries | — | — | 11,969 | |||||||||
Depreciation and amortization | 1,019 | 485 | 415 | |||||||||
Increase (decrease) in deferred and other tax liability, net | (33,364 | ) | 45,900 | — | ||||||||
Amortization (accretion) of origination fees, net | 68 | (49 | ) | (49 | ) | |||||||
Net change in unrealized (appreciation) depreciation on investments | (8,222 | ) | 22,863 | 2,295 | ||||||||
Net change in unrealized depreciation on investments other than securities | 2,060 | 28,372 | 9,621 | |||||||||
Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries | (9,483 | ) | (130,121 | ) | (16,830 | ) | ||||||
Net realized (gains) losses on investments | 43,744 | (457 | ) | (7,636 | ) | |||||||
Goodwill impairment | — | 5,099 | — | |||||||||
Stock-based compensation expense | 785 | 568 | 1,294 | |||||||||
(Increase) decrease in accrued interest receivable | 222 | 234 | (15 | ) | ||||||||
(Increase) decrease in other assets, net | 122 | 804 | (3,664 | ) | ||||||||
Increase (decrease) in accounts payable and accrued expenses | (907 | ) | 353 | (1,481 | ) | |||||||
Increase (decrease) in accrued interest payable | 949 | 1,580 | (869 | ) | ||||||||
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Net cash provided by (used for) operating activities | 13,323 | 61,591 | (44,613 | ) | ||||||||
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CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Proceeds from funds borrowed | — | 294,650 | 111,742 | |||||||||
Repayments of funds borrowed | (21,450 | ) | (350,116 | ) | (55,997 | ) | ||||||
Proceeds from exercise of stock options | — | 19 | 281 | |||||||||
Purchase of treasury stock at cost | — | (1,524 | ) | (3,212 | ) | |||||||
Payments of declared distributions | (145 | ) | (14,570 | ) | (24,372 | ) | ||||||
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Net cash provided by (used for) financing activities | (21,595 | ) | (71,541 | ) | 28,442 | |||||||
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NET DECREASE IN CASH AND CASH EQUIVALENTS | (8,272 | ) | (9,950 | ) | (16,171 | ) | ||||||
Cash and cash equivalents, beginning of year | 20,962 | 30,912 | 47,083 | |||||||||
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Cash and cash equivalents, end of year | $ | 12,690 | $ | 20,962 | $ | 30,912 | ||||||
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SUPPLEMENTAL INFORMATION | ||||||||||||
Cash paid during the year for interest | $ | 11,897 | $ | 10,682 | $ | 10,015 | ||||||
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Cash paid during the year for income taxes | $ | 62 | $ | — | $ | — | ||||||
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Combined (1) | Investment Company Accounting | |||||||||||
Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net loss/net increase in net assets resulting from operations | $ | (22,739 | ) | $ | 278 | $ | 23,515 | |||||
Adjustments to reconcile net loss/net increase in net assets resulting from operations to net cash provided by operating activities: | ||||||||||||
Provision for loan losses | 59,008 | — | — | |||||||||
Loans originated | (8,193 | ) | (29,131 | ) | (324,753 | ) | ||||||
Proceeds from principal receipts, sales, and maturities of loans(2) | 13,279 | 46,755 | 393,104 | |||||||||
Paid-in-kind interest | (1,869 | ) | (2,268 | ) | (2,580 | ) | ||||||
Depreciation and amortization | 5,564 | 1,019 | 485 | |||||||||
Decrease/increase (decrease) in deferred and other tax asset/liabilities, net | 13,637 | (33,364 | ) | 45,900 | ||||||||
Amortization (accretion) of origination fees, net | 3,132 | 68 | (49 | ) | ||||||||
Proceeds from the sale of loan collateral in process of foreclosure | 11,593 | — | — | |||||||||
Net change in loan collateral in process of foreclosure | 9,926 | — | — | |||||||||
Capital returned by (investment in) Medallion Bank and other controlled subsidiaries, net | 93 | 696 | (3,326 | ) | ||||||||
Net realized gains on sale of investments | (5,921 | ) | — | — | ||||||||
Net change in unrealized (appreciation) depreciation on investments | 6,457 | (8,222 | ) | 22,863 | ||||||||
Net change in unrealized depreciation on investment other than securities | 1,915 | 2,060 | 28,372 | |||||||||
Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries | (29,115 | ) | (9,483 | ) | (130,121 | ) | ||||||
Net realized (gains) losses on investments | 34,745 | 43,744 | (457 | ) | ||||||||
Gain on deconsolidation of Trust III | (25,325 | ) | — | — | ||||||||
Intangible asset impairment | 5,615 | — | 5,099 | |||||||||
Stock-based compensation expense | 576 | 785 | 568 | |||||||||
Decrease in accrued interest receivable | 797 | 222 | �� | 234 | ||||||||
Increase in other liabilities | 4,196 | — | — | |||||||||
Decrease in other assets | 1,309 | 122 | 804 | |||||||||
Increase (decrease) in accounts payable and accrued expenses | (675 | ) | (907 | ) | 353 | |||||||
Increase in accrued interest payable | 139 | 949 | 1,580 | |||||||||
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Net cash provided by operating activities | 78,144 | 13,323 | 61,591 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Loans originated | (333,740 | ) | — | — | ||||||||
Proceeds from principal receipts, sales, and maturities of loans | 302,409 | — | — | |||||||||
Purchases of investments | (10,376 | ) | — | — | ||||||||
Proceeds from principal receipts, sales, and maturities of investments | 6,417 | — | — | |||||||||
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Net cash used for investing activities | (35,290 | ) | — | — |
Combined (1) | Investment Company Accounting | |||||||||||
Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Proceeds from time deposits and funds borrowed | 364,139 | — | 294,650 | |||||||||
Repayments of time deposits and funds borrowed | (389,951 | ) | (21,450 | ) | (350,116 | ) | ||||||
Purchase of federal funds | 8,000 | — | — | |||||||||
Repayments of federal funds | (8,000 | ) | — | — | ||||||||
Proceeds from exercise of stock options | — | — | 19 | |||||||||
Purchase of treasury stock | — | — | (1,524 | ) | ||||||||
Distributions tonon-controlling interests | (1,776 | ) | — | — | ||||||||
Payments of declared distributions | (66 | ) | (145 | ) | (14,570 | ) | ||||||
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Net cash used for financing activities | (27,654 | ) | (21,595 | ) | (71,541 | ) | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1) | 15,200 | (8,272 | ) | (9,950 | ) | |||||||
Cash and cash equivalents, beginning of period(3) | 42,513 | 20,962 | 30,912 | |||||||||
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Cash and cash equivalents, end of period(4) | $ | 57,713 | $ | 12,690 | $ | 20,962 | ||||||
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SUPPLEMENTAL INFORMATION | ||||||||||||
Cash paid during the period for interest | $ | 25,102 | $ | 11,897 | $ | 10,682 | ||||||
Cash paid during the period for income taxes | 85 | 62 | — |
(1) | Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under Investment Company Accounting. |
(2) | Originated investments of $280,563 and |
(3) | Included in the beginning balance for the year ended December 31, 2018 was $29,923 of cash, cash equivalents, and |
(4) | Includes federal funds sold at December 31, 2018. |
The accompanying notes should be read in conjunction with these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20172018
(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES
Medallion Financial Corp. (the Company) is aclosed-end management investment finance company organized as a Delaware corporation. The Company has elected to be regulatedcorporation that reports as a business developmentbank holding company, (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act).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 Funding LLC (MFC)Bank (the Bank), a Small Business Investment Company (SBIC) which originates and services taxicab medallion and commercial loans.
A wholly-owned portfolio investment, Medallion Bank, a Federal Deposit Insurance Corporation (FDIC) insured industrial bank, that originates consumer loans, raises deposits, and conducts other banking activities (see Note 3).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 is not an investment company, and therefore, is not consolidated with the Company, but instead is treated as a portfolio investment. It 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 whothat have extensive prior experience in these asset groups. Subsequent to its formation, Medallion Bank began originating consumer loans to finance the purchases of RVs,recreational vehicles (RVs), boats, and other related items, and to finance small scale home improvements.
The Company formedalso conducts business through Medallion Funding LLC (MFC), a wholly-owned portfolio company, Medallion Servicing Corporation (MSC), to provide loanSmall Business Investment Company (SBIC) which originates and services to Medallion Bank, also a portfolio company wholly-owned by the Company. The Company has assigned all of its loan servicing rights for Medallion Bank, which consists of servicing taxitaxicab medallion and commercial loans originated by Medallion Bank, to MSC, who 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.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.
MFC establishedThe 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.
Taxi Medallion Loan Trust III (Trust III), was established for the purpose of owning medallion loans originated by MFC or others. Trust III is a variable interest entity (VIE), and MFC was the primary beneficiary and as a result the Company consolidated Trust III in its financial results until consummation of a restructuring in the 2018 fourth quarter. For a discussion of the restructuring, see Note 23. Trust III is a separate legal and corporate entity with its own creditors who,which, in any liquidation of Trust III, will be entitled to be satisfied out of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders. The assets of Trust III aggregating $97,252,000 at December 31, 2017, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC.
The Company established a wholly-owned subsidiary, Medallion Financing Trust I (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 $36,144,000$36,141,000 at December 31, 2017,2018, 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 fairnet realizable value of $7,450,000$4,305,000 on the Company’s consolidated balance sheet at December 31, 2017,2018 compared to $9,510,000 a year ago, and are considerednon-qualifying assets under the 1940 Act.fair value of $7,450,000 at December 31, 2017.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change to Bank Holding Company Accounting
Effective April 2, 2018, the Company withdrew its previous election to be regulated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). Prior to such time, the Company wasa 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 USU.S. (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,in process of foreclosure, goodwill and intangible assets, and investments, among other effects.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly-owned and controlled subsidiaries except for Medallion Bank and other portfolio investments.commencing with the three months ended June 30, 2018. All significant intercompany transactions, balances, and profits (losses) have been eliminated in consolidation. As anon-investment company, result of the Company’s election to withdraw from being regulated as a BDC under the 1940 Act, effective April 2, 2018, Medallion Bank isand various other Company subsidiaries were not consolidated with the Company which is an investment company underprior to the 1940 Act.three months ended June 30, 2018. See Note 36 for the presentation of financial information for Medallion Bank and other controlled subsidiaries. As discussed in Note 19, the Company expects to withdraw its election to be regulated as a BDC under the 1940 Act on or about April 1, 2018 and commencing with the second quarter of 2018, the Company would consolidate thesubsidiaries for such prior periods.
The consolidated financial statements have been prepared in accordance with GAAP. The Company consolidates all entities it controls through a majority voting interest, a controlling interest through other contractual rights, or as being identified as the primary beneficiary of Medallion BankVIEs. The primary beneficiary is the party who has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and controlled or majority-owned portfolio investments together with those(2) an obligation to absorb losses of the Company.entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third-party’s holding is recorded asnon-controlling interest.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that exceed the federally insured limits, and includes $0 and $500,000 related to compensating balance requirements of regional banking institutions, and $0 and $7,840,000 pledged to a lender of an affiliate as of December 31, 2017 and 2016. The reduction in the pledged balances reflects the conversion of the deposit into a loan to the affiliate, and payment in full to the affiliates lender.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 2, 16,18 and 1719 to the consolidated financial statements.
Investment Valuation
The Company’s loans, net of participations and any unearned discount, are considered investment securities under the 1940 Act and are recorded at fair value. As part of the fair value methodology, loans are valued at cost adjusted for any unrealized appreciation (depreciation). Since no ready market exists for these loans, the fair value is determined in good faith by the Board of Directors. In determining the fair value, the Board of Directors considers 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.Equity Investments other than securities, which represent collateral received from defaulted borrowers, are valued similarly.
Equity investments (commonof $9,197,000 at December 31, 2018, comprised mainly of nonmarketable stock and stock warrants, including certain controlled subsidiary portfolio investments)are recorded at cost and investment securities (US Treasuries and mortgage backed bonds), in total representing 51% and 46% of the investment portfolio at December 31, 2017 and 2016, are evaluated for impairment periodically. Prior to April 2, 2018, equity investments were recorded at fair value, represented atas cost, plus or minus unrealized appreciation or depreciation. The fair value of investments that havehad no ready market arewere 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 marketable securities of $0 and $537,000 at December 31, 2017 and 2016, andnon-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 $7,931,000Equity Securities (ASC 320), which requires that all applicable investments in equity securities with readily determinable fair values, and debt securities be classified as tradingsecurities, available-for-sale securities,or held-to-maturity securities. Investment securities are purchased from time to time in the comparable periods.open market at prices that are greater or lesser than the par value of the investment. The $302,147,000resulting premium or discount is deferred and $293,360,000recognized on a level yield basis as an adjustment to the yield of the related investment. The net premium on investment securities totaled $154,000, and $80,000 was amortized to portfolio investments in controlled subsidiaries atinterest income for the nine months ended December 31, 2018. Medallion Bank, a previously unconsolidated subsidiary under Investment Company Accounting for the period, had net premium on investment securities of $265,000 as of December 31, 2017, and 2016 were all$81,000 and $82,000 was amortized to interest income for the years ended December 31, 2017 and 2016. Refer to Note 3 for more details. ASC 320 further requiresnon-marketablethat held-to-maturity securities in each period. Becausebe reported at amortized cost andavailable-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the inherent uncertaintyfinancial statements, and reported in accumulated other comprehensive income (loss) as a separate component of valuations, the Board of Directors’ estimatesshareholders’ equity, net of the valueseffect 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 investments may differ significantly fromincome tax effect, will be reversed.
Other Investment Valuation (Investment Company Accounting)
Prior to April 2, 2018, under the values that would have been used had a ready market for1940 Act, the investments existed, and the differences could be material.
The Company’s investment in Medallion Bank, as a wholly owned portfolio investment, is alsowas subject to quarterly assessments of fair value. The Company conductsconducted a thorough valuation analysis, as described previously, and also receivesreceived 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 includesincluded 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 fromnon-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 through 2016 and 2017.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 heightensheightened 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, and $7,849,000 was recorded in 2017. See2017, and $39,826,000 was recorded in the 2018 first quarter. Refer to Note 36 for additional information about Medallion Bank.details.
A majority of the Company’s investments consist of long-term loans to persons defined by SBA regulations as small business concerns. Approximately 34% and 41% of the Company’s investment portfolio atAt December 31, 2017, there werenon-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 2016 had arisenthe 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 adjusted to fair value in connection with the financingchange in reporting, and balances, net of taxicab medallions, taxicabs,reserves and related assets, of which 73% and 69% were in New York City at December 31, 2017 and 2016. These loans are secured byfees, became the medallions, taxicabs, and related assets, and are personally guaranteed by the borrowers, or in the case of corporations, are generally guaranteed personally by the owners. A portion of the Company’s portfolio (15% and 13% at December 31, 2017 and 2016) represents loans to various commercial enterprises in a wide variety of industries, including manufacturing, retail trade, information services, and other services. Approximately 4% of these loans are made primarily in the metropolitan New York City area, 43% in the Midwest, and the balance is widely scattered across the United States. Investments in controlled unconsolidated subsidiaries, equity investments, and investment securities were 49%, 2%, and 0% at December 31, 2017, and 45%, 1%, and 0% at December 31, 2016.
On a managed basis, which includes the investments of Medallion Bank after eliminating the Company’s investment in Medallion Bank, medallion loans were 28% and 35% at December 31, 2017 and 2016 (81% and 76% in New York City), commercial loans were 7% and 6%, and 49% and 46% were consumer loans in all 50 states collateralized by recreational vehicles, boats, motorcycles, trailers, and home improvements. Investment securities were 3% and 2% at December 31, 2017 and 2016, and equity investments (including investments in controlled subsidiaries) were 13% and 11% at December 31, 2017 and 2016.
Investment Transactions and Income Recognitionopening balances.
Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At December 31, 20172018 and 2016,December 31, 2017, net loan origination costs were $14,416,000 and $90,000 and $175,000.($11,183,000 when combined with Medallion Bank). The 2018 amount reflects the amount of origination costs that were netted into the loan balances at April 2, 2018. Net amortization expense (income accretion)(accretion) to income for the years ended December 31, 2018, 2017 and 2016 and 2015 was $3,128,000 ($3,993,000 when combined with Medallion Bank), $68,000 ($49,000)3,581,000 when combined with Medallion Bank), and ($49,000) ($3,440,000 when combined with Medallion Bank).
Investment securities are purchased fromtime-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 as an adjustment to the yield of the related investment. At December 31, 2017 and 2016, there were no premiums or discounts on investment securities, and their related income accretion or amortization was immaterial for 2017, 2016, and 2015.
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. AtThe 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 notbeen charged-off, to be impaired. These loans are placed on nonaccrual, when they become 90 days past due, or earlier if they enter bankruptcy, and are charged off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. For the 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 oncharged-off accounts are recorded as a recovery. Total loans more than 90 days past due were $20,154,000 at December 31, 2017, 2016, and 2015, totalnon-accrual loans were $98,494,000, $77,161,000, and $16,873,000, and represented 31%, 20%, and 4%2018, or 2.03% of the gross medallion and commercialtotal loan portfolio, compared to $60,450,000, or 18.9% at each year end,December 31, 2017.
Loan collateral in process of foreclosure primarily includes taxicab medallion loans that have reached 120 days past due and were primarily concentratedhave been charged down to their net realizable value, in addition to consumer repossessed collateral in the process of being sold. The taxicab medallion portfolio. The amount of interest incomeloan component reflects that the collection activities on nonaccrual loans that would have been recognized if the loans have transitioned from working with the borrower to the liquidation of the collateral securing the loans.
The Company had been paying in accordance with their original terms was $12,485,000 ($3,495,000$40,500,000 and $183,529,000 of which had been applied to principal),
$10,658,000, and $8,306,000net loans pledged as ofcollateral under borrowing arrangements at December 31, 2017, 2016,2018 and 2015, of which $5,514,000 ($1,978,000 of which had been applied to principal), $2,634,000, and $1,315,000 would have been recognized in the years ended December 31, 2017, 2016, and 2015. The fluctuations in nonaccrual interest foregone and increase in principal balances reflected the increase in past due loans and market conditions during the affected periods.
Loan Sales and Servicing Fee Receivable2017.
The Company accounts 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, we havethe Company had elected the fair value measurement method for ourits servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $338,867,000$140,180,000 at December 31, 2018 and $352,191,000$338,867,000 at December 31, 2017, and 2016, andwhich included $311,988,000 and $325,751,000 of loans serviced for Medallion Bank. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860, most of which relates to servicing assets held by MFC (related to the remaining assets in Trust III) and Medallion Bank, and determined that no material servicing asset or liability existsexisted as of December 31, 20172018 and 2016.2017. The Company has assigned its servicing rights toof the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment.MSC. The costs of servicing arewere allocated to MSC by the Company, and the servicing fee income iswas billed to and collected from Medallion Bank by MSC. During 2016,
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 exiteduses historical delinquency and actual loss rates with a one year lookback period for consumer loans. For commercial loans deemed nonperforming, the asset based lending businesshistorical loss experience and soldother projections are looked at, and for medallion loans, nonperforming loans are valued at the entire portfoliomedian sales price over the most recent quarter, and performing medallion loans are reserved utilizing historical loss ratios over a three year lookback period. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. As a result, reserves of $45,023,000,$5,708,000 were recorded by the Company as a general reserve on medallion loans as an additional buffer against future losses, not including $42,919,000the Bank general reserve of $17,351,000 which was netted against loan balances at consolidation on April 2, 2018. Credit losses are deducted from the books of Medallion Bankallowance and subsequent recoveries are added back to a third party bank for a gain of $2,701,000, before deductions for closing costs.the allowance.
Unrealized Appreciation (Depreciation) and Realized Gains (Losses) on Investments (Investment Company Accounting)
UnrealizedPrior 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 isas 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 net investments was $139,700,000 $127,367,000, and $44,483,000 as of December 31, 2017, 2016,2017. Refer to Note 5 for additional details.
Goodwill and 2015. Intangible Assets
The Company’s investment in Medallion Bank, a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. The Company conducts a thorough valuation analysisgoodwill and intangible assets arose as described previously, and determines whether any factors give 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 marketplace restrictions, such as the ability to transfer industrial bank charters. 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 valuationthe excess of fair value over book value for several of the Company’s previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under the Company’s new reporting, and was subject to a purchase price accounting allocation process conducted by an independent third party expert to arrive at the current categories and amounts. Goodwill is not amortized, but is subject to 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. As of December 31, 2018, the Company had previously used Medallion Bank’s actual resultsgoodwill of operations as$150,803,000, which all related to the best estimateBank, and intangible assets of changes in fair value,$53,982,000, and recordedrecognized $1,083,000 of amortization expense on the results asintangible assets for the year then ended (at a componentrate of unrealized appreciation (depreciation)$361,000 per quarter for three quarters). The Company engaged an expert to assess the goodwill and intangibles for impairment, who concluded there was no impairment 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 through 2016 and 2017. The Company incorporated these new factors inimpairment on 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 thereRPAC intangible asset 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$5,615,000, which was recorded in 2016,the 2018 fourth quarter.
The table below shows the initial fair value detail inclusive of the goodwill and $7,849,000 was recorded in 2017. See Note 3 for additional information about Medallion Bank.
The following table sets forthintangible assets related to the pretax changes in our unrealized appreciation (depreciation) on investments for the years ended December 31, 2017, 2016, and 2015.Bank as of April 2, 2018.
(Dollars in thousands) | Medallion Loans | Commercial Loans | Investments in Subsidiaries | Equity Investments | Investment Securities | Investments Other Than Securities | Total | |||||||||||||||||||||
Balance December 31, 2014 | $ | — | ($ | 2,949 | ) | $ | 5,698 | $ | 1,608 | $ | — | $ | 38,645 | $ | 43,002 | |||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 18,132 | 1,141 | — | (9,621 | ) | 9,652 | ||||||||||||||||||||
Depreciation on investments | (3,568 | ) | (176 | ) | 586 | (1,426 | ) | (18 | ) | (68 | ) | (4,670 | ) | |||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | (4,809 | ) | (9 | ) | — | — | (4,818 | ) | ||||||||||||||||||
Losses on investments | 130 | 886 | — | 301 | — | 1,317 | ||||||||||||||||||||||
Other(1) | — | — | (967 | ) | 967 | — | — | — | ||||||||||||||||||||
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Balance December 31, 2015 | (3,438 | ) | (2,239 | ) | 18,640 | 2,582 | (18 | ) | 28,956 | 44,483 | ||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 133,805 | 2,979 | 7 | (28,372 | ) | 108,419 | ||||||||||||||||||||
Depreciation on investments | (28,028 | ) | 318 | 305 | — | 5 | — | (27,400 | ) | |||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (1,627 | ) | — | — | (1,627 | ) | |||||||||||||||||||
Losses on investments | 2,943 | 543 | — | — | 12 | — | 3,498 | |||||||||||||||||||||
Other | — | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||||||
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Balance December 31, 2016 | (28,523 | ) | (1,378 | ) | 152,750 | 3,934 | — | 584 | 127,367 | |||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 6,170 | 2,060 | — | (821 | ) | 7,409 | ||||||||||||||||||||
Depreciation on investments | (37,335 | ) | (410 | ) | — | (277 | ) | — | (1,253 | ) | (39,275 | ) | ||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (3,082 | ) | — | — | (3,082 | ) | |||||||||||||||||||
Losses on investments | 45,520 | 1,275 | — | 486 | — | — | 47,281 | |||||||||||||||||||||
Other | — | — | — | — | — | — | — | |||||||||||||||||||||
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Balance December 31, 2017 | ($ | 20,338 | ) | ($ | 513 | ) | $ | 158,920 | $ | 3,121 | $ | — | ($ | 1,490 | ) | $ | 139,700 | |||||||||||
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(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 | ) | ||||||
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Total fair value excluding goodwill and intangibles | 166,743 | |||||||
Goodwill | 150,803 | |||||||
Intangibles | 28,900 | |||||||
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Total fair value (2) | $ | 346,446 | $ | 346,446 | ||||
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(1) | Includes $12,387 of |
(2) | Includes $26,303 of preferred stock held by the U.S. Treasury. See Note 21 for details. |
The table below summarizes pretax componentsshows the initial fair value detail inclusive of unrealized and realized gains and losses in the investment portfolio for the years ended December 31, 2017, 2016, and 2015.intangible assets related to RPAC as of April 2, 2018.
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Net change in unrealized appreciation (depreciation) on investments | ||||||||||||
Unrealized appreciation | $ | 2,060 | $ | 2,986 | $ | 288 | ||||||
Unrealized depreciation | (38,022 | ) | (27,705 | ) | (3,822 | ) | ||||||
Net unrealized appreciation on investments in Medallion Bank and other controlled subsidiaries | 9,483 | 130,121 | 21,638 | |||||||||
Realized gains | (3,082 | ) | (1,627 | ) | (4,818 | ) | ||||||
Realized losses | 47,281 | 3,498 | 1,317 | |||||||||
Net unrealized losses on investments other than securities and other assets | (2,075 | ) | (28,387 | ) | (9,689 | ) | ||||||
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Total | $ | 15,645 | $ | 78,886 | $ | 4,914 | ||||||
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Net realized gains (losses) on investments | ||||||||||||
Realized gains | $ | 3,082 | $ | — | $ | 4,818 | ||||||
Realized losses | (47,281 | ) | (3,486 | ) | (1,317 | ) | ||||||
Other gains | 4,684 | 4,140 | 4,261 | |||||||||
Direct chargeoffs | (4,229 | ) | (197 | ) | (126 | ) | ||||||
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Total | ($ | 43,744 | ) | $ | 457 | $ | 7,636 | |||||
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(in thousands) | Fair Value as of March 31, 2018 | Allocation as of April 2, 2018 | ||||||
RPAC | ||||||||
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 | ) | ||||||
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Total fair value excluding goodwill and intangibles | (30,584 | ) | ||||||
Intangibles (2) | 31,779 | |||||||
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Total fair value (3) | $ | 1,195 | $ | 1,195 | ||||
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(1) | Includes $20,177 due to the Company and its affiliates as of March 31, 2018. |
(2) | As of December 31, 2018 an assessment of the intangible asset resulted in impairment of $5,615 based upon the analysis of current market conditions using discounted cash flows. |
(3) | Fair value as of March 31, 2018 represents the Company’s investment in RPAC series D units. |
The following table provides additional information on attributesbelow shows the details of the nonperforming loan portfoliointangible assets as of December 31, 2017 and 2016.2018.
(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 | |||||||||
December 31, 2016 | ||||||||||||
Medallion(3) | $ | 73,192 | $ | 74,078 | $ | 87,999 | ||||||
Commercial(3) | 3,969 | 11,118 | 4,695 |
The following tables show the aging of medallion and commercial loans as of December 31, 2017 and 2016.
December 31, 2017 (Dollars in thousands) | Days Past Due | Total | Current | Total | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||||||
31 – 60 | 61 – 90 | 91 + | ||||||||||||||||||||||||||
Medallion loans | $ | 16,049 | $ | 12,387 | $ | 59,701 | $ | 88,137 | $ | 140,279 | $ | 228,416 | $ | 265 | ||||||||||||||
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Commercial loans | ||||||||||||||||||||||||||||
Secured mezzanine | — | — | — | — | 88,334 | 88,334 | — | |||||||||||||||||||||
Other secured commercial | — | — | 749 | 749 | 1,728 | 2,477 | — | |||||||||||||||||||||
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Total commercial loans | — | — | 749 | 749 | 90,062 | 90,811 | — | |||||||||||||||||||||
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Total | $ | 16,049 | $ | 12,387 | $ | 60,450 | $ | 88,886 | $ | 230,341 | $ | 319,227 | $ | 265 | ||||||||||||||
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December 31, 2016 (Dollars in thousands) Medallion loans Commercial loans Secured mezzanine Other secured commercial Total commercial loans Total Days Past Due Total Current Total Recorded Investment >
90 Days and Accruing 31 – 60 61 – 90 91 + $ 12,350 $ 13,064 $ 71,976 $ 97,390 $ 197,660 $ 295,050 $ 4,665 — — 1,390 1,390 75,079 76,469 — 69 472 734 1,275 7,382 8,657 — 69 472 2,124 2,665 82,461 85,126 — $ 12,419 $ 13,536 $ 74,100 $ 100,055 $ 280,121 $ 380,176 $ 4,665
A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013 the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount was divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company’s liquidation. In May 2013, the bankruptcy court presiding over the third party finance company’s case entered an order converting the involuntary chapter 7 case to a chapter 11 case. The Company and Medallion Bank have placed these loans on nonaccrual, and reversed interest income. In addition, the Company and Medallion Bank have established valuation allowances against the outstanding balances. On May 31, 2013, the Company and Medallion Bank commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that the Company’s and Medallion Bank’s loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the third party finance company’s assets. The third party finance company and bank lenders are contesting the Company’s and Medallion Bank’s position. In April 2014, the Company and Medallion Bank received a decision from the court granting summary judgment in their favor with respect to the issue of whether the Company’s and Medallion Bank’s loan participations are true participations. In March 2015, the Company and Medallion Bank received a decision from the court finding that the bank lenders generally held a first lien on the Company’s and Medallion Bank’s loan participations subject to, among other things, defenses still pending prosecution by the parties and adjudication by the court. The Company and Medallion Bank are appealing the decision. The remaining issues are still being litigated. Although the Company and Medallion Bank believe the claims raised by the third party finance company and the bank lenders are without merit and will vigorously defend against them, the Company and Medallion Bank cannot at this time predict the outcome of this litigation or determine their potential exposure. At December 31, 2017, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. In September 2015, one loan was sold at a discount to a third party, and the related proceeds are held in escrow pending resolution of the bankruptcy proceeding. One loan was charged off in September 2014. The balances related to the paid off loans have been reclassified to other assets on the consolidated balance sheet. The table below summarizes these receivables and their status with the Company and Medallion Bank as of December 31, 2017.
(Dollars in thousands) | The Company | Medallion Bank | Total | |||||||||
Loans outstanding | $ | 258 | $ | 1,953 | $ | 2,211 | ||||||
Loans charged off(1) | (258 | ) | (1,953 | ) | (2,211 | ) | ||||||
Valuation allowance | — | — | — | |||||||||
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Net loans outstanding | — | — | — | |||||||||
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Other receivables | 590 | 11,062 | 11,652 | |||||||||
Valuation allowance | (251 | ) | (5,901 | ) | (6,152 | ) | ||||||
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Net other receivables | 339 | 5,161 | 5,500 | |||||||||
Total net outstanding | 339 | 5,161 | 5,500 | |||||||||
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Income foregone in 2017 | — | — | — | |||||||||
Total income foregone | $ | 74 | $ | 108 | $ | 182 | ||||||
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The following table shows troubled debt restructurings which the Company entered into during the year ended December 31, 2017.
(Dollars in thousands) | Number of Loans | Pre-Modification Investment | Post-Modification Investment | |||||||||
Medallion loans | 63 | $ | 39,898 | $ | 39,824 | |||||||
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Commercial loans | 2 | 6,547 | 6,547 | |||||||||
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Total | 65 | $ | 46,445 | $ | 46,371 | |||||||
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During the twelve months ended December 31, 2017, sixteen loans modified as troubled debt restructurings were in default and had an investment value of $4,248,000 as of December 31, 2017, net of $1,956,000 of unrealized depreciation.
The following table shows troubled debt restructurings which the Company entered into during the year ended December 31, 2016.
(Dollars in thousands) | Number of Loans | Pre-Modification Investment | Post-Modification Investment | |||||||||
Medallion loans | 7 | $ | 3,639 | $ | 3,670 | |||||||
Commercial loans | — | — | — | |||||||||
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Total | 7 | $ | 3,639 | $ | 3,670 | |||||||
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During the twelve months ended December 31, 2016, one loan modified as troubled debt restructurings was in default and had an investment value of $394,000 as of December 31, 2016, net of $335,000 of unrealized depreciation.
(in thousands) | December 31, 2018 | |||
Brand- related intellectual property | $ | 21,176 | ||
Home improvement contractor relationships | 6,641 | |||
Race organization | 26,165 | |||
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Total intangible assets | $ | 53,982 | ||
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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 $422,000, $94,000 ($232,000 had Medallion Bank been consolidated), and $110,000 and $140,000($225,000 had Medallion Bank been consolidated) for the years ended December 31, 2018, 2017, 2016, and 2015.2016.
Deferred Costs
Deferred financing costs, included in other assets, represents costs associated with obtaining the Company’s borrowing facilities, and is amortized on a straight line basis over the lives of the related financing agreements. Amortization expense was $1,864,000, $925,000 ($2,255,000 had Medallion Bank been consolidated), and $722,000 and $276,000($2,091,000 had Medallion Bank been consolidated) for the years ended December 31, 2018, 2017, and
2016, and 2015, recorded as interest expense on the Consolidated Statements of Operations.expense. In addition, the Company capitalizes certain costs for transactions in the process of completion (other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon completion or termination of the transaction, any accumulated amounts will be amortized against income over an appropriate period, or written off. The amounts on the Company’s balance sheet for all of these purposes were $4,461,000 and $3,070,000 and $4,003,000($5,011,000 had Medallion Bank been consolidated) at December 31, 20172018 and 2016.2017.
Income Taxes
Income taxes are accounted for using the asset and liability approach in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”)(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. Through December 31, 2015
Sponsorship and Race Winnings
The Company accounts for the Company qualified tosponsorship and race winnings revenue under FASB ASC Topic 606, Revenue from Contracts with Customers. Sponsorship revenue is recognized based upon the contract terms and only over the course of the whole season, will revenue be taxed as a RIC underrecognized evenly throughout the Code. Generally, a RICten months. Race winnings revenue is entitled to deduct dividends it pays to its shareholders from its income to determine taxable income.recognized after each race during the season based upon terms provided by NASCAR and the placement of the driver.
Net Increase in Net Assets Resulting from Operations perEarnings (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.
Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Net increase in net assets resulting from operations available to common shareholders | $ | 278 | $ | 23,515 | $ | 29,376 | ||||||||||||||||||
Net (loss)/net increase in net assets resulting from operations available to common shareholders | $ | (25,046 | ) | $ | 278 | $ | 23,515 | |||||||||||||||||
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Weighted average common shares outstanding applicable to basic EPS | 23,919,994 | 24,123,888 | 24,315,427 | 24,214,978 | 23,919,994 | 24,123,888 | ||||||||||||||||||
Effect of dilutive stock options | 439 | 230 | 10,378 | — | 439 | 230 | ||||||||||||||||||
Effect of restricted stock grants | 132,874 | 48,902 | 66,154 | — | 132,874 | 48,902 | ||||||||||||||||||
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Adjusted weighted average common shares outstanding applicable to diluted EPS | 24,053,307 | 24,173,020 | 24,391,959 | 24,214,978 | 24,053,307 | 24,173,020 | ||||||||||||||||||
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Basic earnings per share | $ | 0.01 | $ | 0.97 | $ | 1.21 | ||||||||||||||||||
Diluted earnings per share | 0.01 | 0.97 | 1.20 | |||||||||||||||||||||
Basic earnings (loss) per share | $ | (1.03 | ) | $ | 0.01 | $ | 0.97 | |||||||||||||||||
Diluted earnings (loss) per share | (1.03 | ) | 0.01 | 0.97 |
Potentially dilutive common shares excluded from the above calculations aggregated 100,000, 366,245, 346,232, and 435,254346,232 shares as of December 31, 2018, 2017, 2016, and 2015.2016.
Stock Compensation
The Company follows FASB Accounting Standard CodificationASC 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 increase in net income/net assets resulting from operations for any new grants using the fair values established by usage of the Black-Scholes option pricing model, expensed over the vesting period of the underlying option. Stock-based employee compensation costs pertaining to restricted stock are reflected in net income/net increase 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 2018, 2017, 2016, and 2015,2016, the Company issued 101,010, 327,251, 48,527, and 162,57648,527 restricted shares of stock-based compensation awards, and issued 39,000, 29,666, 12,000, and 27,00012,000 shares of other stock-based compensation awards, and recognized $576,000, $785,000, and $568,000, or $0.02, $0.03, and $1,294,000, or $0.03, $0.02 and $0.05 per diluted common share for each respective year, ofnon-cash stock-based compensation expense related to the grants. As of December 31, 2017,2018, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $396,000,$244,000, which is expected to be recognized over the next 1110 quarters (see Note 6)9).
Regulatory Capital
Distributions to Shareholders
The table below shows the tax character of distributions for tax reporting purposes.
Years Ended December 31, | ||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Distributions paid from | ||||||||||||
Investment income, net | $ | — | $ | 14,570 | $ | 20,042 | ||||||
Return of capital | — | — | 4,330 | |||||||||
Realized gains from investment transactions, net | — | — | — | |||||||||
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Total distributions | $ | — | $ | 14,570 | $ | 24,372 | ||||||
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Our ability to make distributions is restricted by SBA regulations and under the terms of the SBA debentures. As of December 31, 2017, the Company had no undistributed net investment income or realized gains.
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 $70,000,000 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 $19,000, $20,000, and $81,000 in 2017, 2016, and 2015, and all are carried at $0 on the balance sheet at December 31, 2017.
Reclassifications
Certain reclassifications have been made to prior year balances to conform with the current year presentation. These reclassifications have no effect on the previously reported results of operations.
(3) INVESTMENTS IN MEDALLION BANK AND OTHER CONTROLLED SUBSIDIARIES
The following table presents information derived from Medallion Bank’s statement of comprehensive income and other valuation adjustments on other controlled subsidiaries for the years ended December 31, 2017, 2016, and 2015.
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Statement of comprehensive income | ||||||||||||
Investment income | $ | 111,281 | $ | 103,454 | $ | 91,021 | ||||||
Interest expense | 13,869 | 11,762 | 9,205 | |||||||||
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Net interest income | 97,412 | 91,692 | 81,816 | |||||||||
Noninterest income | 121 | 308 | 291 | |||||||||
Operating expenses(1) | 26,032 | 24,281 | 21,621 | |||||||||
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Net investment income before income taxes | 71,501 | 67,719 | 60,486 | |||||||||
Income tax provision (benefit) | 15,093 | (326 | ) | 18,974 | ||||||||
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Net investment income after income taxes | 56,408 | 68,045 | 41,512 | |||||||||
Net realized/unrealized losses of Medallion Bank(1) | (51,696 | ) | (66,328 | ) | (18,275 | ) | ||||||
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Net increase in net assets resulting from operations of Medallion Bank | 4,712 | 1,717 | 23,237 | |||||||||
Unrealized appreciation (depreciation) on Medallion Bank(2) | 5,482 | 123,667 | (2,763 | ) | ||||||||
Net realized/unrealized gains (losses) on controlled subsidiaries other than Medallion Bank | (711 | ) | 4,737 | (3,644 | ) | |||||||
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Net increase in net assets resulting from operations of Medallion Bank and other controlled subsidiaries | $ | 9,483 | $ | 130,121 | $ | 16,830 | ||||||
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The following table presents Medallion Bank’s balance sheets and the net investments in other controlled subsidiaries as of December 31, 2017 and 2016.
(Dollars in thousands) | 2017 | 2016 | ||||||
Loans | $ | 864,819 | $ | 965,082 | ||||
Investment securities, at fair value | 43,478 | 36,861 | ||||||
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Net investments(1) | 908,297 | 1,001,943 | ||||||
Cash | 110,233 | 30,881 | ||||||
Other assets, net | 58,827 | 43,134 | ||||||
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Total assets | $ | 1,077,357 | $ | 1,075,958 | ||||
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Other liabilities | $ | 3,836 | $ | 3,453 | ||||
Due to affiliates | 1,055 | 1,084 | ||||||
Deposits and other borrowings, including accrued interest payable | 908,236 | 909,536 | ||||||
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Total liabilities | 913,127 | 914,073 | ||||||
Medallion Bank equity (2) | 164,230 | 161,885 | ||||||
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Total liabilities and equity | $ | 1,077,357 | $ | 1,075,958 | ||||
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Investment in other controlled subsidiaries | $ | 11,449 | $ | 12,771 | ||||
Total investment in Medallion Bank and other controlled subsidiaries(3) | $ | 302,147 | $ | 293,360 | ||||
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The following paragraphs summarize the accounting and reporting policies of Medallion Bank, and provide additional information relating to the tables presented above.
Investment securities are purchased fromtime-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. At December 31, 2017 and 2016, the net premium on investment securities totaled $265,000 and $238,000, and $81,000, $82,000, and $83,000 was amortized to interest income for the years ended December 31, 2017, 2016, and 2015.
Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At December 31, 2017 and 2016, net loan origination costs were $11,097,000 and $12,371,000. Net amortization expense for the years ended December 31, 2017, 2016, and 2015 was $3,513,000, $3,489,000, and $3,354,000.
Medallion Bank’s policies regarding nonaccrual of medallion and commercial loans are similar to those of the Company. The consumer portfolio has different characteristics compared to commercial loans, typified by a larger number of lower dollar loans that have similar characteristics. These loans are placed on nonaccrual, when they become 90 days past due, or earlier if they enter bankruptcy, and are charged off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. At December 31, 2017, $5,366,000 or 1% of consumer loans, no commercial loans, and $27,332,000 or 12% of medallion loans were on nonaccrual, compared to $4,179,000 or 1% of consumer loans, no commercial loans, and $47,841,000 or 16% of medallion loans on nonaccrual at December 31, 2016, and $3,381,000 or 1% of consumer loans, no commercial loans, and $21,722,000 or 6% of medallion loans on nonaccrual at December 31, 2015. The amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $1,487,000 ($1,221,000 of which had been applied to principal), $514,000, and $233,000 as of December 31, 2017, 2016, and 2015. See also the paragraph and table onpage F-13 following the delinquency table for a discussion of other past due amounts.
Medallion Bank’s loan and investment portfolios are assessed for collectability on a monthly basis, and a loan loss allowance is established for any realizability concerns on specific investments, and general reserves have also been established for any unknown factors. Adjustments to the value of this portfolio are based on the Company’s own historical loan loss data developed since 2004, adjusted for changes in delinquency trends and other factors as described previously in Note 2.
Medallion Bank raises deposits to fund loan originations. The deposits were raised through the use of investment brokerage firms who package deposits qualifying for FDIC insurance into pools that are sold to Medallion Bank. The rates paid on the deposits are highly competitive with market rates paid by other financial institutions, and include a brokerage fee, depending on the maturity of the deposit, which averages less than 0.15% and, which is capitalized and amortized to interest expense over the life of the respective pool. The total amount capitalized at December 31, 2017 and 2016 was $1,941,000 and $1,996,000, and $1,330,000, $1,369,000, and $1,314,000 was amortized to interest expense during 2017, 2016, and 2015. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity.
The outstanding balances of fixed rate borrowings were as follows:
Payments Due for the Year Ending December 31, | December 31, 2017 | December 31, 2016 | Interest Rate(1) | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | ||||||||||||||||||||||||||||||
Deposits and other borrowings | $ | 424,115 | $ | 260,872 | $ | 91,136 | $ | 76,884 | $ | 53,741 | $ | — | $ | 906,748 | $ | 908,442 | 1.51 | % |
Medallion Bank is subject to various regulatory capital requirements administered by the FDIC and State ofthe Utah Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain
mandatory and possiblypossible additional disciplinarydiscretionary actions by regulators that, if undertaken, could have a direct material effect on Medallionthe Bank’s and the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Medallionthe Bank must meet specific capital guidelines that involve quantitative measures of Medallionthe Bank’s assets, liabilities, andcertainoff-balance sheet sheet items as calculated under regulatory accounting practices. MedallionThe Bank’s capital amounts and classificationclassifications are also subject to qualitative judgments by Medallion Bankthe 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 Medallionthe Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting Medallionthe Bank’s application for federal deposit insurance, the FDIC ordered that the Tier 1 leverage ratio (Tier 1 capital to average assets)total assets ratio, as defined, be not less than 15%, which would preclude their ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As a result, to facilitate maintenance of December 31, 2018, the capitalBank’s Tier 1 leverage ratio requirement and to provide the necessary capital for continued growth, the Company periodically makes capital contributions to Medallion Bank, including $0 in 2017, $3,000,000 in 2016, and $8,000,000 in 2015. Separately, Medallion Bank declared dividends to the Company of $0 in 2017, $3,000,000 in 2016, and $18,000,000 in 2015.
On February 27, 2009 and December 22, 2009, Medallion Bank issued, and the US Treasury purchased under the TARP Capital Purchase Program (the CPP) Medallion Bank’s fixed ratenon-cumulative Perpetual Preferred Stock, Series A, B, C, and D for an aggregate purchase price of $21,498,000 in cash. On July 21, 2011, Medallion Bank issued, and the US Treasury purchased 26,303 shares of SeniorNon-Cumulative Perpetual Preferred Stock, Series E (Series E) for an aggregate purchase price of $26,303,000 under the Small Business Lending Fund Program (SBLF)was 15.85%. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. In connection with the issuance of the Series E, Medallion Bank exited the CPP by redeeming the Series A, B, C, and D; and received approximately $4,000,000, net of dividends due on the repaid securities. Medallion Bank previously paid a dividend rate of 1% on the Series E, which increased to 9% in the 2016 first quarter.
The following table represents Medallion Bank’s actual capital amounts and related ratios as of December 31, 2017 and 2016, compared to required regulatory minimum capital ratios, and the regulatory minimum ratios required to be considered well capitalized. As of December 31, 2017, Medallion Bank meets all regulatory capital adequacy requirements to which it is subject, and is well-capitalized.are presented in the following table.
Regulatory | Regulatory | |||||||||||||||||||||||||||||||
(Dollars in Thousands) | Minimum | Well-capitalized | December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||
Common equity tier 1 capital | $ | — | $ | — | $ | 137,494 | $ | 130,158 | ||||||||||||||||||||||||
(Dollars in thousands) | Minimum | Well-capitalized | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||
Common equity Tier 1 capital | — | — | $ | 141,608 | $ | 137,494 | ||||||||||||||||||||||||||
Tier 1 capital | — | — | 163,797 | 156,461 | — | — | 167,911 | 163,797 | ||||||||||||||||||||||||
Total capital | — | — | 176,876 | 170,385 | — | — | 180,917 | 176,876 | ||||||||||||||||||||||||
Average assets | — | — | 1,127,087 | 1,081,522 | — | — | 1,059,461 | 1,127,087 | ||||||||||||||||||||||||
Risk-weighted assets | — | — | 995,145 | 1,067,103 | — | — | 993,374 | 995,145 | ||||||||||||||||||||||||
Leverage ratio(1) | 4 | % | 5 | % | 14.5 | % | 14.5 | % | 4.0 | % | 5.0 | % | 15.8 | % | 14.5 | % | ||||||||||||||||
Common equity tier 1 capital ratio(2) | 5 | 7 | 13.8 | 12.2 | ||||||||||||||||||||||||||||
Common equity Tier 1 capital ratio (2) | 4.5 | 6.5 | 14.3 | 13.8 | ||||||||||||||||||||||||||||
Tier 1 capital ratio (3) | 6 | 8 | 16.5 | 14.7 | 6.0 | 8.0 | 16.9 | 16.5 | ||||||||||||||||||||||||
Total capital ratio(3) | 8 | 10 | 17.8 | 16.0 | 8.0 | 10.0 | 18.2 | 17.8 |
(1) | Calculated by dividing Tier 1 capital by average assets. |
(2) | Calculated by subtracting preferred stock ornon-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 increased by 0.625% each subsequent January 1 until January 1, 2019. Including the buffer, commencing January 1, 2019, the Bank is 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 August 2018, the FASB issued ASU2018-13 Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value. The objective of this update is to modify the disclosure requirements as it relates to the fair value of assets and liabilities. 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 January 2017, the FASB issued ASU2017-04 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 issuedASU 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 statements, and expects the update to have a significant impact on how the Company will account for estimated credit losses on its loans.
In February 2016, the FASB issuedASU 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 determined that effective January 1, 2019, a right-of-use asset and lease liability each of $13,997,000 would be recorded, and accrued/amortized over the remaining lease life terms. See Note 12 for additional information.
Reclassifications
Certain reclassifications have been made to prior year balances to conform with the current year presentation. These reclassifications have no effect on the previously reported results of operations.
(3) INVESTMENT SECURITIES (Bank Holding Company Accounting)
Fixed maturity securities available for sale at December 31, 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 | $ | 32,184 | $ | 15 | $ | (742 | ) | $ | 31,457 | |||||||
State and municipalities | 14,239 | 35 | (407 | ) | 13,867 | |||||||||||
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Total | $ | 46,423 | $ | 50 | $ | (1,149 | ) | $ | 45,324 | |||||||
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The amortized cost and estimated market value of investment securities as of December 31, 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 | $ | 26 | $ | 26 | ||||
Due after one year through five years | 9,040 | 8,834 | ||||||
Due after five years through ten years | 11,487 | 11,218 | ||||||
Due after ten years | 25,870 | 25,246 | ||||||
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Total | $ | 46,423 | $ | 45,324 | ||||
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Information pertaining to securities with gross unrealized losses at December 31, 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 | $ | (54 | ) | $ | 4,616 | $ | (688 | ) | $ | 24,871 | ||||||
State and municipalities | (78 | ) | 5,429 | (329 | ) | 6,259 | ||||||||||
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Total | $ | (132 | ) | $ | 10,045 | $ | (1,017 | ) | $ | 31,130 | ||||||
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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.
(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 December 31, 2018.
(Dollars in thousands) | Amount | As a Percent of Gross Loans | ||||||
Recreation | $ | 587,038 | 58 | % | ||||
Home improvement | 183,155 | 18 | ||||||
Commercial | 64,083 | 6 | ||||||
Medallion | 183,606 | 18 | ||||||
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Total gross loans | 1,017,882 | 100 | % | |||||
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Allowance for loan losses | (36,395 | ) | ||||||
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Total net loans | $ | 981,487 | ||||||
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The following table sets forth the activity in the allowance for loan losses for the nine months ended December 31, 2018.
(Dollars in thousands) | Nine Months Ended December 31, 2018 | |||
Allowance for loan losses – beginning balance(1) | $ | — | ||
Charge-offs | ||||
Recreation | (12,697 | ) | ||
Home improvement | (1,562 | ) | ||
Commercial | — | |||
Medallion | (14,277 | ) | ||
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Total charge-offs | (28,536 | ) | ||
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Recoveries | ||||
Recreation | 4,437 | |||
Home improvement | 905 | |||
Commercial | 4 | |||
Medallion | 577 | |||
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Total recoveries | 5,923 | |||
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Net charge-offs | (22,613 | )(2) | ||
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Provision for loan losses(3) | 59,008 | |||
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Allowance for loan losses – ending balance | $ | 36,395 | ||
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(1) | Beginning balance for the nine months ended 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) | As of December 31, 2018, cumulative charge-offs of loans and loans in process of foreclosure in the medallion portfolio were $215,789, representing collection opportunities for the Company. |
(3) | Includes $5,708 of a general reserve, for the Company, for current and performing medallion loans under 90 days past due, as an additional buffer against future losses, representing 16% of the total allowance, and 3.54% of the loans in question. This figure excludes the general reserve for the Bank, which was netted against loan balances at consolidation on April 2, 2018. |
The following table sets forth the composition of the allowance for loan losses by type as of December 31, 2018.
(Dollars in thousands) | Amount | Percentage of Allowance | Allowance as a Percent of Loan Category | |||||||||
Recreation | $ | 6,856 | 19 | % | 1.17 | % | ||||||
Home Improvement | 1,796 | 5 | 0.98 | |||||||||
Commercial | — | — | 0.00 | |||||||||
Medallion | 27,743 | 76 | 15.11 | |||||||||
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Total | $ | 36,395 | 100 | % | 3.58 | % | ||||||
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The following table presents total nonaccrual loans and foregone interest, substantially all of which is in the medallion portfolio. The decline reflects the charge-offs 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) | December 31, 2018 | December 31, 2017 (1) | December 31, 2016 (2) | |||||||||
Total nonaccrual loans | $ | 34,877 | $ | 98,494 | $ | 77,161 | ||||||
Interest foregone for the year | 1,153 | 823 | 1,317 | |||||||||
Amount of foregone interest applied to principal for the year | 535 | 52 | 638 | |||||||||
Interest foregonelife-to-date | 1,952 | 12,485 | 10,658 | |||||||||
Amount of foregone interest applied to principallife-to-date | 1,214 | 3,495 | 7,834 | |||||||||
Percentage of nonaccrual loans to gross loan portfolio | 3% | 31% | 20% |
(1) | Does not include Medallion Bank nonaccrual loans of $32,668, interest income foregone for the year of $795 and foregone interest paid and applied to principal for the year of $917, interest income foregonelife-to-date of $1,487 and foregone interest paid and applied to principallife-to-date of $1,221. |
(2) | Does not include Medallion Bank nonaccrual loans of $52,020, interest income foregone for the year of $683 and foregone interest paid and applied to principal for the year of $402, interest income foregonelife-to-date of $1,034 and foregone interest paid and applied to principallife-to-date of $520. |
The following presents our performance status of loans as of December 31, 2018 under Bank Holding Company Accounting.
(Dollars in thousands) | Performing | Nonperforming | Total | Percentage of Nonperforming to Total | ||||||||||||
Recreation | $ | 581,250 | $ | 5,788 | $ | 587,038 | 0.99 | % | ||||||||
Home improvement | 183,018 | 137 | 183,155 | 0.07 | ||||||||||||
Commercial | 60,249 | 3,834 | 64,083 | 5.98 | ||||||||||||
Medallion | 158,488 | 25,118 | 183,606 | 13.68 | ||||||||||||
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Total | $ | 983,005 | $ | 34,877 | $ | 1,017,882 | 3.43 | % | ||||||||
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For those loans aged31-90 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 December 31, 2018 under Bank Holding Company Accounting, all of which had an allowance recorded against the principal balance.
December 31, 2018 | Nine Months Ended December 31, 2018 | |||||||||||||||||||
(Dollars in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Investment Recorded | Interest Income (Expense) Recognized | |||||||||||||||
With an allowance recorded | ||||||||||||||||||||
Recreation | $ | 5,788 | $ | 5,788 | $ | 204 | $ | 6,165 | $ | 357 | ||||||||||
Home improvement | 137 | 137 | 3 | 137 | — | |||||||||||||||
Commercial | 3,834 | 3,929 | — | 6,036 | (12) | |||||||||||||||
Medallion | 25,118 | 26,237 | 22,035 | 46,176 | 482 | |||||||||||||||
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Total with allowance | $ | 34,877 | $ | 36,091 | $ | 22,242 | $ | 58,514 | $ | 827 | ||||||||||
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Total nonperforming loans | $ | 34,877 | $ | 36,091 | $ | 22,242 | $ | 58,514 | $ | 827 | ||||||||||
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The following table provides additional information on attributes of the nonperforming loan portfolio as of December 31, 2017 under Investment Company Accounting.
(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 |
(1) | As of December 31, 2017, $20,851 of unrealized depreciation was recorded as a valuation allowance on these loans. |
(2) | Interest income of $1,729 was recognized on loans for the year ended December 31, 2017. |
(3) | Included in the unpaid principal balance is unearnedpaid-in-kind interest on nonaccrual loans of $4,609 as of December 31, 2017, which is included in the nonaccrual disclosures on page F-25. |
The following tables show the aging of all loans as of December 31, 2018 and December 31, 2017.
Bank Holding Company Accounting | Days Past Due | Recorded Investment > 90 Days and Accruing | ||||||||||||||||||||||||||
December 31, 2018 (Dollars in thousands) | 31-60 | 61-90 | 91 + | Total | Current | Total(1) | ||||||||||||||||||||||
Recreation | $ | 18,483 | $ | 5,655 | $ | 4,020 | $ | 28,158 | $ | 539,051 | $ | 567,209 | $ | — | ||||||||||||||
Home improvement | 715 | 283 | 135 | 1,133 | 184,528 | 185,661 | — | |||||||||||||||||||||
Commercial | — | 454 | 279 | 733 | 63,350 | 64,083 | — | |||||||||||||||||||||
Medallion | 8,689 | 3,652 | 15,720 | 28,061 | 148,774 | 176,835 | — | |||||||||||||||||||||
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Total | $ | 27,887 | $ | 10,044 | $ | 20,154 | $ | 58,085 | $ | 935,703 | $ | 993,788 | $ | — | ||||||||||||||
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(1) | Excludes loan premiums of $9,047 resulting from purchase price accounting and $15,047 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 | ||||||||||||||
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Commercial loans | ||||||||||||||||||||||||||||
Secured mezzanine | — | — | — | — | 88,334 | 88,334 | — | |||||||||||||||||||||
Other secured commercial | — | — | 749 | 749 | 1,728 | 2,477 | — | |||||||||||||||||||||
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Total commercial loans | — | — | 749 | 749 | 90,062 | 90,811 | — | |||||||||||||||||||||
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Total | $ | 16,049 | $ | 12,387 | $ | 60,450 | $ | 88,886 | $ | 230,341 | $ | 319,227 | $ | 265 | ||||||||||||||
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The following table shows the troubled debt restructurings which the Company entered into during the year ended December 31, 2018.
(Dollars in thousands) | Number of Loans | Pre- Modification Investment | Post- Modification Investment | |||||||||
Medallion loans | 11 | $ | 5,581 | $ | 5,581 | |||||||
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During the year ended December 31, 2018, one loan modified as troubled debt restructurings were in default and had an investment value of $218,000 as of December 31, 2018, net of $71,000 of an allowance for loan loss under Bank Holding Company Accounting.
The following table shows troubled debt restructurings which the Company entered into during the year ended December 31, 2017.
(Dollars in thousands) | Number of Loans | Pre-Modification Investment | Post- Modification Investment | |||||||||
Medallion loans | 63 | $ | 39,898 | $ | 39,824 | |||||||
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Commercial loans | 2 | 6,547 | 6,547 | |||||||||
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Total | 65 | $ | 46,445 | $ | 46,371 | |||||||
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During the year ended December 31, 2017, sixteen loans modified as troubled debt restructurings were in default and had an investment value of $4,248,000 as of December 31, 2017, net of $1,956,000 of unrealized depreciation.
The following table shows the activity of the loans in process of foreclosure, which relates only to the recreation and medallions loans, for the nine months ended December 31, 2018.
(Dollars in thousands) | Recreation | Medallions | Total | |||||||||
Loans in process of foreclosure – beginning balance (1) | $ | 1,369 | $ | 51,479 | $ | 52,848 | ||||||
Transfer from loans | 9,289 | 25,369 | 34,658 | |||||||||
Loan in process of foreclosure sales | (451 | ) | (2,533 | ) | (2,984 | ) | ||||||
Principal payments | — | (4,275 | ) | (4,275 | ) | |||||||
Collateral adjustment | (4,350 | ) | (4,122 | ) | (8,472 | ) | ||||||
Liquidation | (4,354 | ) | (62 | ) | (4,416 | ) | ||||||
Deconsolidation of Trust III | — | (17,864 | ) | (17,864 | ) | |||||||
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Total | $ | 1,503 | $ | 47,992 | $ | 49,495 | ||||||
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(1) | Beginning balance for the nine months ended December 31, 2018 reflects the transition to Bank Holding Company Accounting by reclassifying the medallions loans of the Company of $31,099,000 from investments to loans in process of foreclosure as of April 2, 2018. |
(5) UNREALIZED APPRECIATION (DEPRECIATION) AND REALIZED GAINS (LOSSES) ON INVESTMENTS (Investment Company Accounting)
The following table sets forth thepre-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 years ended December 31, 2017 and 2016.
(Dollars in thousands) | Medallion Loans | Commercial Loans | Investments in Subsidiaries | Equity Investments | Investment Securities | Investments Other Than Securities | Total | |||||||||||||||||||||
Balance December 31, 2015 | $ | (3,438 | ) | $ | (2,239 | ) | $ | 18,640 | $ | 2,582 | $ | (18 | ) | $ | 28,956 | $ | 44,483 | |||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 133,805 | 2,979 | 7 | (28,372 | ) | 108,419 | ||||||||||||||||||||
Depreciation on investments | (28,028 | ) | 318 | 305 | — | 5 | — | (27,400 | ) | |||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (1,627 | ) | — | — | (1,627 | ) | |||||||||||||||||||
Losses on investments | 2,943 | 543 | — | — | 12 | — | 3,498 | |||||||||||||||||||||
Other | — | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||||||
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Balance December 31, 2016 | (28,523 | ) | (1,378 | ) | 152,750 | 3,934 | — | 584 | 127,367 | |||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 6,170 | 2,060 | — | (821 | ) | 7,409 | ||||||||||||||||||||
Depreciation on investments | (37,335 | ) | (410 | ) | — | (277 | ) | — | (1,253 | ) | (39,275 | ) | ||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (3,082 | ) | — | — | (3,082 | ) | |||||||||||||||||||
Losses on investments | 45,520 | 1,275 | — | 486 | — | — | 47,281 | |||||||||||||||||||||
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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 | |||||||||||||||||||||
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Balance March 31, 2018 | ($ | 23,761 | ) | ($ | 495 | ) | $ | 197,715 | $ | 2,123 | $ | — | ($ | 3,405 | ) | $ | 172,177 | |||||||||||
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The table below summarizespre-tax components of unrealized and realized gains and losses in the investment portfolio for the periods indicated under Investment Company Accounting.
Three Months Ended March 31, 2018 | Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2017 | 2016 | ||||||||||
Net change in unrealized appreciation (depreciation) on investments | ||||||||||||
Unrealized appreciation | $ | (998 | ) | $ | 2,060 | $ | 2,986 | |||||
Unrealized depreciation | (38,152 | ) | (38,022 | ) | (27,705 | ) | ||||||
Net unrealized appreciation on investments in Medallion Bank and other controlled subsidiaries | 29,115 | 9,483 | 130,121 | |||||||||
Realized gains | — | (3,082 | ) | (1,627 | ) | |||||||
Realized losses | 34,747 | 47,281 | 3,498 | |||||||||
Net unrealized losses on investments other than securities and other assets | (1,915 | ) | (2,075 | ) | (28,387 | ) | ||||||
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Total | $ | 22,797 | $ | 15,645 | $ | 78,886 | ||||||
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Net realized gains (losses) on investments | ||||||||||||
Realized gains | $ | — | $ | 3,082 | $ | — | ||||||
Realized losses | (34,747 | ) | (47,281 | ) | (3,486 | ) | ||||||
Other gains | — | 4,684 | 4,140 | |||||||||
Direct charge-offs | 2 | (4,229 | ) | (197 | ) | |||||||
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Total | $ | (34,745 | ) | $ | (43,744 | ) | $ | 457 | ||||
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(6) INVESTMENTS IN MEDALLION BANK AND OTHER CONTROLLED SUBSIDIARIES
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 years ended December 31, 2017 and 2016.
(Dollars in thousands) | 2017 | 2016 | ||||||
Statement of comprehensive income | ||||||||
Investment income | $ | 111,281 | $ | 103,454 | ||||
Interest expense | 13,869 | 11,762 | ||||||
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Net interest income | 97,412 | 91,692 | ||||||
Noninterest income | 121 | 308 | ||||||
Operating expenses(1) | 26,032 | 24,281 | ||||||
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Net investment income before income taxes | 71,501 | 67,719 | ||||||
Income tax provision (benefit) | 15,093 | (326 | ) | |||||
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Net investment income after income taxes | 56,408 | 68,045 | ||||||
Net realized/unrealized losses of Medallion Bank(1) | (51,696 | ) | (66,328 | ) | ||||
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Net increase in net assets resulting from operations of Medallion Bank | 4,712 | 1,717 | ||||||
Unrealized appreciation on Medallion Bank(2) | 5,482 | 123,667 | ||||||
Net realized/unrealized gains (losses) on controlled subsidiaries other than Medallion Bank | (711 | ) | 4,737 | |||||
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Net increase in net assets resulting from operations of Medallion Bank and other controlled subsidiaries | $ | 9,483 | $ | 130,121 | ||||
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(1) | Excluded from operating expenses and included in net realized/unrealized losses of Medallion Bank were $1,476 and $0 of unrealized losses on other assets for 2017 and 2016. |
(2) | Unrealized appreciation on Medallion Bank reflects the adjustment to the investment carrying amount to reflect the dividends declared to the Company and the U.S. Treasury, and the fair value adjustments to the carrying amount of Medallion Bank. |
The following table presents Medallion Bank’s balance sheets and the net investments in other controlled subsidiaries as of December 31, 2017.
(Dollars in thousands) | 2017 | |||
Loans | $ | 864,819 | ||
Investment securities, at fair value | 43,478 | |||
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Net investments | 908,297 | |||
Cash | 110,233 | |||
Other assets, net | 58,827 | |||
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Total assets | $ | 1,077,357 | ||
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Other liabilities | $ | 3,836 | ||
Due to affiliates | 1,055 | |||
Deposits and other borrowings, including accrued interest payable | 908,236 | |||
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Total liabilities | 913,127 | |||
Medallion Bank equity(1) | 164,230 | |||
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Total liabilities and equity | $ | 1,077,357 | ||
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Investment in other controlled subsidiaries | $ | 11,449 | ||
Total investment in Medallion Bank and other controlled subsidiaries (2) | $ | 302,147 | ||
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(1) | Includes $26,303 of preferred stock issued to the U.S. 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. |
(7) FUNDS BORROWED
The outstanding balances of funds borrowed were as follows:
Payments Due for the Year Ending December 31, | December 31, 2017 | December 31, 2016 | Interest Rate(1) | Payments Due for the Fiscal Year Ending December 31, | Bank Holding Company Accounting December 31, 2018 | Investment Company Accounting December 31, 2017 | Interest Rate (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 325,890 | $ | 191,054 | $ | 158,846 | $ | 136,508 | $ | 35,742 | $ | — | $ | 848,040 | $ | — | 2.14 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
DZ loan | $ | 99,984 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 99,984 | $ | 106,244 | 3.02 | % | — | — | — | — | — | — | — | 99,984 | — | |||||||||||||||||||||||||||||||||||||||||||||
SBA debentures and borrowings | 3,226 | 25,873 | 8,500 | — | 5,000 | 37,500 | 80,099 | 79,564 | 3.40 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes payable to banks | 81,450 | — | — | — | — | — | 81,450 | 94,219 | 3.94 | 51,452 | 458 | 7,145 | 280 | 280 | — | 59,615 | 81,450 | 4.55 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
SBA debentures and borrowings | 1,655 | 3,044 | 26,365 | 8,500 | — | 40,000 | 79,564 | 81,985 | 3.39 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail notes | — | — | — | 33,625 | — | — | 33,625 | 33,625 | 9.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred securities | — | — | — | — | — | 33,000 | 33,000 | 33,000 | 3.63 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail notes(2) | — | — | 33,625 | — | — | — | 33,625 | 33,625 | 9.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred securities (2) | — | — | — | — | — | 33,000 | 33,000 | 33,000 | 4.86 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowings | 500 | 7,149 | — | — | — | — | 7,649 | — | 2.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total | $ | 183,089 | $ | 3,044 | $ | 26,365 | $ | 42,125 | $ | — | $ | 73,000 | $ | 327,623 | $ | 349,073 | 4.01 | $ | 381,068 | $ | 224,534 | $ | 208,116 | $ | 136,788 | $ | 41,022 | $ | 70,500 | $ | 1,062,028 | $ | 327,623 | 2.67 | % | |||||||||||||||||||||||||||||||||||||
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(1) | Weighted average contractual rate as of December 31, |
(2) | Relates to loans held at the Company, Parent Company only. |
(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) | December 31, 2018 | |||
Three months or less | $ | 72,280 | ||
Over three months through six months | 110,012 | |||
Over six months through one year | 143,598 | |||
Over one year | 522,150 | |||
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Total deposits | $ | 848,040 | ||
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(B) DZ LOAN
In December 2008, Trust III entered into the DZ loan agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC (DZ loan), which was extended in December 2013 until December 2016 through an amended and restated credit agreement, which has been further extended several times and currently terminates in March 2018.September 2019. The line was reduced to $150,000,000, and which was further reduced in stages lowering to $125,000,000 on July 1, 2016, and remainsremained as an amortizing facility;facility and was restructured during the fourth quarter of which $99,984,000 was outstanding at December 31, 2017. During 2016 and 2017, the DZ loan was amended several times, for the most part to improve Trust III’s flexibility under the credit facility.2018.
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 withSee Note 23 for more information about Trust III and the 2013 extension is a pooled short-term commercial paper rate which approximates LIBOR (30 day LIBOR was 1.56% at December 31, 2017) plus 1.65%.DZ loan.
(B)(C) SBA DEBENTURES AND BORROWINGS
In 2016,Over the years, the SBA has approved $10,000,000 of commitments for MCI and FSVC, typically for a four and a half year term and a 1% fee, which was paid. In 2015, the SBA approved $15,500,000 of commitments for MCI for a four year term and a 1% fee, which was paid. In 2014, the SBA approved $10,000,000 of commitments for MCI for a four year term and a 1% fee, which was paid. In 2013, the SBA approved $23,000,000 and $5,000,000 of commitments for FSVC and MCI, respectively, for a four year term and a 1% fee, which was paid, and of which FSVC issued $23,000,000 of debentures, $18,150,000 of which was used to repay maturing debentures, and MCI issued $2,500,000 of debentures. During 2017, the SBA restructured FSVC’s debentures with SBA totaling $33,485,000 in principal into a new loan by the SBA to FreshstartFSVC in the principal amount of $34,024,756 (the “SBA Loan”)SBA Loan). In connection with the SBA loan,Loan, FSVC executed a Note (the “SBA Note”)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, and requiresrequired a minimum of $5,500,000$5,000,000 of principal and interest to be paid on or before February 1, 2018 (which was paid) and a minimum of $9,500,000$10,000,000 of principal and interest to be paid on or before February 1,March 15, 2019, and all remaining unpaid principal and interest on or before February 1, 2020, the final maturity date of the SBA Loan.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 December 31, 2017, $169,985,0002018, $172,485,000 of commitments had been fully utilized, there were $5,500,000$3,000,000 of commitments available, and $79,564,000$80,099,000 was outstanding, including $31,064,000$29,099,000 under the SBA Note.
(C)(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. 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 December 31, 2017.2018.
(Dollars in thousands) | (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrower | # of Lenders/ Notes | Note Dates | Maturity Dates | Type | Note Amounts | Balance Outstanding at December 31, 2017 | Monthly Payment | Average Interest Rate at December 31, 2017 | Interest Rate Index(1) | # of Lenders/ Notes | Note Dates | Maturity Dates | Type | Note Amounts | Balance Outstanding at December 31, 2018 | Monthly Payment | Average Interest Rate at December 31, 2018 | Interest Rate Index(1) | ||||||||||||||||||||||||||||||||||||||||||||||||
The Company | 6/6 | | 4/11 - 8/14 |
| | 1/18 - 11/18 |
| Term loans and demand notes secured by pledged loans(2) | $ | 59,360 | (2) | $ | 59,360 | Interest only(3) | 4.17 | % | Various | (3) | 6/6 | | 4/11 - 8/14 |
| | 3/19 - 7/19 |
| Term loans and demand notes secured by pledged loans(2) | $ | 38,870 | (2) | $ | 38,870 | Interest only | (3) | 5.09 | % | Various | (3) | |||||||||||||||||||||||||||||
Medallion | 3/28 | | 11/11 - 12/11 |
| | 10/16 - 06/18 |
| Term loans secured by owned Chicago medallions(4) | 25,708 | 22,090 | $135 principal & interest | 3.34 | % | N/A | 3/28 | | 11/11 - 12/11 |
| | 6/19 - 9/21 |
| Term loans secured by owned Chicago medallions (4) | 25,708 | 19,345 | | $171 of principal & interest | | 3.50 | % | N/A | ||||||||||||||||||||||||||||||||||||
Medallion | 1/1 | 11/18 | 12/23 | 1,400 | 1,400 | | $70 principal & interest paid quarterly | | 4.00 | % | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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$ | 85,068 | $ | 81,450 | $ | 65,978 | $ | 59,615 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(1) | At December 31, |
(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 up to or from |
(4) | Guaranteed by the Company. |
(D) PREFERRED SECURITIES
In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bear a variable rate of interest of 90 day LIBOR (1.69% at December 31, 2017) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor. At December 31, 2017, $33,000,000 was outstanding on the preferred securities.
(E) MARGIN LOAN
In June 2015, the CompanyNovember 2018, MFC entered into a margin loan agreement with Morgan Stanley. The margin loan is secured bynote to the pledgebenefit of short-term, high-quality investment securities held by the Company, and is initially availableDZ Bank for $1,400,000 at 90%a 4.00% interest rate due December 2023, as part of the current fair market valuerestructuring of the securities. The margin loan bears interest at30-day LIBOR (1.56% at December 31, 2017) plus 1.00%. As of December 31, 2017, there were no outstandings under this marginDZ loan. See Note 23 for more information.
(F)(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 (2.81% at December 31, 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 December 31, 2018, $33,000,000 was outstanding on the preferred securities.
(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 December 31, 2018, $7,149,000 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, 2019.
(H) COVENANT COMPLIANCE
Certain of our 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 isworth, which in compliance with such restrictions asthe event of December 31, 2017 and 2016.noncompliance could preclude their ability to pay dividends to the Company.
(5)(8) INCOME TAXES
Through December 31, 2015, the Company qualified to be taxed as a RIC under Subchapter M of the Code. A RIC is not subject to federal income tax on the portion of its taxable ordinary income and net long-term capital gains that are distributed to its shareholders. For the tax year ended December 31, 2015, the Company had an ordinary loss for tax purposes.
During 2016, the Company’s assets did not meet the quarterly investment diversification requirements to qualify as a RIC, primarily due to the increase in Medallion Bank’s fair value. Therefore, for the year ended December 31, 2016, the Company became subject to taxation as a regular corporation under Subchapter C of the Code. This change in tax status does not affect the Company’s status as a BDC under the 1940 Act or its compliance with the portfolio composition requirements of that statute.
As a result of being taxed as a corporation under Subchapter C, theThe 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 including portfolio companies such as Medallion Bank, 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 December 31, 20172018 and 2016.2017.
(Dollars in thousands) | 2017 | 2016 | 2015 | 2018 | 2017 | |||||||||||||||
Unrealized gain on investment in Medallion Bank | ($ | 35,297 | ) | ($ | 58,512 | ) | $ | — | ||||||||||||
Unrealized losses on loans and nonaccrual interest | 10,071 | 16,382 | — | |||||||||||||||||
Goodwill and other intangibles/unrealized gain on investment in Medallion Bank | ($ | 45,272 | ) | ($ | 35,297 | ) | ||||||||||||||
Provision for loan losses/unrealized losses on loans and nonaccrual interest | 25,790 | 10,071 | ||||||||||||||||||
Net operating loss carryforwards(1) | 615 | 732 | — | 11,132 | 615 | |||||||||||||||
Unrealized gains on investments in other controlled subsidiaries | (3,617 | ) | (5,610 | ) | — | — | (3,617 | ) | ||||||||||||
Unrealized gains on investments other than securities | (1,395 | ) | (3,206 | ) | — | — | (1,395 | ) | ||||||||||||
Accrued expenses, compensation | 782 | 1,263 | — | |||||||||||||||||
Accrued expenses, compensation, and other assets | 1,844 | 782 | ||||||||||||||||||
Unrealized gains on other investments | (542 | ) | (299 | ) | — | (2,024 | ) | (542 | ) | |||||||||||
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Total deferred tax liability | (29,383 | ) | (49,250 | ) | — | (8,530 | ) | (29,383 | ) | |||||||||||
Valuation allowance | (39 | ) | (30 | ) | — | (255 | ) | (39 | ) | |||||||||||
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Deferred tax liability, net | (29,422 | ) | (49,280 | ) | — | (8,785 | ) | (29,422 | ) | |||||||||||
Taxes receivable (payable) | 16,886 | 3,380 | — | |||||||||||||||||
Taxes receivable | 1,812 | 16,886 | ||||||||||||||||||
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Net deferred and other tax liabilities | ($ | 12,536 | ) | ($ | 45,900 | ) | $ | — | ($ | 6,973 | ) | ($ | 12,536 | ) | ||||||
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(1) | As of December 31, |
The components of our tax provision (benefit)benefit (provision) for the years ended December 31, 2018, 2017, 2016, and 20152016 were as follows.
(Dollars in thousands) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Current | ||||||||||||||||||||||||
Federal | ($ | 15,613 | ) | $ | (2,690 | ) | $ | — | ($ | 2,797 | ) | $ | 15,613 | $ | 2,690 | |||||||||
State | (756 | ) | (689 | ) | — | (1,078 | ) | 756 | 689 | |||||||||||||||
Deferred | ||||||||||||||||||||||||
Federal | 4,169 | 39,028 | — | 5,270 | (4,169 | ) | (39,028 | ) | ||||||||||||||||
Federal income tax rate change | (17,279 | ) | — | — | — | 17,279 | — | |||||||||||||||||
State | (6,747 | ) | 10,251 | — | (1,464 | ) | 6,747 | (10,251 | ) | |||||||||||||||
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Net provision (benefit) for income taxes | ($ | 36,226 | ) | $ | 45,900 | $ | — | |||||||||||||||||
Net benefit (provision) for income taxes | ($ | 69 | ) | $ | 36,226 | ($ | 45,900 | ) | ||||||||||||||||
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The following table presents a reconciliation of statutory federal income tax (benefit) expensebenefit (provision) to consolidated actual income tax (benefit) expense reported in net increase in net assets for the years ended December 31, 2018, 2017, 2016, and 2015.2016.
(Dollars in thousands) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Statutory Federal Income tax at 35% | ($ | 12,582 | ) | $ | 24,295 | $ | — | |||||||||||||||||
Statutory Federal Income tax at 21% (35% in 2017 and 2016) | $ | 4,935 | $ | 12,582 | ($ | 24,295 | ) | |||||||||||||||||
State and local income taxes, net of federal income tax benefit | (645 | ) | 3,829 | — | 440 | 645 | (3,829 | ) | ||||||||||||||||
Federal income tax rate change | (17,279 | ) | — | — | — | 17,279 | — | |||||||||||||||||
Change in effective state income tax rate | (3,232 | ) | — | — | (2,564 | ) | 3,232 | — | ||||||||||||||||
Utilization of carry forwards | (2,284 | ) | — | — | (910 | ) | 2,284 | — | ||||||||||||||||
Appreciation of Medallion Bank | (1,050 | ) | — | — | (1,974 | ) | 1,050 | — | ||||||||||||||||
Conversion to a taxable corporation | — | 16,630 | — | — | — | (16,630 | ) | |||||||||||||||||
Book impairment of goodwill | — | 2,065 | — | — | — | (2,065 | ) | |||||||||||||||||
Other | 846 | (919 | ) | — | 4 | (846 | ) | 919 | ||||||||||||||||
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Total income tax (benefit) expense | ($ | 36,226 | ) | $ | 45,900 | $ | — | |||||||||||||||||
Total income tax benefit (provision) | ($ | 69 | ) | $ | 36,226 | ($ | 45,900 | ) | ||||||||||||||||
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On December 22, 2017, the U.S. Government signed into law the “Tax Cuts and Jobs Act” which, starting in 2018, reducesreduced the Company’s corporate statutory income tax rate from 35% to 21%, but eliminateseliminated or increasesincreased certain permanent differences. As of the date of enactment, the Company has adjusted its deferred tax assets and liabilities for the new statutory rate, which resulted in a $17.3 million income tax benefit for the year ended December 31, 2017.
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. It is basedBased upon these considerations, by which the Company has determined the valuation allowance deemed necessary as of December 31, 2017.2018.
The Company has filed tax returns in many states. Federal, New York State, and New York City, and Utah tax filings of the Company for the tax years 20142015 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 2017.
(6)(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 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 1,500,253 shares of the Company’s common stock are issuable under the 2018 Plan, and 1,458,407 remained issuable as of December 31, 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, and 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 transferability until such forfeiture restrictions have lapsed. A total of 700,000 shares of the Company’s common stock arewere issuable under the 2015 Restricted Stock Plan, and 332,796241,919 remained issuable as of December 31, 2017.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 2009 Employee Restricted Stock Plan (the Employee Restricted Stock Plan) on April 16, 2009. The Employee Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC and approval of the Employee Restricted Stock Option Plan by the Company’s shareholders on June 11, 2010. No additional shares are available for issuance under the Employee Restricted Stock Plan. The terms of the Employee Restricted Stock Plan provided for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock which, at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 800,000 shares of the Company’s common stock were issuable under the Employee Restricted Stock Plan, and as of December 31, 2017, none of the Company’s common stock remained available for future grants. Awards under the 2009 Employee Plan are subject to certain limitations as set forth in the Employee Restricted Stock Plan. The Employee Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the Employee 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 Employee Restricted Stock Plan, whichever first occurs.
The Company’s Board of Directors approved the 2015Non-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 arewere issuable under the 2015 Director Plan, and 258,334 remained issuable as of December 31, 2017.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 anon-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 wereare not eligible for grants under the Amended Director Plan, the Company grantedwill 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 wasmay not be less than the current market value of the Company’s common stock on the date the option wasis 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.
No additionalAdditional shares are only available for future issuance under the Employee Restricted Stock Plan and the Amended Director2018 Plan. At December 31, 2017, 320,6262018, 144,666 options on the Company’s common stock were outstanding under the 2006 and 2015Company’s plans, of which 273,96081,889 options were exercisable, and there were 408,582190,915 unvested shares of the Company’s common stock outstanding under the Employee Restricted Stock Plan.Company’s restricted stock plans.
The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of options granted was $1.06, $0.28, $0.53, and $0.90$0.53 per share for the years ended December 31, 2018, 2017, 2016, and 2015.2016. The following assumption categories are used to determine the value of any option grants.
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
Risk free interest rate | 1.84 | % | 1.22 | % | 1.87 | % | 2.82 | % | 1.84 | % | 1.22 | % | ||||||||||||
Expected dividend yield | 7.39 | 10.13 | 8.90 | 4.86 | 7.39 | 10.13 | ||||||||||||||||||
Expected life of option in years(1) | 6.00 | 6.00 | 6.00 | 6.00 | 6.00 | 6.00 | ||||||||||||||||||
Expected volatility(2) | 30.00 | % | 30.00 | % | 30.00 | % | 30.00 | % | 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 years ended December 31, 2018, 2017, 2016, and 2015.2016.
Number of Options | Exercise Price Per Share | Weighted Average Exercise Price | ||||||||||||||||||||||
Outstanding at December 31, 2014 | 461,821 | $ | 7.49-13.84 | $ | 10.38 | |||||||||||||||||||
Granted | 27,000 | 9.38 | 9.38 | |||||||||||||||||||||
Cancelled | (12,118 | ) | 9.22-13.06 | 11.07 | ||||||||||||||||||||
Exercised(1) | (30,449 | ) | 9.22 | 9.22 | ||||||||||||||||||||
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| Number of Options | Exercise Price Per Share | Weighted Average Exercise Price | |||||||||||||||||||
Outstanding at December 31, 2015 | 446,254 | 7.49-13.84 | 10.38 | 446,254 | $ | 7.49-13.84 | $ | 10.38 | ||||||||||||||||
Granted | 12,000 | 7.10 | 7.10 | 12,000 | 7.10 | 7.10 | ||||||||||||||||||
Cancelled | (110,636 | ) | 9.22-13.84 | 12.25 | (110,636 | ) | 9.22-13.84 | 12.25 | ||||||||||||||||
Exercised(1) | (2,100 | ) | 9.22 | 9.22 | (2,100 | ) | 9.22 | 9.22 | ||||||||||||||||
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Outstanding at December 31, 2016 | 345,518 | 7.10-13.84 | 9.67 | 345,518 | 7.10-13.84 | 9.67 | ||||||||||||||||||
Granted | 29,666 | 2.14-2.61 | 2.35 | 29,666 | 2.14-2.61 | 2.35 | ||||||||||||||||||
Cancelled | (54,558 | ) | 10.76-11.21 | 10.94 | (54,558 | ) | 10.76-11.21 | 10.94 | ||||||||||||||||
Exercised(1) | — | — | — | — | — | — | ||||||||||||||||||
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Outstanding at December 31, 2017(2) | 320,626 | $ | 2.14-13.84 | $ | 8.78 | |||||||||||||||||||
Outstanding at December 31, 2017 | 320,626 | 2.14-13.84 | 8.78 | |||||||||||||||||||||
Granted | 39,000 | 5.27-5.58 | 5.46 | |||||||||||||||||||||
Cancelled | (214,960 | ) | 9.22-9.24 | 9.22 | ||||||||||||||||||||
Exercised(1) | — | — | — | |||||||||||||||||||||
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Outstanding at December 31, 2018 (2) | 144,666 | $ | 2.06-13.84 | $ | 7.23 | |||||||||||||||||||
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Options exercisable at | ||||||||||||||||||||||||
December 31, 2015 | 391,921 | 7.49-13.84 | 10.27 | |||||||||||||||||||||
December 31, 2016 | 312,518 | 7.49-13.84 | 9.75 | 312,518 | $ | 7.49-13.84 | $ | 9.75 | ||||||||||||||||
December 31, 2017(2) | 273,960 | 7.10-13.84 | 9.50 | |||||||||||||||||||||
December 31, 2017 | 273,960 | 7.10-13.84 | 9.50 | |||||||||||||||||||||
December 31, 2018(2) | 81,889 | 2.14-13.84 | 9.25 | |||||||||||||||||||||
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(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, $0, and $0 for 2018, 2017, |
(2) | The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at December 31, |
The following table presents the activity for the restricted stock programs for the years ended December 31, 2018, 2017, 2016, and 2015.2016.
Number of Shares | Grant Price Per Share | Weighted Average Grant Price | ||||||||||||||||||||||
Outstanding at December 31, 2014 | 209,365 | $ | 10.08-15.61 | $ | 12.47 | |||||||||||||||||||
Granted | 162,576 | 9.08-10.38 | 9.89 | |||||||||||||||||||||
Cancelled | (53,761 | ) | 9.92-15.61 | 11.16 | ||||||||||||||||||||
Vested(1) | (109,140 | ) | 10.08-15.61 | 12.16 | ||||||||||||||||||||
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| Number of Shares | Grant Price Per Share | Weighted Average Grant Price | |||||||||||||||||||
Outstanding at December 31, 2015 | 209,040 | 9.08-15.61 | 10.96 | 209,040 | $ | 9.08-15.61 | $ | 10.96 | ||||||||||||||||
Granted | 48,527 | 3.95-7.98 | 4.47 | 48,527 | 3.95-7.98 | 4.47 | ||||||||||||||||||
Cancelled | (11,325 | ) | 9.92-15.61 | 11.17 | (11,325 | ) | 9.92-15.61 | 11.17 | ||||||||||||||||
Vested(1) | (78,539 | ) | 9.08-15.61 | 11.38 | (78,539 | ) | 9.08-15.61 | 11.38 | ||||||||||||||||
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Outstanding at December 31, 2016 | 167,703 | 3.95-13.46 | 8.88 | 167,703 | 3.95-13.46 | 8.88 | ||||||||||||||||||
Granted | 327,251 | 2.06-3.93 | 2.48 | 327,251 | 2.06-3.93 | 2.48 | ||||||||||||||||||
Cancelled | (8,988 | ) | 2.14-10.08 | 3.07 | (8,988 | ) | 2.14-10.08 | 3.07 | ||||||||||||||||
Vested(1) | (77,384 | ) | 9.08-13.46 | 11.09 | (77,384 | ) | 9.08-13.46 | 11.09 | ||||||||||||||||
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Outstanding at December 31, 2017(2) | 408,582 | $ | 2.06-10.38 | $ | 3.45 | |||||||||||||||||||
Outstanding at December 31, 2017 | 408,582 | 2.06-10.38 | 3.45 | |||||||||||||||||||||
Granted | 101,010 | 3.93-5.27 | 4.41 | |||||||||||||||||||||
Cancelled | (9,737 | ) | 3.93-9.08 | 4.66 | ||||||||||||||||||||
Vested(1) | (308,940 | ) | 2.06-10.38 | 3.35 | ||||||||||||||||||||
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Outstanding at December 31, 2018 (2) | 190,915 | $ | 2.14-5.27 | $ | 4.06 | |||||||||||||||||||
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(1) | The aggregate fair value of the restricted stock vested was $1,270,000, $169,000, and $722,000 for 2018, 2017, and |
(2) | The aggregate fair value of the restricted stock was |
The following table presents the activity for the unvested options outstanding under the plans for the year ended December 31, 2017.2018.
Number of Options | Exercise Price Per Share | Weighted Average Exercise Price | Number of Options | Exercise Price Per Share | Weighted Average Exercise Price | |||||||||||||||||||
Outstanding at December 31, 2016 | 33,000 | $ | 7.10-13.53 | $ | 8.93 | |||||||||||||||||||
Outstanding at December 31, 2017 | 46,666 | $ | 2.14-9.38 | $ | 4.52 | |||||||||||||||||||
Granted | 29,666 | 2.14-2.61 | 2.35 | 39,000 | 5.27-5.58 | 5.46 | ||||||||||||||||||
Cancelled | — | — | — | — | — | — | ||||||||||||||||||
Vested | (16,000 | ) | 7.10-13.53 | 9.59 | (22,889 | ) | 2.14-9.38 | 5.95 | ||||||||||||||||
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Outstanding at December 31, 2017 | 46,666 | $ | 2.14-9.38 | $ | 4.52 | |||||||||||||||||||
Outstanding at December 31, 2018 | 62,777 | $ | 2.14-7.10 | $ | 4.59 | |||||||||||||||||||
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The intrinsic value of the options vested was $0,$32,000, $0, and $0 in 2018, 2017, 2016, and 2015.2016.
(7)(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents the Company’s quarterly results of operations for the years ended December 31, 2018, 2017, 2016, and 2015.2016.
(Dollars in thousands, except per share data) | March 31 | June 30 | September 30 | December 31 | March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||||||||
2018 Quarter Ended(1) | ||||||||||||||||||||||||||||||||
Net interest income/net investment income | $ | 482 | $ | 24,719 | $ | 24,265 | $ | 23,003 | ||||||||||||||||||||||||
Income (loss) before income taxes/net investment loss before taxes | (3,566 | ) | (17,905 | ) | (3,963 | ) | 14,712 | |||||||||||||||||||||||||
Net income (loss) after taxes/net decrease on net assets resulting from operations | (14,874 | ) | (13,884 | ) | (3,846 | ) | 9,865 | |||||||||||||||||||||||||
Net income (loss) attributable to Medallion Financial Corp./net decrease in net assets resulting from operations | (14,874 | ) | (14,647 | ) | (4,697 | ) | 9,172 | |||||||||||||||||||||||||
Basic | ($ | 0.62 | ) | ($ | 0.60 | ) | ($ | 0.19 | ) | $ | 0.38 | |||||||||||||||||||||
Diluted | (0.62 | ) | (0.60 | ) | (0.19 | ) | 0.38 | |||||||||||||||||||||||||
2017 Quarter Ended | ||||||||||||||||||||||||||||||||
Investment income | $ | 4,250 | $ | 3,787 | $ | 5,567 | $ | 6,020 | $ | 4,250 | $ | 3,787 | $ | 5,567 | $ | 6,020 | ||||||||||||||||
Net investment income (loss) after income taxes | (435 | ) | (1,293 | ) | (2,490 | ) | (2,903 | ) | ||||||||||||||||||||||||
Net investment loss after income taxes | (435 | ) | (1,293 | ) | (2,490 | ) | (2,903 | ) | ||||||||||||||||||||||||
Net increase (decrease) in net assets resulting from operations | 1,111 | (4,797 | ) | 619 | 3,345 | 1,111 | (4,797 | ) | 619 | 3,345 | ||||||||||||||||||||||
Net increase (decrease) in net assets resulting from operations per common share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.05 | $ | (0.20 | ) | $ | 0.03 | $ | 0.14 | $ | 0.05 | ($ | 0.20 | ) | $ | 0.03 | $ | 0.14 | ||||||||||||||
Diluted | 0.05 | (0.20 | ) | 0.03 | 0.14 | 0.05 | (0.20 | ) | 0.03 | 0.14 | ||||||||||||||||||||||
2016 Quarter Ended | ||||||||||||||||||||||||||||||||
Investment income | $ | 8,986 | $ | 5,836 | $ | 5,269 | $ | 4,997 | $ | 8,986 | $ | 5,836 | $ | 5,269 | $ | 4,997 | ||||||||||||||||
Net investment income (loss) after income taxes | 2,039 | (1,402 | ) | (2,606 | ) | 2,088 | 2,039 | (1,402 | ) | (2,606 | ) | 2,088 | ||||||||||||||||||||
Net increase in net assets resulting from operations | 6,848 | 4,568 | 5,043 | 7,056 | 6,848 | 4,568 | 5,043 | 7,056 | ||||||||||||||||||||||||
Net increase in net assets resulting from operations per common share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.28 | $ | 0.19 | $ | 0.21 | $ | 0.29 | $ | 0.28 | $ | 0.19 | $ | 0.21 | $ | 0.29 | ||||||||||||||||
Diluted | 0.28 | 0.19 | 0.21 | 0.29 | 0.28 | 0.19 | 0.21 | 0.29 | ||||||||||||||||||||||||
2015 Quarter Ended | ||||||||||||||||||||||||||||||||
Investment income | $ | 11,831 | $ | 10,838 | $ | 10,665 | $ | 9,319 | ||||||||||||||||||||||||
Net investment income after income taxes | 4,904 | 4,330 | 4,236 | 3,356 | ||||||||||||||||||||||||||||
Net increase in net assets resulting from operations | 7,068 | 8,086 | 7,312 | 6,911 | ||||||||||||||||||||||||||||
Net increase in net assets resulting from operations per common share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.29 | $ | 0.33 | $ | 0.30 | $ | 0.29 | ||||||||||||||||||||||||
Diluted | 0.29 | 0.33 | 0.30 | 0.29 |
(8) RECENTLY ISSUED ACCOUNTING STANDARDS
(1) | The three months ended March 31, 2018 have been accounted for under Investment Company Accounting and subsequent 2018 quarters have been accounted for under Bank Holding Company Accounting. |
(11) SEGMENT REPORTING (Bank Holding Company Accounting)
In May 2017,Under Bank Holding Company Accounting, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The objective of this update is to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance of Topic 718. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company has assessedsix business segments, which include four lending and twonon-operating segments, which are reflective of how Company management makes decisions about its business and operations.
Prior to April 2, 2018, the impact of the update and has determined that it will not have a material effect on its financial condition and results of operations.
In January 2017, the FASB issued ASU2017-04, 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 August 2016, the FASB issued ASU2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company has assessed the impact of the update and has determined that it will not have a material effect on its financial condition and results of operations.
In February 2016, the FASB issued ASU2016-02, Leases (Topic 842). ASU2016-02 requires the recognition of lease assets and lease liabilities by lessees for leases classified as operating under current GAAP. ASU2016-02 applies to all entities and is effective for fiscal years beginning after December 15, 2018 for public entities, with early adoption permitted. The Company is assessing the impact the update will have on its financial condition and results of operations.
In January 2016, the FASB issued ASU2016-01, Financial Instruments—Overall (Topic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective of this Update is to enhance the reporting model for financial instruments and provide users of financial statements with more decision-useful information. ASU2016-01 requires equity investments to be measured at fair value, simplifies the impairment assessment of equity investment without readily determinable fair value, eliminates the requirements to disclose the fair value of financial instruments measured at amortized cost, and requires public business entities to use the exit price notion when measuring the fair value of financial instruments. The update, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has assessed the impact of the update and has determined that it will not have a material effect on its financial condition and results of operations.
(9) SEGMENT REPORTING
The Company hashad one business segment, ourits lending and investing operations. This segment originatesoriginated and servicesserviced medallion, secured commercial and consumer loans, and investsinvested in both marketable and nonmarketable securities.
(10)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 18%, 11%, and 10% of loans outstanding and with no other states over 10% as of December 31, 2018. 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 swimming pools, solar panels, roofs, and windows, at 31%, 16%, 15%, and 11% of total loans outstanding, respectively, and with no other product lines over 10% as of December 31, 2018. The commercial lending segment focuses on enterprise wide industries, including manufacturing, retail trade, information, recreation and various other industries, in which 42% 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 87% were in New York City as of December 31, 2018.
In addition, ournon-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 December 31, 2018 and for the nine months then ended.
Nine Months Ended December 31, | Consumer Lending | Commercial Lending | Medallion Lending | RPAC | Corp. and Other | Consolidated | ||||||||||||||||||||||
(Dollars in thousands) | Recreation | Home Improvement | ||||||||||||||||||||||||||
Total interest income | $ | 68,870 | $ | 12,799 | $ | 7,459 | $ | 6,317 | $ | — | $ | 1,358 | $ | 96,803 | ||||||||||||||
Total interest expense | 6,986 | 2,290 | 2,037 | 10,125 | 121 | 3,257 | 24,816 | |||||||||||||||||||||
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Net interest income (loss) | 61,884 | 10,509 | 5,422 | (3,808 | ) | (121 | ) | (1,899 | ) | 71,987 | ||||||||||||||||||
Provision for loan losses | 15,118 | 2,453 | — | 41,437 | — | — | 59,008 | |||||||||||||||||||||
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Net interest income after loss provision | 46,766 | 8,056 | 5,422 | (45,245 | ) | (121 | ) | (1,899 | ) | 12,979 | ||||||||||||||||||
Sponsorship and race | — | — | — | — | 14,368 | — | 14,368 | |||||||||||||||||||||
Race team related expenses | — | — | — | — | (7,121 | ) | — | (7,121 | ) | |||||||||||||||||||
Other income (expense) | (14,242 | ) | (3,093 | ) | (1,917 | ) | 9,742 | (11,476 | ) | (6,396 | ) | (27,382 | ) | |||||||||||||||
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Net income before taxes | 32,524 | 4,963 | 3,505 | (35,503 | ) | (4,350 | ) | (8,295 | ) | (7,156 | ) | |||||||||||||||||
Income tax benefit | (8,579 | ) | (1,319 | ) | (808 | ) | 7,938 | 1,108 | 951 | (709 | ) | |||||||||||||||||
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Net income (loss) after tax | $ | 23,945 | $ | 3,644 | $ | 2,697 | ($ | 27,565 | ) | ($ | 3,242 | ) | ($ | 7,344 | ) | ($ | 7,865 | ) | ||||||||||
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Balance Sheet Data | ||||||||||||||||||||||||||||
Total loans net | $ | 580,182 | $ | 181,359 | $ | 64,083 | $ | 155,863 | $ | — | $ | — | $ | 981,487 | ||||||||||||||
Total assets | 590,746 | 188,892 | 90,264 | 273,501 | 29,925 | 208,522 | 1,381,846 | |||||||||||||||||||||
Total funds borrowed | 434,527 | 143,815 | 51,266 | 294,465 | 7,649 | 130,306 | 1,062,028 | |||||||||||||||||||||
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Selected Financial Ratios | ||||||||||||||||||||||||||||
Return on assets | 5.48 | % | 2.56 | % | 3.59 | % | (10.13 | %) | (11.69 | %) | (4.13 | %) | (0.90 | %) | ||||||||||||||
Return on equity | 22.60 | 11.30 | 7.52 | NM | NM | (13.18 | ) | (4.62 | ) | |||||||||||||||||||
Interest yield | 15.78 | 9.06 | 12.61 | 3.58 | N/A | N/A | 10.98 | |||||||||||||||||||||
Net interest margin | 14.18 | 7.44 | 9.17 | (2.16 | ) | N/A | N/A | 8.19 | ||||||||||||||||||||
Reserve coverage | 1.17 | 0.98 | 0.00 | 15.11 | N/A | N/A | 3.58 | |||||||||||||||||||||
Delinquency ratio | 0.69 | 0.07 | 0.44 | 8.89 | N/A | N/A | 2.03 | |||||||||||||||||||||
Charge-off ratio | 1.89 | 0.46 | 0.00 | 7.21 | N/A | N/A | 2.73 | |||||||||||||||||||||
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(12) COMMITMENTS AND CONTINGENCIES
(a) Employment Agreements(A) EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key officers for either a twotwo- or five-year term. Annually, the contracts with a five-year term will renew for new five-year terms unless prior to the end of the
first year, either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current five-year term. Annually, the contracts with atwo-year term will renew for newtwo-year terms unless prior to the term either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the currentone-year term. In the event of a change in control, as defined, during the employment period, the agreements provide for severance compensation to the executive in an amount equal to the balance of the salary, bonus, and value of fringe benefits which the executive would be entitled to receive for the remainder of the employment period.
Employment agreements expire at various dates through 2022.2023. At December 31, 2017,2018, minimum payments under employment agreements arewere as follows:
(Dollars in thousands) | ||||||||
2018 | $ | 2,460 | ||||||
2019 | 1,068 | $ | 2,062 | |||||
2020 | 660 | 889 | ||||||
2021 | 660 | 665 | ||||||
2022 | 275 | 665 | ||||||
2023 | 277 | |||||||
Thereafter | — | — | ||||||
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Total | $ | 5,123 | $ | 4,558 | ||||
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(b) Other Commitments(B) OTHER COMMITTMENTS
The Company had $1,375,000no commitments outstanding at December 31, 2017.2018. Generally, commitments are on the same terms as loans to or investments in existing borrowers or investees, and generally have fixed expiration dates. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Commitments for leased premises expire at various dates through April 30, 2027. At December 31, 2017,2018, minimum rental commitments fornon-cancelable leases arewere as follows:
(Dollars in thousands) | ||||||||
2018 | $ | 1,679 | ||||||
2019 | 1,940 | $ | 2,357 | |||||
2020 | 1,950 | 2,380 | ||||||
2021 | 1,846 | 2,278 | ||||||
2022 | 1,812 | 2,216 | ||||||
2023 | 2,136 | |||||||
Thereafter | 7,861 | 6,048 | ||||||
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Total | $ | 17,088 | $ | 17,415 | ||||
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Occupancy expense was $2,287,000, $1,069,000, $966,000, and $877,000$966,000 for the years ended December 31, 2018, 2017, 2016, and 2015.2016.
(c) Litigation(C) LITIGATION
The Company and its subsidiaries become defendants to various legal proceedings arising from the normal course of business. In the opinion of management, based on the advice of legal counsel, other than as set forth in the following paragraph there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse impact on the financial condition or results of operations of the Company.
The Company and its subsidiaries obtain financing under lending facilities extended by various banks and other financial institutions, some of which are secured by loans, taxi medallions and other assets. Where these facilities are extended to its subsidiaries, the Company and others of its subsidiaries may guarantee the obligations of the relevant borrower. Five of the Company’s smallest subsidiaries are borrowers under promissory notes extended to them by a bank that total $8.8 million that came due on October 17, 2016. These loans are secured by Chicago taxi medallions owned by its subsidiaries. These notes are guaranteed by Medallion Funding, not by Medallion Financial Corp. These subsidiaries have not repaid the amounts due under the notes and the bank has filed a suit seeking payment of these amounts. This failure to pay would constitute an event of default under certain loan agreements which the Company or its subsidiaries are borrowers, but the lenders under those agreements have waived the default. If judgment is entered against the Company in the suit brought by the bank or entered and not satisfied within specified periods of time, these outcomes may constitute an additional event of default under these other agreements. If waivers are required and not granted for this additional event of default, it would lead to events of default under other of its financing arrangements.
On December 20, 2017, a stockholder derivative action was filed in the Supreme Court of the State of New York, County of New York (Shields v. Murstein, et al.). The complaint namesnamed the Company as a nominal defendant and purports to assert claims derivatively on behalf of the Company against certain of the Company’s current directors, one of the Company’s former directors, and a former independent contractor for one of the Company’s subsidiaries. The complaint allegesalleged that the director defendants breached their fiduciary duties with respect to certain alleged misconduct by the former independent contractor involving postings about the Company under an alleged pseudonym. On January 25, 2018, the Company and the director defendants filed a motion to dismiss the action. Plaintiff filed his opposition to the motionOn June 27, 2018, a hearing was held on March 1, 2018. The Company and the director defendants have until March 22, 2018 to file reply papers in further support of the motion. On November 26, 2018, the Court entered a decision granting the motion. On December 17, 2018, the Court entered an order dismissing the plaintiff’s complaint with prejudice. The Company believestime for the case is without merit and intendsplaintiff to defend it vigorously.appeal the Court’s order has elapsed.
(d) Regulatory(D) REGULATORY
In the ordinary course of business, the Company and its subsidiaries are subject to inquiries from certain regulators. During 2014, FSVC was examined by the SBA. The foregoing regulatory examination was resolved in January 2017 as a result of Freshstart’s transfer to liquidation status and the restructure of the Freshstart loan described in Note 4.7.
(11)(13) RELATED PARTY TRANSACTIONS
Certain directors, officers, and shareholders of the Company are also directors and officers of its wholly-ownedmain consolidated subsidiaries, MFC, MCI, FSVC, and Medallion Bank, as well as of certain portfolio investment companies.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 portfolio companies.equity investments. Mr. Rudnick receives a salary from LAX of $170,000$171,000 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 endyear-end bonus. In addition, Mr. Rudnick provides consulting services to the Company directly for a monthly retainer of $4,200.
AtThe 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 Mr. Petty of $7,149,000 that earns interest at an annual rate of 2% as of December 31, 2017, 2016, and 2015, the2018.
The Company and MSC serviced $311,988,000 $325,751,000, and $382,919,000$325,751,000 of loans for Medallion Bank. IncludedBank at December 31, 2017 and 2016. 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 behalfbehalf.
The Company has assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned entity that had been unconsolidated portfolio investment.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, $5,272,000 $5,421,000, and $5,658,000$5,421,000 of servicing fee income was earned by MSC in the years ended December 31, 2017 2016, and 2015.2016.
The following table summarizes the net revenues received from Medallion Bank.Bank not eliminated under Investment Company Accounting.
Year ended December 31, | Three Months Ended March 31, | Year Ended December 31, | ||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Reimbursement of operating expenses | $ | 865 | $ | 1,006 | $ | 775 | $ | 250 | $ | 865 | $ | 1,006 | ||||||||||||
Loan origination and servicing fees | 5 | 229 | 176 | 6 | 5 | 229 | ||||||||||||||||||
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Total other income | $ | 870 | $ | 1,235 | $ | 951 | $ | 256 | $ | 870 | $ | 1,235 | ||||||||||||
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The Company had a loan to Medallion Fine Art, Inc., a wholly-owned entity that had been unconsolidated under Investment Company Accounting, in the amount of $999,000 and $3,159,000 as of December 31, 2017, and 2016.which was repaid in full during the 2018 first quarter. The loan bearsbore interest at a rate of 12%, all of which iswas paid in kind. During 2017, and 2016, the Company advanced $0, and $300,000 and was repaid $2,365,000 and $6,111,000 with respect to this loan. Additionally, the Company recognized $10,000 of interest income not eliminated for the year ended December 31, 2018, and $165,000 $596,000, and $944,000$596,000 of interest income in 2017 2016, and 2015.2016.
The Company and MCI hadhave loans to RPAC, Racing, LLC, an affiliate of Medallion Motorsports LLC, which totaled $16,472,000 and $8,589,000 as of December 31, 2017 and 2016,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 nine months ended December 31, 2018. The loans bear interest at 2%, inclusive of cash and paid in kind interest. During 2017, 2016, and 2015, theThe Company and MCI recognized $0 of interest income for the three months ended March 31, 2018 and during the years ended December 31, 2017 and 2016, recognized $56,000 $626,000, and $547,000$626,000 of interest income with respect to these loans.
(12) (14) STOCKHOLDERS’/SHAREHOLDERS’ EQUITY
In November 2003, the Company announced a stock repurchase program which authorized the repurchase of up to $10,000,000 of common stock during the following six months, with an option for the Board of Directors to extend the time frame for completing the purchases, which expiresexpired in May 2018. In November 2004, the repurchase program was increased by an additional $10,000,000, which was further increased to a total of $20,000,000 in July 2014, and which was further increased to a total of $26,000,000 in July 2015. As of December 31, 2017,2018, a total of 2,931,125 shares had been repurchased for $24,587,000. There were no purchases in 2018 and 2017, and purchases were 361,174 shares for $1,524,000 in 2016 and were 413,193 shares for $3,212,000 in 2015.2016.
(13) NONINTEREST INCOME AND(15) OTHER OPERATING EXPENSES (Investment Company Accounting)
The major components of noninterest income were as follows.
Year ended December 31, | ||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Prepayment fees | $ | 50 | $ | 89 | $ | 65 | ||||||
Late charges | 8 | 47 | 49 | |||||||||
Servicing fees | 8 | 36 | 51 | |||||||||
Management fees | — | 75 | 75 | |||||||||
Partnership income | — | 35 | — | |||||||||
Other | 41 | 126 | 79 | |||||||||
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Total noninterest income | $ | 107 | $ | 408 | $ | 319 | ||||||
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The major components of other operating expenses were as follows.
Year ended December 31, | Three Months Ended, | Year ended December 31, | ||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | March 31, 2018 | 2017 | 2016 | ||||||||||||||||||
Travel, meals, and entertainment | $ | 750 | $ | 964 | $ | 940 | ||||||||||||||||||
Directors’ fees | 319 | 387 | 396 | $ | 89 | $ | 319 | $ | 387 | |||||||||||||||
Loan collection expense | 316 | 94 | 113 | |||||||||||||||||||||
Miscellaneous taxes | 258 | 328 | 213 | 120 | 258 | 328 | ||||||||||||||||||
Computer expense | 244 | 257 | 315 | 74 | 244 | 257 | ||||||||||||||||||
Office expense | 204 | 200 | 216 | |||||||||||||||||||||
Insurance | 180 | 205 | 173 | |||||||||||||||||||||
Printing and stationary | 108 | 150 | 148 | |||||||||||||||||||||
Other expenses | 235 | 19 | 203 | 304 | 727 | 574 | ||||||||||||||||||
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Total other operating expenses | $ | 2,614 | $ | 2,604 | $ | 2,717 | $ | 587 | $ | 1,548 | $ | 1,546 | ||||||||||||
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(14)
(16) SELECTED FINANCIAL RATIOS AND OTHER DATA (Investment Company Accounting)
The following table provides selected financial ratios and other data:data for the periods indicated.
Year ended December 31, | Three Months Ended March 31, | Year ended December 31, | ||||||||||||||||||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2017 | 2016 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||
Net share data | ||||||||||||||||||||||||||||||||||||||||
Net asset value at the beginning of the year | $ | 11.91 | $ | 11.42 | $ | 11.16 | $ | 10.95 | $ | 9.99 | $ | 11.80 | $ | 11.91 | $ | 11.42 | $ | 11.16 | $ | 10.95 | ||||||||||||||||||||
Net investment income (loss) | (0.33 | ) | (0.41 | ) | 0.69 | 0.60 | 0.55 | (0.15 | ) | (0.33 | ) | (0.41 | ) | 0.69 | 0.60 | |||||||||||||||||||||||||
Income tax provision | 1.51 | (1.90 | ) | 0.00 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||||||
Income tax provision (benefit) | 0.03 | 1.51 | (1.90 | ) | 0.00 | 0.00 | ||||||||||||||||||||||||||||||||||
Net realized gains (losses) on investments | (1.82 | ) | 0.02 | 0.31 | (0.22 | ) | 0.03 | (1.44 | ) | (1.82 | ) | 0.02 | 0.31 | (0.22 | ) | |||||||||||||||||||||||||
Net change in unrealized appreciation on investments | 0.65 | 3.26 | 0.20 | 0.76 | 0.58 | 0.94 | 0.65 | 3.26 | 0.20 | 0.76 | ||||||||||||||||||||||||||||||
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Net increase in net assets resulting from operations | 0.01 | 0.97 | 1.20 | 1.14 | 1.16 | |||||||||||||||||||||||||||||||||||
Net increase (decrease) in net assets resulting from operations | (0.62 | ) | 0.01 | 0.97 | 1.20 | 1.14 | ||||||||||||||||||||||||||||||||||
Issuance of common stock | (0.12 | ) | — | — | (0.01 | ) | 0.67 | (0.03 | ) | (0.12 | ) | — | — | (0.01 | ) | |||||||||||||||||||||||||
Repurchase of common stock | — | 0.12 | 0.06 | 0.03 | — | — | — | 0.12 | 0.06 | 0.03 | ||||||||||||||||||||||||||||||
Distribution of net investment income | — | (0.60 | ) | (0.81 | ) | (0.60 | ) | (0.48 | ) | — | — | (0.60 | ) | (0.81 | ) | (0.60 | ) | |||||||||||||||||||||||
Return of capital | — | — | (0.18 | ) | (0.35 | ) | (0.41 | ) | — | — | — | (0.18 | ) | (0.35 | ) | |||||||||||||||||||||||||
Distribution of net realized gains on investments | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
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Total distributions | — | (0.60 | ) | (0.99 | ) | (0.95 | ) | (0.89 | ) | — | — | (0.60 | ) | (0.99 | ) | (0.95 | ) | |||||||||||||||||||||||
Other | — | — | (0.01 | ) | — | 0.02 | — | — | — | (0.01 | ) | — | ||||||||||||||||||||||||||||
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Total increase (decrease) in net asset value | (0.11 | ) | 0.49 | 0.26 | 0.21 | 0.96 | (0.65 | ) | (0.11 | ) | 0.49 | 0.26 | 0.21 | |||||||||||||||||||||||||||
Net asset value at the end of the period/year(1) | $ | 11.15 | $ | 11.80 | $ | 11.91 | $ | 11.42 | $ | 11.16 | ||||||||||||||||||||||||||||||
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Per share market value at beginning of year | $ | 3.53 | $ | 3.02 | $ | 7.04 | $ | 10.01 | $ | 14.35 | ||||||||||||||||||||||||||||||
Per share market value at end of period/year | 4.65 | 3.53 | 3.02 | 7.04 | 10.01 | |||||||||||||||||||||||||||||||||||
Total return(2) | (129 | %) | 17 | % | (54 | %) | (22 | %) | (25 | %) | ||||||||||||||||||||||||||||||
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Total shareholders’ equity (net assets) | $ | 272,437 | $ | 287,159 | $ | 286,096 | $ | 278,088 | $ | 274,670 | ||||||||||||||||||||||||||||||
Average net assets | 284,021 | 285,704 | 276,978 | 276,745 | 276,254 | |||||||||||||||||||||||||||||||||||
Total expense ratio(3) (4) (5) | 10.02 | % | (3.03 | %) | 29.36 | % | 9.45 | % | 9.57 | % | ||||||||||||||||||||||||||||||
Operating expenses to average net assets(4) (5) | 5.87 | 4.83 | 8.23 | 6.04 | 6.48 | |||||||||||||||||||||||||||||||||||
Net investment income (loss) after income taxes to average net assets(4) (5) | (4.61 | ) | (2.49 | ) | 0.04 | 6.08 | 5.48 | |||||||||||||||||||||||||||||||||
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(Dollars in thousands, except per share data) Net asset value at the end of the year(1) Per share market value at beginning of year Per share market value at end of year Total return(2) Ratios/supplemental data Total shareholders’ equity (net assets) Average net assets Total expense ratio(3) (4) (5) Operating expenses to average net assets(4) (5) Net investment income (loss) after income taxes to average net assets(4) (5) Year ended December 31, 2017 2016 2015 2014 2013 $ 11.80 $ 11.91 $ 11.42 $ 11.16 $ 10.95 $ 3.02 $ 7.04 $ 10.01 $ 14.35 $ 11.74 3.53 3.02 7.04 10.01 14.35 17 % (54 %) (22 %) (25 %) 29 % $ 287,159 $ 286,096 $ 278,088 $ 274,670 $ 273,495 285,704 276,978 276,745 276,254 225,653 (3.03 %) 29.36 % 9.45 % 9.57 % 11 % 4.83 8.23 6.04 6.48 6.94 (2.49 ) 0.04 6.08 5.48 5.40
(1) | Includes $0.00 of undistributed net investment income per share as of three months ended March 31, 2018 and December 31, 2017, 2016, 2015 |
(2) | Total return is calculated by dividing the change in market value of a share of common stock during the year, assuming the reinvestment of distributions on the payment date, by the per share market value at the beginning of the year. |
(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, $5,272, $5,421, $5,658, |
11.75%, 6.88%, and 7.51% in the March 31, 2018 quarter, (1.37%), 6.31%, and (2.49%) in 2017, 29.42%, 8.28%, and 1.95% in 2016, 11.63%, 8.23%, and 5.94% in 2015, and 11.74%, 8.65%, and 5.46% in |
(5) | These ratios include the goodwill impairment writeoff of $5,099 in 2016. Excluding the writeoff, the total expense, operating expense, and net investment income ratios were 27.52%, 6.39%, and 1.88% in 2016. |
(15)(17) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Investment Plan (the 401(k) Plan) which covers all full-time and part-time employees of the Company who have attained the age of 21 and have a minimum of one year of service, including the employees of Medallion Bank. Under the 401(k) Plan, an employee may elect to defer not less than 1% and no more than 15% of the total annual compensation that would otherwise be paid to the employee, provided, however, that employee’s contributions may not exceed certain maximum amounts determined under the Internal Revenue Code. Employee contributions are invested in various mutual funds according to the directions of the employee. The Company matches employee contributions to the 401(k) Plan in an amount per employee up toone-third of such employee’s contribution but in no event greater than 2% of the portion of such employee’s annual salary eligible for 401(k) Plan benefits. The Company’s 401(k) plan expense, including amounts for the employees of Medallion Bank and other unconsolidated, wholly-owned portfolio companies,consolidated subsidiaries in the prior year periods, was approximately $182,000, $185,000, $187,000, and $185,000$187,000 for the years ended December 31, 2018, 2017, 2016, and 2015.2016.
(16)(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB ASC Topic 825, “Financial Instruments,” requires disclosure of fair value information about certain financial instruments, whether assets, liabilities, oroff-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) Investments—The Company’s investments are recorded at the estimated fair value of such investments.
(b) Floating rate borrowings—Due to the short-term nature of these instruments, the carrying amount approximates
(a) | Cash –Book value equals fair value.
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December 31, 2017 | December 31, 2016 | |||||||||||||||
(Dollars in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial assets | ||||||||||||||||
Investments | $ | 610,135 | $ | 610,135 | $ | 652,278 | $ | 652,278 | ||||||||
Cash(1) | 12,690 | 12,690 | 20,962 | 20,962 | ||||||||||||
Accrued interest receivable(2) | 547 | 547 | 769 | 769 | ||||||||||||
Financial liabilities | ||||||||||||||||
Funds borrowed(2)(3) | 327,623 | 330,084 | 349,073 | 340,290 | ||||||||||||
Accrued interest payable(2) | 3,831 | 3,831 | 2,883 | 2,883 |
(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) | Floatingrateborrowings –Due to the short-term nature of these instruments, the carrying amount approximates fair value. |
(f) | Commitmentstoextendcredit –The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At December 31, 2018 and December 31, 2017, the estimated fair value of theseoff-balance-sheet instruments was not material. |
(g) | Fixedrateborrowings – 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 December 31, 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) | $ | 57,713 | $ | 57,713 | $ | 12,690 | $ | 12,690 | ||||||||
Equity investments | 9,197 | 9,197 | — | — | ||||||||||||
Investment securities | 45,324 | 45,324 | — | — | ||||||||||||
Loans receivable | 981,487 | 981,487 | — | — | ||||||||||||
Investments | — | — | 610,135 | 610,135 | ||||||||||||
Accrued interest receivable (2) | 7,413 | 7,413 | 547 | 547 | ||||||||||||
Financial liabilities | ||||||||||||||||
Funds borrowed(3) | 1,062,028 | 1,062,297 | 327,623 | 330,084 | ||||||||||||
Accrued interest payable (2) | 3,852 | 3,852 | 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 December 31, |
(17)(19) 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. The Company accounts for substantially all of its financial instruments at fair value or considers fair value in its measurement, in accordance with the accounting guidance for investment companies. See Note 2 sections “Fair Value of Assets and Liabilities” and “Investment Valuation” for a description of our valuation methodology which is unchanged during 2017.
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 innon-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 mostover-the-counter derivatives, including interest rate and currency swaps); and |
D) | Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities, and derivatives). |
Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, and certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).
A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur. The following paragraphs describe the sensitivity of the various level 3 valuations to the factors that are relevant in their valuation analysis.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 December 31, 2018.
Bank Holding Company Accounting (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Equity investments | $ | — | $ | — | $ | 9,197 | $ | 9,197 | ||||||||
Available for sale investment securities (1) | — | 45,324 | — | 45,324 | ||||||||||||
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Total | $ | — | $ | 45,324 | $ | 9,197 | $ | 54,521 | ||||||||
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(1) | Total unrealized losses of $82, net of tax, was included in accumulated other comprehensive income (loss) for the nine months ended December 31, 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, under Investment Company Accounting, the initial valuation assessment iswas 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 becomesbecame nonperforming, the collateral value has beenwould be 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). Recently, as transfer price activity and the collateral value of medallion loans has declined, and greater weight has beenwas placed on the operating cash flows of the borrowers and the values of their personal guarantees in determining whether or not a valuation adjustment iswould be necessary. Those portfolios had historically been at very low loan to collateral value ratios, and as a result, historically havewere 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 hashad become more significant, which could resulthave resulted in a significantly lower fair value measurement.
The mezzanine and other secured commercial portions of the commercial loan portfolio arewere a combination of cash flow and collateral based lending. The initial valuation assessment iswas that as long as the loan is current and performing, its fair value approximates the par value of the loan. If a loan becomesbecame nonperforming, an evaluation iswould be performed which considersconsidered and analyzesanalyzed a variety of factors which may includehave included the financial condition and operating performance of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience, the relationships between the then 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 hashad its own unique attributes, the factors analyzed, and their relative importance to each valuation analysis, differdiffered between each asset, and may differhave differed from period to period for a particular asset. The valuation iswas highly sensitive to changes in the assumptions used. To the extent that any assumption in the analysis changeschanged significantly from one period to another, that change could resulthave resulted 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 had a material impact on the valuation in the currentappropriate period.
The investment in Medallion Bank iswas subject to a thorough valuation analysis as described previously, and on at least an annual basis, the Company also receivesreceived 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 determinesdetermined whether any factors givegave 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 fromnon-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. The Company incorporated these newthose 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. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016 and 2017. The Company incorporated thesethose 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 heightensbelieved heightened the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and thisthe appreciation of $15,500,000 was thereby recorded in 2015, additional appreciation of $128,918,000 was recorded in 2016, and $7,849,000 was recorded in 2017. See Note 3 for additional information about Medallion Bank.2017, and $39,826,000 was recorded in 2018.
Investments in controlled subsidiaries, other than Medallion Bank, equity investments, and investments other than securities arewere valued similarly, whilebut also consideringconsidered available currentthen-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 usesused the actual results of operations of the controlled subsidiaries as the best estimate of changes in fair value, in most cases, and recordsrecorded 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 resultsresulted in changes to the value of the position if there iswas clear evidence that it’sits value hashad either decreased or increased in light of the specific facts considered for each investment. The valuation iswas highly sensitive to changes in the assumptions used. To the extent that any assumption in the analysis changeschanged significantly from one period to another, that change could resulthave resulted 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 tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016.2017.
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||
2017 Assets | ||||||||||||||||||||||||||||||||
Investment Company Accounting (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Medallion loans | $ | — | $ | — | $ | 208,279 | $ | 208,279 | $ | — | $ | — | $ | 208,279 | $ | 208,279 | ||||||||||||||||
Commercial loans | — | — | 90,188 | 90,188 | — | — | 90,188 | 90,188 | ||||||||||||||||||||||||
Investments in Medallion Bank and other controlled subsidiaries | — | — | 302,147 | 302,147 | — | — | 302,147 | 302,147 | ||||||||||||||||||||||||
Equity investments | — | — | 9,521 | 9,521 | — | — | 9,521 | 9,521 | ||||||||||||||||||||||||
Investments other than securities | — | — | 7,450 | 7,450 | — | — | 7,450 | 7,450 | ||||||||||||||||||||||||
Other assets | — | — | 339 | 339 | — | — | 339 | 339 | ||||||||||||||||||||||||
2016 Assets | ||||||||||||||||||||||||||||||||
Medallion loans | $ | — | $ | — | $ | 266,816 | $ | 266,816 | ||||||||||||||||||||||||
Commercial loans | — | — | 83,634 | 83,634 | ||||||||||||||||||||||||||||
Investments in Medallion Bank and other controlled subsidiaries | — | — | 293,360 | 293,360 | ||||||||||||||||||||||||||||
Equity investments | 61 | — | 8,407 | 8,468 | ||||||||||||||||||||||||||||
Investments other than securities | — | — | 9,510 | 9,510 | ||||||||||||||||||||||||||||
Other assets | — | — | 354 | 354 | ||||||||||||||||||||||||||||
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Included in level 3 investments in Medallion Bank and other controlled subsidiaries 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 innon-marketable securities.
The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilities for the yearsnine months ended December 31, 2018 under Bank Holding Company Accounting, and for the quarter ended March 31, 2018 and year ended December 31, 2017 and 2016.under Investment Company Accounting.
(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 | (41,555 | ) | (491 | ) | 10,761 | 4,727 | (2,060 | ) | (15 | ) | ||||||||||||||
Purchases, investments, and issuances | 1,953 | 25,517 | 441 | 1,660 | — | — | ||||||||||||||||||
Sales, maturities, settlements, and distributions | (18,935 | ) | (18,472 | ) | (2,415 | ) | (5,273 | ) | — | — | ||||||||||||||
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December 31, 2017 | $ | 208,279 | $ | 90,188 | $ | 302,147 | $ | 9,521 | $ | 7,450 | $ | 339 | ||||||||||||
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Amounts related to held assets(1) | $ | 37,335 | ($ | 410 | ) | $ | 10,756 | $ | 1,941 | ($ | 2,060 | ) | ($ | 15 | ) | |||||||||
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(1) Total unrealized gains (losses) included in income for the year which relate to assets held as of December 31, 2017.
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(Dollars in thousands) | Medallion Loans | Commercial Loans | Investments in Medallion Bank & Other Controlled Subs | Equity Investments | Investments Other Than Securities | Other Assets | ||||||||||||||||||
December 31, 2015 | $ | 308,408 | $ | 81,895 | $ | 159,913 | $ | 6,797 | $ | 37,882 | $ | 354 | ||||||||||||
Gains (losses) included in earnings | (28,223 | ) | 2,394 | 133,121 | 3,383 | (28,372 | ) | — | ||||||||||||||||
Purchases, investments, and issuances | 19,996 | 22,544 | 5,061 | 1,851 | — | — | ||||||||||||||||||
Sales, maturities, settlements, and distributions | (33,365 | ) | (23,423 | ) | (4,735 | ) | (3,400 | ) | — | — | ||||||||||||||
Transfers in (out)(1) | — | 224 | — | (224 | ) | — | — | |||||||||||||||||
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December 31, 2016 | $ | 266,816 | $ | 83,634 | $ | 293,360 | $ | 8,407 | $ | 9,510 | $ | 354 | ||||||||||||
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Amounts related to held assets(2) | ($ | 28,028 | ) | ($ | 261 | ) | $ | 133,121 | $ | 2,481 | ($ | 28,372 | ) | — | ||||||||||
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(Dollars in thousands) | Equity Investments | |||
March 31, 2018 | $ | 9,458 | ||
Losses included in earnings | (1,274 | ) | ||
Purchases, investments, and issuances | 1,232 | |||
Sales, maturities, settlements, and distributions | (1,596 | ) | ||
Transfers in(1) | 1,377 | |||
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December 31, 2018 | $ | 9,197 | ||
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Amounts related to held assets(2) | ($ | 1,851 | ) | |
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(1) | Represents the |
(2) | Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of December 31, 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 | ) | — | — | ||||||||||||||
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March 31, 2018 | $ | 161,155 | $ | 93,620 | $ | 331,169 | $ | 9,458 | $ | 5,535 | $ | 339 | ||||||||||||
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Amounts related to held assets (1) | ($ | 38,190 | ) | ($ | 10 | ) | $ | 29,143 | ($ | 993 | ) | ($ | 1,915 | ) | $ | — | ||||||||
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|
(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 | ||||||||||||||||||
December 31, 2016 | $ | 266,816 | $ | 83,634 | $ | 293,360 | $ | 8,407 | $ | 9,510 | $ | 354 | ||||||||||||
Gains (losses) included in earnings | (41,555 | ) | (491 | ) | 10,761 | 4,727 | (2,060 | ) | (15 | ) | ||||||||||||||
Purchases, investments, and issuances | 1,953 | 25,517 | 441 | 1,660 | — | — | ||||||||||||||||||
Sales, maturities, settlements, and distributions | (18,935 | ) | (18,472 | ) | (2,415 | ) | (5,273 | ) | — | — | ||||||||||||||
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|
|
| |||||||||||||
December 31, 2017 | $ | 208,279 | $ | 90,188 | $ | 302,147 | $ | 9,521 | $ | 7,450 | $ | 339 | ||||||||||||
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| |||||||||||||
Amounts related to held assets (1) | $ | 37,335 | ($ | 410 | ) | $ | 10,756 | $ | 1,941 | ($ | 2,060 | ) | ($ | 15 | ) | |||||||||
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(1) | Total unrealized gains (losses) included in income for the year which relate to assets held as of December 31, |
The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on anon-recurring basis as of December 31, 2018 under Bank Holding Company Accounting.
2018(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 34,877 | $ | 34,877 | ||||||||
Loan collateral in process of foreclosure | — | — | 49,495 | 49,495 | ||||||||||||
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| |||||||||
Total | $ | — | $ | — | $ | 84,372 | $ | 84,372 | ||||||||
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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 Levellevel 3 within the fair value hierarchy. The tables below are not intended to beall-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 Levellevel 3 fair value measurements of assets and liabilities as of December 31, 2018 were as follows under Bank Holding Company Accounting.
(Dollars in thousands) | Fair Value at 12/31/18 | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Equity investments | $5,683 | Investee financial analysis | Financial condition and operating performance of the borrower | N/A | ||||||||
Collateral support | N/A | |||||||||||
1,850 | Investee book value adjusted for market appreciation | Financial condition and operating performance of the investee | N/A | |||||||||
Precedent arm’s length offer | Business enterprise value | $6,014 – $7,214 | ||||||||||
Business enterprise value/revenue multiples | 0.96x – 4.54x | |||||||||||
1,455 | Precedent market transaction | Offering price | $8.73 / share | |||||||||
209 | Investee book value | Valuation indicated by investee filings | N/A |
The valuation techniques and significant unobservable inputs used in recurring level 3 fair value measurements of assets and liabilities as of December 31, 2017 and 2016 were as follows.follows under Investment Company Accounting.
(Dollars in thousands) | Fair Value at 12/31/17 | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Medallion Loans | $ | 208,279 | Precedent market transactions | Adequacy of collateral (loan to value) | 1% - 420% (131%) | |||||||
Commercial Loans – Mezzanine and Other | 90,188 | Borrower financial analysis | Financial condition and operating performance of | N/A | ||||||||
the borrower Portfolio yields | 2% -19.00% (12.02%) | |||||||||||
Investment in Medallion Bank | 290,548 | Precedent M&A transactions | Price / Book Value multiples | 2.1x to 2.5x | ||||||||
Price / Earnings multiples | 8.7x to 10.6x | |||||||||||
Discounted cash flow | Discount rate | 17.50% | ||||||||||
Terminal value | $470,964 to $623,007 | |||||||||||
Investment in Other Controlled Subsidiaries | 4,623 | Investee financial analysis | Financial condition and operating performance | N/A | ||||||||
Enterprise value | $37,500 - 41,500 | |||||||||||
Equity value | $2,000 - $5,000 | |||||||||||
3,878 | Investee book value adjusted for asset appreciation | Financial condition and operating performance of the investee | N/A | |||||||||
Third party valuation/ offer to purchase asset | N/A | |||||||||||
3,001 | Investee book value adjusted for market appreciation | Financial condition and operating performance of the investee | N/A | |||||||||
Third party offer to purchase investment | N/A | |||||||||||
97 | Investee book value and equity pickup | Financial condition and operating performance of | N/A | |||||||||
Equity Investments | 5,417 | Investee financial analysis | Financial condition and operating performance of the borrower | N/A | ||||||||
Collateral support | N/A | |||||||||||
2,193 | Investee financial analysis | Equity value | $2,000 - $5,000 | |||||||||
Preferred equity yield | 12% | |||||||||||
1,455 | Precedent Market transaction | Offering price | $8.73 / share | |||||||||
456 | Investee book value | Valuation indicated by investee filings | N/A | |||||||||
Investments Other Than Securities | 7,450 | Precedent market transaction | Transfer prices of Chicago medallions | N/A | ||||||||
Cash flow analysis | Discount rate in cash flow analysis | 6% | ||||||||||
Other Assets | 339 | Borrower collateral analysis | Adequacy of collateral (loan to value) | 0% |
(Dollars in thousands) | Fair Value at 12/31/17 | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Medallion Loans | $208,279 | Precedent market transactions | Adequacy of collateral (loan to value) | 1% - 420% (131%) | ||||||||
Commercial Loans – Mezzanine and Other | 90,188 | Borrower financial analysis | Financial condition and operating performance of | N/A | ||||||||
the borrower Portfolio yields | 2% -19.00% (12.02%) | |||||||||||
Investment in Medallion Bank | 290,548 | Precedent M&A transactions | Price/book value multiples | 2.1x to 2.5x | ||||||||
Price/earnings multiples | 8.7x to 10.6x | |||||||||||
Discounted cash flow | Discount rate | 17.50% | ||||||||||
Terminal value | $470,964 to $623,007 | |||||||||||
Investment in Other Controlled Subsidiaries | 4,623 | Investee financial analysis | Financial condition and operating performance | N/A | ||||||||
Enterprise value | $37,500 - $41,500 | |||||||||||
Equity value | $2,000 - $5,000 | |||||||||||
3,878 | Investee book value adjusted for asset appreciation | Financial condition and operating performance of the investee | N/A | |||||||||
Third party valuation/ offer to purchase asset | N/A | |||||||||||
3,001 | Investee book value adjusted for market appreciation | Financial condition and operating performance of the investee | N/A |
(Dollars in thousands) Medallion Loans Commercial Loans – Mezzanine and Other Investment in Medallion Bank Investment in Other Controlled Subsidiaries operating performance Equity Investments Investments Other Than Securities Other Assets Fair Value
at 12/31/16 Valuation Techniques Unobservable Inputs Range
(Weighted Average) $ 266,816 Precedent market
transactions Adequacy of collateral
(loan to value) 0% - 379% (135%) 83,634 Borrower financial
analysis Financial condition and
operating performance
of the borrower N/A Portfolio yields 3% -19.00% (13.05%) 280,589 Publicly traded
comparables Price / Tangible Book
Value multiples 1.4x to 1.6x Price / Earnings
multiples 10.5x to 12.5x Weight of the
valuation method 40% Precedent M&A
transactions Price / Tangible Book
Value multiples 1.5x to 1.7x Price / Earnings
multiples 12.0x to 14.0x Weight of the
valuation method 40% Discounted cash
flow Risk-free rate 2.40% Discount rate 11.74% Terminal value $468,700 Weight of the
valuation method 20% 6,980 Investee financial
analysis Financial condition and
operating performance N/A Implied value of
individual franchises $30,000 Equity value $3,000 - $5,000 3,647 Investee book
value adjusted for
asset appreciation Financial condition and
operating performance
of the investee N/A Third party valuation/
offer to purchase asset N/A 1,690 Investee book
value adjusted for
market
appreciation Financial condition and
operating performance
of the investee N/A 454 Investee book
value and equity
pickup Financial condition and
of the investee N/A 5,480 Investee financial
analysis Financial condition and
operating performance
of the borrower N/A Collateral support N/A 1,351 Investee financial
analysis Equity value $3,000 - $5,000 Preferred equity yield 12% 1,101 Investee book
value Valuation indicated by
investee filings N/A 475 Market
comparables Discount for lack of
marketability 10% (10%) 9,510 Precedent market
transaction Transfer prices of
Chicago medallions N/A Cash flow analysis Discount rate in cash
flow analysis 6% 354 Borrower
collateral analysis Adequacy of collateral
(loan to value) 0%
(Dollars in thousands) | Fair Value at 12/31/17 | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Third party offer to purchase investment | N/A | |||||||||||
97 | Investee book value and equity pickup | Financial condition and operating performance of the investee | N/A | |||||||||
Equity Investments | 5,417 | Investee financial analysis | Financial condition and operating performance of the borrower | N/A | ||||||||
Collateral support | N/A | |||||||||||
2,193 | Investee financial analysis | Equity value | | $2,000 - $5,000 | ||||||||
Preferred equity yield | 12% | |||||||||||
1,455 | Precedent market transaction | Offering price | $8.73/share | |||||||||
456 | Investee book value | Valuation indicated by investee filings | N/A | |||||||||
Investments Other Than Securities | 7,450 | Precedent market transaction | Transfer prices of Chicago medallions | N/A | ||||||||
Cash flow analysis | Discount rate in cash flow analysis | 6% | ||||||||||
Other Assets | 339 | Borrower collateral analysis | Adequacy of collateral (loan to value) | 0% |
(18)(20) INVESTMENTS OTHER THAN SECURITIES
The following table presents the Company’s investments other than securities as of December 31, 2017 and 2016.under Investment Company Accounting.
Investment Type(Dollars in thousands) | Number of Investments | Investment Cost | Value as of 12/31/17 | Value as of 12/31/16 | ||||||||||||
City of Chicago Taxicab Medallions | 154 | (1) | $ | 8,411 | $ | 7,238 | (2) | $ | 9,240 | (2) | ||||||
City of Chicago Taxicab Medallions (handicap accessible) | 5 | (1) | 278 | 212 | (3) | 270 | (3) | |||||||||
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| |||||||||||
Total Investments Other Than Securities | $ | 8,689 | $ | 7,450 | $ | 9,510 | ||||||||||
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Investment Type(Dollars in thousands) | Number of Investments | Investment Cost | Value as of 12/31/17 | |||||||||
City of Chicago taxicab medallions | 154 | (1) | $ | 8,411 | $ | 7,238 | (2) | |||||
City of Chicago taxicab medallions (handicap accessible) | 5 | (1) | 278 | 212 | (3) | |||||||
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|
| |||||||||
Total investments other than securities | $ | 8,689 | $ | 7,450 | ||||||||
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|
(1) | Investment is not readily marketable, is considered income producing, is not subject to option, and is anon-qualifying asset under the 1940 Act. |
(2) | Gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation for |
(3) | Gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation for |
(19)(21) SMALL BUSINESS LENDING FUND PROGRAM (SBLF) AND TROUBLED ASSETS RELIEF PROGRAM (TARP)
On February 27, 2009 and December 22, 2009, Medallion Bank issued, and the U.S. Treasury purchased under the TARP Capital Purchase Program (the CPP), Medallion Bank’s fixed ratenon-cumulative Perpetual Preferred Stock, Series A, B, C, and D for an aggregate purchase price of $21,498,000 in cash. On July 21, 2011,
Medallion Bank issued, and the U.S. Treasury purchased, 26,303 shares ofSenior Non-Cumulative Perpetual Preferred Stock, Series E (Series E) for an aggregate purchase price of $26,303,000 under the SBLF. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. In connection with the issuance of the Series E, the Bank exited the CPP by redeeming the Series A, B, C, and D; and received approximately $4,000,000, net of dividends due on the repaid securities. The Bank pays a dividend rate of 9% on the Series E.
(22) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The following shows the condensed financial information of Medallion Financial Corp. (parent company only) under Bank Holding Company Accounting.
Condensed balance sheet
(Dollars in thousands) | December 31, 2018 | |||
Assets | ||||
Cash | $ | 1,110 | ||
Net loans receivable | 37,737 | |||
Loans collateral in process of foreclosure | 12,001 | |||
Goodwill and intangible assets | 178,621 | |||
Investments in bank subsidiaries | 142,469 | |||
Investments innon-bank subsidiaries | 91,059 | |||
Other assets | 5,776 | |||
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| |||
Total assets | $ | 468,773 | ||
|
| |||
Liabilities | ||||
Other liabilities | $ | 9,073 | ||
Intercompany payables | 63,352 | |||
Short-term borrowings | 38,870 | |||
Deferred tax liabilities and other tax payables | 28,245 | |||
Long-term borrowings | 66,625 | |||
|
| |||
Total liabilities | 206,165 | |||
|
| |||
Total stockholders’ equity | 262,608 | |||
|
| |||
Total liabilities and equity | $ | 468,773 | ||
|
|
Condensed statements of operations
(Dollars in thousands) | Nine Months Ended December 31, 2018 | |||
Interest income | $ | (1,958 | ) | |
Interest expense | 5,480 | |||
|
| |||
Net interest loss | (7,438 | ) | ||
Provision for loan losses | 19,190 | |||
|
| |||
Net interest loss after provision for loan losses | (26,628 | ) | ||
Other income (expenses), net | (16,913 | ) | ||
|
| |||
Loss before income taxes and undistributed earnings of subsidiaries | (43,541 | ) | ||
Income tax benefit | 5,328 | |||
|
| |||
Loss before undistributed earnings of subsidiaries | (38,213 | ) | ||
Undistributed earnings of subsidiaries | 28,041 | |||
|
| |||
Net loss attributable to parent company | $ | (10,172 | ) | |
|
|
Condensed statement of other comprehensive loss
(Dollars in thousands) | Nine Months Ended December 31, 2018 | |||
Net loss | $ | (10,172 | ) | |
Other comprehensive loss | (82 | ) | ||
|
| |||
Total comprehensive loss attributable to MFIN | $ | (10,254 | ) | |
|
|
Condensed statement of cash flow
(Dollars in thousands) | Nine Months Ended December 31, 2018 | |||
CASH FLOWS FROM OPERATING ACTIVITIES Net loss | $ | (10,172 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries | (28,041 | ) | ||
Provision for loan losses | 19,190 | |||
Depreciation and amortization | 5,451 | |||
Change in deferred and other tax assets/liabilities, net | 4,512 | |||
Proceeds loan collateral in process of foreclosure | 487 | |||
Net change in loan collateral in process of foreclosure | 678 | |||
Stock-based compensation expense | 425 | |||
Decrease in other assets | 4,073 | |||
Decrease in intercompany payables | (3,368 | ) | ||
Increase in other liabilities | 4,237 | |||
|
| |||
Net cash used by operating activities | (2,528 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES Loans originated | (309 | ) | ||
Proceeds from principal receipts, sales, and maturities of loans | 10,900 | |||
Dividends from subsidiaries | 5,200 | |||
|
| |||
Net cash provided by investing activities | 15,791 | |||
CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from funds borrowed | — | |||
Repayments of funds borrowed | (17,208 | ) | ||
|
| |||
Net cash used for financing activities | (17,208 | ) | ||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (3,945 | ) | ||
Cash and cash equivalents,beginning of period | 5,055 | |||
|
| |||
Cash and cash equivalents,end of period | $ | 1,110 | ||
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|
(23) VARIABLE INTEREST ENTITIES (VIE)
During the 2018 third quarter, the Company determined that Trust III was a VIE. Trust III had been consolidated as a subsidiary of MFC historically, although it should have been consolidated under the variable interest model, since MFC was its primary beneficiary until October 31, 2018. Trust III is a VIE since the key decision-making authority rests in the servicing agreement (where MFC is the servicer for Trust III) rather than in the voting rights of the equity interests and as a result the decision-making rights are considered a variable interest. This conclusion is supported by a qualitative assessment that Trust III does not have sufficient equity at risk. Since the inception of Trust III, MFC had also been party to a limited guaranty which was considered a variable interest because, pursuant to the guaranty, MFC absorbed variability as a result of theon-going performance of the loans in Trust III. As of October 31, 2018, the Company determined that MFC was no longer the primary beneficiary of Trust III and accordingly deconsolidated the VIE, leading to a net gain of $25,325,000 recorded as well as a new promissory note payable by MFC of $1,400,000 issued in settlement of the limited guaranty (see Note 7 for more details). In addition, the Company remains the servicer of the assets of Trust III for a fee.
The following table shows the assets and liabilities of Trust III as December 31, 2017 when it had been a consolidated VIE.
Investment Company Accounting | ||||
(Dollars in thousands) | December 31, 2017 | |||
Assets | ||||
Cash | $ | 393 | ||
Net investments | 96,688 | |||
Accrued interest receivable | 170 | |||
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| |||
Total assets | $ | 97,251 | ||
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| |||
Liabilities | ||||
Accrued interest payable | $ | 1,849 | ||
DZ loan | 99,984 | |||
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| |||
Total liabilities | $ | 101,833 | ||
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(24) SUBSEQUENT EVENTS
We have evaluated subsequent events that have occurred through the date of financial statement issuance.
On January 31, 2018,February 28, 2019, a credit facility with a maturity date of January 31, 2018 was extended to July 31, 2019.
On January 31, 2018, the SBA Note was amended to change the required minimum principal and interest to be paid on or before FebruaryMarch 1, 2018 to $5,000,000 and the minimum principal and interest to be paid on or before February 1, 2019 to $10,000,000.
On March 7, 2018, a majority of the Company’s shareholders authorized the Company’s Board of Directors to withdraw the Company’s election to be regulated as a BDC under the 1940 Act and our Board of Directors approved the filing of the Company’s withdrawal form with the SEC to be made on or about April 1, 2018. At that point, the Company would no longer be a BDC or be subject to the provisions of the 1940 Act applicable to BDCs. Assuming such withdrawal from BDC status occurs, commencing with the second quarter of 2018, Medallion Bank would no longer be reported as an investment at fair value and instead its financial results would be consolidated with those of the Company.
On March 13, 2018, the DZ loan was extended until December 15, 2018.September 1, 2020.
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate | Security Type (all restricted unless otherwise noted) | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||||
Medallion Loans | ||||||||||||||||||||||||||||||||||||||||||
New York | 350 | 53 | % | 4.23 | % | $ | 10,898 | $ | 168,710 | $ | 167,226 | $ | 151,309 | |||||||||||||||||||||||||||||
Sean Cab Corp ## | Term Loan | 12/09/11 | 11/23/18 | 1 | 1 | % | 4.63 | % | $ | 3,159 | $ | 3,159 | $ | 3,159 | ||||||||||||||||||||||||||||
Real Cab Corp ## | Term Loan | 07/20/07 | 12/20/17 | 1 | 1 | % | 2.81 | % | $ | 2,545 | $ | 2,545 | $ | 2,545 | ||||||||||||||||||||||||||||
Real Cab Corp ## | Term Loan | 07/20/07 | 12/20/17 | 1 | * | 2.81 | % | $ | 350 | $ | 350 | $ | 350 | |||||||||||||||||||||||||||||
Slo Cab Corp ## | Term Loan | 07/20/07 | 12/20/17 | 1 | 1 | % | 2.81 | % | $ | 1,527 | $ | 1,527 | $ | 1,527 | ||||||||||||||||||||||||||||
Slo Cab Corp ## | Term Loan | 07/20/07 | 12/20/17 | 1 | * | 2.81 | % | $ | 210 | $ | 210 | $ | 210 | |||||||||||||||||||||||||||||
Junaid Trans Corp ## & {Annually-Prime plus 1.00%} | Term Loan | 04/30/13 | 04/29/19 | 1 | * | 5.00 | % | $ | 1,379 | $ | 1,379 | $ | 1,379 | |||||||||||||||||||||||||||||
Avi Taxi Corporation ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||||
Hj Taxi Corp ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||||
Anniversary Taxi Corp ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||||
Kby Taxi Inc ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||||
Apple Cab Corp ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||||
Penegali Taxi LLC ## | Term Loan | 12/11/14 | 12/10/17 | 1 | * | 3.75 | % | $ | 1,294 | $ | 1,294 | $ | 1,294 | |||||||||||||||||||||||||||||
Uddin Taxi Corp ## & | Term Loan | 11/05/15 | 11/05/18 | 1 | * | 4.75 | % | $ | 1,284 | $ | 1,284 | $ | 1,284 | |||||||||||||||||||||||||||||
Waylon Transit LLC ## | Term Loan | 09/27/17 | 09/27/22 | 1 | * | 0.00 | % | $ | 1,275 | $ | 1,275 | $ | 1,275 | $ | 1,277 | |||||||||||||||||||||||||||
Sonu-Seema Corp ## (interest rate includes deferred interest of 2.50%) | Term Loan | 12/07/12 | 12/20/18 | 1 | * | 5.00 | % | $ | 1,275 | $ | 1,275 | $ | 1,275 | |||||||||||||||||||||||||||||
(deferred interest of $34 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Bunty & Jyoti Inc ## (interest rate includes deferred interest of 2.50%) | Term Loan | 03/13/13 | 12/13/18 | 1 | * | 5.00 | % | $ | 1,259 | $ | 1,259 | $ | 1,259 | |||||||||||||||||||||||||||||
(deferred interest of $35 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Perem Hacking Corp ## & {Annually-Prime plus .25%} | Term Loan | 05/01/16 | 05/01/21 | 1 | * | 4.25 | % | $ | 1,223 | $ | 1,223 | $ | 1,225 | |||||||||||||||||||||||||||||
S600 Service Co Inc ## & {Annually-Prime plus .25%} | Term Loan | 05/01/16 | 05/01/21 | 1 | * | 4.25 | % | $ | 1,223 | $ | 1,223 | $ | 1,225 | |||||||||||||||||||||||||||||
Ela Papou LLC ## | Term Loan | 06/27/14 | 12/15/17 | 1 | * | 4.00 | % | $ | 1,213 | $ | 1,213 | $ | 1,213 | |||||||||||||||||||||||||||||
Earie Hacking LLC ## | Term Loan | 12/28/15 | 12/28/20 | 1 | * | 3.60 | % | $ | 1,173 | $ | 1,173 | $ | 1,174 | |||||||||||||||||||||||||||||
Amme Taxi Inc ## | Term Loan | 10/21/13 | 10/21/18 | 1 | * | 3.70 | % | $ | 1,162 | $ | 1,162 | $ | 1,162 | |||||||||||||||||||||||||||||
Yosi Transit Inc ## | Term Loan | 07/20/07 | 12/20/17 | 1 | * | 2.81 | % | $ | 1,018 | $ | 1,018 | $ | 1,018 | |||||||||||||||||||||||||||||
Yosi Transit Inc ## | Term Loan | 07/20/07 | 12/20/17 | 1 | * | 2.81 | % | $ | 140 | $ | 140 | $ | 140 | |||||||||||||||||||||||||||||
Various New York && ## | 0.00% to 18.38% (interest rate includes deferred interest 1.00% to 9.19%) | | Term Loan | | | 03/23/01 to 12/22/17 | | | 05/28/16 to 12/21/26 | | 327 | 42 | % | 4.36 | % | $ | 9,623 | $ | 139,356 | $ | 137,872 | $ | 121,948 | |||||||||||||||||||
(deferred interest of $1,281 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Chicago | 107 | 5 | % | 4.74 | % | $ | 0 | $ | 20,172 | $ | 19,436 | $ | 15,602 | |||||||||||||||||||||||||||||
Sweetgrass Peach &Chadwick Cap ## (interest rate includes deferred interest of 1.00%) | Term Loan | 08/28/12 | 02/24/18 | 1 | * | 6.00 | % | $ | 1,374 | $ | 1,374 | $ | 1,374 | |||||||||||||||||||||||||||||
(deferred interest of $20 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Various Chicago && ## | 0.00% to 7.00% (interest rate includes deferred interest .75% to 2.75%) | Term Loan | | 01/22/10 to 08/08/16 | | | 03/12/16 to 12/22/20 | | 106 | 5 | % | 4.65 | % | $ | 0 | $ | 18,798 | $ | 18,062 | $ | 14,228 | |||||||||||||||||||||
(deferred interest of $207 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Newark && ## | 110 | 8 | % | 5.34 | % | $ | 1,047 | $ | 21,999 | $ | 21,935 | $ | 21,684 | |||||||||||||||||||||||||||||
Viergella Inc ## | Term Loan | 02/20/14 | 02/20/18 | 1 | * | 4.75 | % | $ | 1,278 | $ | 1,278 | $ | 1,278 | |||||||||||||||||||||||||||||
Various Newark && ## | 4.50% to 7.00% (interest rate includes deferred interest 1.50%) | Term Loan | | 04/09/10 to 10/12/17 | | | 10/17/17 to 05/14/25 | | 109 | 7 | % | 5.38 | % | $ | 1,047 | $ | 20,721 | $ | 20,657 | $ | 20,406 | |||||||||||||||||||||
(deferred interest of $2 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Boston && ## | 2.75% to 6.15% | Term Loan | | 06/12/07 to 10/04/17 | | | 12/07/15 to 11/06/25 | | 59 | 6 | % | 4.51 | % | $ | 633 | $ | 18,907 | $ | 18,564 | $ | 18,504 | |||||||||||||||||||||
Cambridge && ## | 3.75% to 5.50% | Term Loan | | 05/06/11 to 12/15/15 | | | 03/29/16 to 01/26/20 | | 13 | 0 | % | 4.55 | % | $ | 0 | $ | 824 | $ | 773 | $ | 693 | |||||||||||||||||||||
Various Other && ## | 4.75% to 9.00% | Term Loan | | 04/28/08 to 07/30/15 | | | 01/03/17 to 09/01/23 | | 9 | 0 | % | 7.95 | % | $ | 0 | $ | 500 | $ | 482 | $ | 487 | |||||||||||||||||||||
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Total medallion loans ($183,529 pledged as collateral under borrowing arrangements) |
| 648 | 73 | % | 4.41 | % | $ | 12,578 | $ | 231,112 | $ | 228,416 | $ | 208,279 | ||||||||||||||||||||||||||||
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Commercial Loans | ||||||||||||||||||||||||||||||||||||||||||
Secured mezzanine (22% North Carolina, 16% Minnesota, 7% Ohio, 6% Texas, 6% Delaware 6% California, 5% Oklahoma, 5% Oregon, 4% Kansas, 4% North Dakota, 4% Pennsylvania, and 15% all other states)(2) |
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Manufacturing (37% of the total) | Innovative Metal, Inc. dba Southwest Data Products (interest rate includes PIK interest of 2.00%) | Term Loan | 04/06/17 | 04/06/24 | 1 | 2 | % | 14.00 | % | $ | 5,000 | $ | 5,000 | $ | 5,000 | $ | 4,980 | |||||||||||||||||||||||||
Stride Tool Holdings, LLC (interest rate includes PIK interest of 3.00%) | Term Loan | 04/05/16 | 04/05/21 | 1 | 1 | % | 15.00 | % | $ | 4,217 | $ | 4,217 | $ | 4,179 | ||||||||||||||||||||||||||||
(capitalized interest of $217 per footnote 2) |
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||
Medallion Loans | ||||||||||||||||||||||||||||||||||||||||
New York | 350 | 53 | % | 4.23 | % | $ | 10,898 | $ | 168,710 | $ | 167,226 | $ | 151,309 | |||||||||||||||||||||||||||
Sean Cab Corp ## | Term Loan | 12/09/11 | 11/23/18 | 1 | 1 | % | 4.63 | % | $ | 3,159 | $ | 3,159 | $ | 3,159 | ||||||||||||||||||||||||||
Real Cab Corp ## | Term Loan | 07/20/07 | 12/20/17 | 1 | 1 | % | 2.81 | % | $ | 2,545 | $ | 2,545 | $ | 2,545 | ||||||||||||||||||||||||||
Real Cab Corp ## | Term Loan | 07/20/07 | 12/20/17 | 1 | * | 2.81 | % | $ | 350 | $ | 350 | $ | 350 | |||||||||||||||||||||||||||
Slo Cab Corp ## | Term Loan | 07/20/07 | 12/20/17 | 1 | 1 | % | 2.81 | % | $ | 1,527 | $ | 1,527 | $ | 1,527 | ||||||||||||||||||||||||||
Slo Cab Corp ## | Term Loan | 07/20/07 | 12/20/17 | 1 | * | 2.81 | % | $ | 210 | $ | 210 | $ | 210 | |||||||||||||||||||||||||||
Junaid Trans Corp ## & {Annually-Prime plus 1.00%} | Term Loan | 04/30/13 | 04/29/19 | 1 | * | 5.00 | % | $ | 1,379 | $ | 1,379 | $ | 1,379 | |||||||||||||||||||||||||||
Avi Taxi Corporation ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||
Hj Taxi Corp ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||
Anniversary Taxi Corp ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||
Kby Taxi Inc ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||
Apple Cab Corp ## | Term Loan | 04/11/14 | 12/10/17 | 1 | * | 3.25 | % | $ | 1,329 | $ | 1,329 | $ | 1,329 | |||||||||||||||||||||||||||
Penegali Taxi LLC ## | Term Loan | 12/11/14 | 12/10/17 | 1 | * | 3.75 | % | $ | 1,294 | $ | 1,294 | $ | 1,294 | |||||||||||||||||||||||||||
Uddin Taxi Corp ## & | Term Loan | 11/05/15 | 11/05/18 | 1 | * | 4.75 | % | $ | 1,284 | $ | 1,284 | $ | 1,284 | |||||||||||||||||||||||||||
Waylon Transit LLC ## | Term Loan | 09/27/17 | 09/27/22 | 1 | * | 0.00 | % | $ | 1,275 | $ | 1,275 | $ | 1,275 | $ | 1,277 | |||||||||||||||||||||||||
Sonu-Seema Corp ## (interest rate includes deferred interest of 2.50%) | Term Loan | 12/07/12 | 12/20/18 | 1 | * | 5.00 | % | $ | 1,275 | $ | 1,275 | $ | 1,275 | |||||||||||||||||||||||||||
(deferred interest of $34 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Bunty & Jyoti Inc ## (interest rate includes deferred interest of 2.50%) | Term Loan | 03/13/13 | 12/13/18 | 1 | * | 5.00 | % | $ | 1,259 | $ | 1,259 | $ | 1,259 | |||||||||||||||||||||||||||
(deferred interest of $35 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Perem Hacking Corp ## & {Annually-Prime plus .25%} | Term Loan | 05/01/16 | 05/01/21 | 1 | * | 4.25 | % | $ | 1,223 | $ | 1,223 | $ | 1,225 | |||||||||||||||||||||||||||
S600 Service Co Inc ## & {Annually-Prime plus .25%} | Term Loan | 05/01/16 | 05/01/21 | 1 | * | 4.25 | % | $ | 1,223 | $ | 1,223 | $ | 1,225 | |||||||||||||||||||||||||||
Ela Papou LLC ## | Term Loan | 06/27/14 | 12/15/17 | 1 | * | 4.00 | % | $ | 1,213 | $ | 1,213 | $ | 1,213 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security Type (all restricted unless otherwise noted) | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost (4) | Fair Value | |||||||||||||||||||||||||||||||||
AA Plush Holdings, LLC (interest rate includes PIK interest of 6.00%) | Term Loan | 08/15/14 | 08/15/19 | 1 | 1 | % | 14.00 | % | $ | 3,397 | $ | 3,397 | $ | 3,393 | ||||||||||||||||||||||||||||||
(capitalized interest of $397 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Pinnacle Products International, Inc. (interest rate includes PIK interest of 3.00%) | Term Loan | 10/09/15 | 10/09/20 | 1 | 1 | % | 15.00 | % | $ | 3,249 | $ | 3,249 | $ | 3,249 | ||||||||||||||||||||||||||||||
(capitalized interest of $449 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Liberty Paper Products Acquisition, LLC (interest rate includes PIK interest of 2.00%) | Term Loan | 06/09/16 | 06/09/21 | 1 | 1 | % | 14.00 | % | $ | 3,096 | $ | 3,096 | $ | 3,096 | ||||||||||||||||||||||||||||||
(capitalized interest of $101 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
EMI Porta Opco, LLC (interest rate includes PIK interest of 1.00%) | Term Loan | 12/11/17 | 03/11/23 | 1 | 1 | % | 13.00 | % | $ | 3,000 | $ | 3,002 | $ | 3,002 | $ | 3,002 | ||||||||||||||||||||||||||||
(capitalized interest of $2 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
BB Opco, LLC d/b/a BreathableBaby, LLC (interest rate includes PIK interest of 3.00%) | Term Loan | 08/01/14 | 08/01/19 | 1 | 1 | % | 15.00 | % | $ | 2,718 | $ | 2,718 | $ | 2,718 | ||||||||||||||||||||||||||||||
(capitalized interest of $218 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
EGC Operating Company, LLC (interest rate includes PIK interest of 1.00%) | Term Loan | 09/30/14 | 09/30/19 | 1 | 1 | % | 13.00 | % | $ | 1,959 | $ | 1,959 | $ | 1,959 | ||||||||||||||||||||||||||||||
(capitalized interest of $49 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
American Cylinder, Inc. d/b/a All Safe (interest rate includes PIK interest of 7.00%) | Term Loan | 07/03/13 | 09/30/18 | 1 | 1 | % | 19.00 | % | $ | 1,782 | $ | 1,782 | $ | 1,782 | ||||||||||||||||||||||||||||||
(capitalized interest of $282 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Tri-Tech Forensics, Inc. (interest rate includes PIK interest of 2.00%) | Term Loan | 06/15/17 | 06/15/22 | 1 | 1 | % | 14.00 | % | $ | 1,500 | $ | 1,500 | $ | 1,500 | $ | 1,500 | ||||||||||||||||||||||||||||
Orchard Holdings, Inc. & | Term Loan | 03/10/99 | 03/31/10 | 1 | * | 13.00 | % | $ | 1,390 | $ | 1,390 | $ | 1,390 | |||||||||||||||||||||||||||||||
Filter Holdings, Inc. (interest rate includes PIK interest of 2.00%) | Term Loan | 05/05/17 | 05/05/22 | 1 | * | 14.00 | % | $ | 1,250 | $ | 1,250 | $ | 1,250 | $ | 1,250 | |||||||||||||||||||||||||||||
Various Other 10.00% | Term Loan | 03/28/17 | 03/28/22 | 1 | * | 10.00 | % | $ | 200 | $ | 200 | $ | 200 | $ | 200 | |||||||||||||||||||||||||||||
Arts, Entertainment, and Recreation (19% of the total) | RPAC Racing LLC & (interest rate includes PIK interest of 2.00%) | Term Loan | 11/27/17 | 03/31/20 | 1 | 3 | % | 2.00 | % | $ | 7,827 | $ | 7,827 | $ | 7,827 | $ | 7,827 | |||||||||||||||||||||||||||
(capitalized interest of $15 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
RPAC Racing LLC & (interest rate includes PIK interest of 2.00%) | Term Loan | 06/22/16 | 03/31/20 | 1 | 1 | % | 2.00 | % | $ | 2,034 | $ | 2,034 | $ | 2,034 | ||||||||||||||||||||||||||||||
(capitalized interest of $278 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
RPAC Racing LLC & (interest rate includes PIK interest of 2.00%) | Term Loan | 09/14/16 | 03/31/20 | 1 | * | 2.00 | % | $ | 1,000 | $ | 1,000 | $ | 1,000 | |||||||||||||||||||||||||||||||
(capitalized interest of $120 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
RPAC Racing LLC & (interest rate includes PIK interest of 2.00%) | Term Loan | 11/19/10 | 03/30/20 | 1 | 2 | % | 2.00 | % | $ | 5,611 | $ | 5,611 | $ | 5,611 | ||||||||||||||||||||||||||||||
(capitalized interest of $2,572 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Professional, Scientific, and Technical Services (18% of the total) | Weather Decision Technologies, Inc. (interest rate includes PIK interest of 9.00%) | Term Loan | 12/11/15 | 12/11/20 | 1 | 1 | % | 18.00 | % | $ | 4,221 | $ | 4,221 | $ | 4,214 | |||||||||||||||||||||||||||||
(capitalized interest of $721 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Weather Decision Technologies, Inc. (interest rate includes PIK interest of 7.00%) | Term Loan | 11/08/17 | 06/30/18 | 1 | * | 14.00 | % | $ | 325 | $ | 327 | $ | 327 | $ | 327 | |||||||||||||||||||||||||||||
(capitalized interest of $2 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
ADSCO Opco, LLC (interest rate includes PIK interest of 2.00%) | Term Loan | 10/25/16 | 10/25/21 | 1 | 1 | % | 13.00 | % | $ | 3,687 | $ | 3,687 | $ | 3,677 | ||||||||||||||||||||||||||||||
(capitalized interest of $87 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Northern Technologies, LLC (interest rate includes PIK interest of 1.00%) | Term Loan | 01/29/16 | 01/29/23 | 1 | 1 | % | 13.00 | % | $ | 3,670 | $ | 3,670 | $ | 3,670 | ||||||||||||||||||||||||||||||
(capitalized interest of $70 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
+ | DPIS Engineering, LLC | Term Loan | 12/01/14 | 06/30/20 | 1 | 1 | % | 12.00 | % | $ | 2,000 | $ | 2,000 | $ | 1,998 | |||||||||||||||||||||||||||||
+ | Portu-Sunberg Marketing LLC | Term Loan | 10/21/16 | 02/21/22 | 1 | * | 12.00 | % | $ | 1,250 | $ | 1,250 | $ | 1,245 | ||||||||||||||||||||||||||||||
Various Other 14.00% | Term Loan | 05/21/15 | 05/21/22 | 1 | * | 14.00 | % | $ | 1,156 | $ | 1,156 | $ | 1,156 | |||||||||||||||||||||||||||||||
(capitalized interest of $11 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Information (9% of the total) | US Internet Corp. | Term Loan | 03/14/17 | 03/14/22 | 1 | 1 | % | 14.50 | % | $ | 5,650 | $ | 4,075 | $ | 4,075 | $ | 4,062 | |||||||||||||||||||||||||||
US Internet Corp. (interest rate includes PIK interest of 17.00%) | Term Loan | 03/14/17 | 03/14/22 | 1 | * | 19.00 | % | $ | 1,000 | $ | 1,147 | $ | 1,147 | $ | 1,147 | |||||||||||||||||||||||||||||
(capitalized interest of $147 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Centare Holdings, Inc. (interest rate includes PIK interest of 2.00%) | Term Loan | 08/30/13 | 08/30/18 | 1 | 1 | % | 14.00 | % | $ | 2,500 | $ | 2,500 | $ | 2,497 | ||||||||||||||||||||||||||||||
Wholesale Trade (6% of the total) | + | Classic Brands, LLC | Term Loan | 01/08/16 | 04/30/23 | 1 | 1 | % | 12.00 | % | $ | 2,880 | $ | 2,880 | $ | 2,880 |
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||
Earie Hacking LLC ## | Term Loan | 12/28/15 | 12/28/20 | 1 | * | 3.60 | % | $ | 1,173 | $ | 1,173 | $ | 1,174 | |||||||||||||||||||||||||||
Amme Taxi Inc ## | Term Loan | 10/21/13 | 10/21/18 | 1 | * | 3.70 | % | $ | 1,162 | $ | 1,162 | $ | 1,162 | |||||||||||||||||||||||||||
Yosi Transit Inc ## | Term Loan | 07/20/07 | 12/20/17 | 1 | * | 2.81 | % | $ | 1,018 | $ | 1,018 | $ | 1,018 | |||||||||||||||||||||||||||
Yosi Transit Inc ## | Term Loan | 07/20/07 | 12/20/17 | 1 | * | 2.81 | % | $ | 140 | $ | 140 | $ | 140 | |||||||||||||||||||||||||||
Various New York && ## | 0.00% to 18.38% (interest rate includes deferred interest 1.00% to 9.19%) | Term Loan | | 03/23/01 to 12/22/17 | | | 05/28/16 to 12/21/26 | | 327 | 42 | % | 4.36 | % | $ | 9,623 | $ | 139,356 | $ | 137,872 | $ | 121,948 | |||||||||||||||||||
(deferred interest of $1,281 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Chicago | 107 | 5 | % | 4.74 | % | $ | 0 | $ | 20,172 | $ | 19,436 | $ | 15,602 | |||||||||||||||||||||||||||
Sweetgrass Peach &Chadwick Cap ## (interest rate includes deferred interest of 1.00%) | Term Loan | 08/28/12 | 02/24/18 | 1 | * | 6.00 | % | $ | 1,374 | $ | 1,374 | $ | 1,374 | |||||||||||||||||||||||||||
(deferred interest of $20 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Various Chicago && ## | 0.00% to 7.00% (interest rate includes deferred interest .75% to 2.75%) | Term Loan | | 01/22/10 to 08/08/16 | | | 03/12/16 to 12/22/20 | | 106 | 5 | % | 4.65 | % | $ | 0 | $ | 18,798 | $ | 18,062 | $ | 14,228 | |||||||||||||||||||
(deferred interest of $207 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Newark && ## | 110 | 8 | % | 5.34 | % | $ | 1,047 | $ | 21,999 | $ | 21,935 | $ | 21,684 | |||||||||||||||||||||||||||
Viergella Inc ## | Term Loan | 02/20/14 | 02/20/18 | 1 | * | 4.75 | % | $ | 1,278 | $ | 1,278 | $ | 1,278 | |||||||||||||||||||||||||||
Various Newark && ## | 4.50% to 7.00% (interest rate includes deferred interest 1.50%) | Term Loan | | 04/09/10 to 10/12/17 | | | 10/17/17 to 05/14/25 | | 109 | 7 | % | 5.38 | % | $ | 1,047 | $ | 20,721 | $ | 20,657 | $ | 20,406 | |||||||||||||||||||
(deferred interest of $2 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Boston && ## | 2.75% to 6.15% | Term Loan | | 06/12/07 to 10/04/17 | | | 12/07/15 to 11/06/25 | | 59 | 6 | % | 4.51 | % | $ | 633 | $ | 18,907 | $ | 18,564 | $ | 18,504 | |||||||||||||||||||
Cambridge && ## | 3.75% to 5.50% | Term Loan | | 05/06/11 to 12/15/15 | | | 03/29/16 to 01/26/20 | | 13 | 0 | % | 4.55 | % | $ | 0 | $ | 824 | $ | 773 | $ | 693 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security Type (all restricted unless otherwise noted) | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost (4) | Fair Value | |||||||||||||||||||||||||||||||||
Harrell’s Car Wash Systems, Inc. (interest rate includes PIK interest of 3.00%) | Term Loan | 07/03/17 | 09/03/22 | 1 | 1 | % | 15.00 | % | $ | 2,000 | $ | 2,532 | $ | 2,532 | $ | 2,529 | ||||||||||||||||||||||||||||
(capitalized interest of $32 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Mining, Quarrying, and Oil and Gas Extraction (5% of the total) | Green Diamond Performance Materials, Inc. (interest rate includes PIK interest of 4.50%) | Term Loan | 09/08/17 | 09/08/24 | 1 | 1 | % | 16.50 | % | $ | 4,000 | $ | 4,057 | $ | 4,057 | $ | 4,057 | |||||||||||||||||||||||||||
(capitalized interest of $57 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Transportation and Warehousing (4% of the total) | LLL Transport, Inc. (interest rate includes PIK interest of 3.00%) | Term Loan | 10/23/15 | 04/23/21 | 1 | 1 | % | 15.00 | % | $ | 3,914 | $ | 3,914 | $ | 3,912 | |||||||||||||||||||||||||||||
(capitalized interest of $410 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Construction (2% of the total) | HighlandCrossing-M, LLC (interest rate includes PIK interest of 11.50%) | Term Loan | 01/07/15 | 02/01/25 | 1 | 1 | % | 11.50 | % | $ | 1,445 | $ | 1,445 | $ | 1,444 | |||||||||||||||||||||||||||||
Accommodation and Food Services (0% of the total) | Various Other 9.25% | Term Loan | 11/05/10 | 11/05/20 | 1 | * | 9.25 | % | $ | 241 | $ | 241 | $ | 241 | ||||||||||||||||||||||||||||||
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Total secured mezzanine(2) | 33 | 31 | % | 12.09 | % | $ | 31,752 | $ | 88,334 | $ | 88,334 | $ | 88,226 | |||||||||||||||||||||||||||||||
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Other secured commercial (51% New York, 42% New Jersey and 7% all other states) |
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Retail Trade (81% of the total) | Medallion Fine Art Inc (interest rate includes PIK interest of 12%) | Term Loan | 12/17/12 | 03/17/18 | 1 | * | 12.00 | % | $ | 999 | $ | 999 | $ | 999 | ||||||||||||||||||||||||||||||
Various Other && 4.75% to 10.50% | Term Loan | | 10/28/08 to 12/23/15 | | | 05/09/18 to 03/03/20 | | 5 | * | 7.74 | % | $ | 835 | $ | 795 | $ | 604 | |||||||||||||||||||||||||||
Accommodation and Food Services (12% of the total) | Various Other && 6.75% to 9.00% | Term Loan | | 11/29/05 to 06/06/14 | | | 04/18/17 to 09/06/19 | | 3 | * | 8.26 | % | $ | 644 | $ | 544 | $ | 228 | ||||||||||||||||||||||||||
Transportation and Warehousing (4% of the total) | Various Other && 4.25% | Term Loan | 03/17/15 | 09/10/18 | 1 | * | 4.25 | % | $ | 75 | $ | 74 | $ | 75 | ||||||||||||||||||||||||||||||
Real Estate and Rental and Leasing (3% of the total) | Various Other && 5.00% | Term Loan | 03/31/15 | 03/31/20 | 1 | * | 5.00 | % | $ | 69 | $ | 65 | $ | 56 | ||||||||||||||||||||||||||||||
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Total Other Commercial Loans(2) | 11 | 1 | % | 9.39 | % | $ | 2,622 | $ | 2,477 | $ | 1,962 | |||||||||||||||||||||||||||||||||
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Total commercial loans (2) |
| 44 | 31 | % | 12.02 | % | $ | 31,752 | $ | 90,956 | $ | 90,811 | $ | 90,188 | ||||||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries |
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Commercial Banking | Medallion Bank ** | 100% of common stock | 05/16/02 | None | 1 | 101 | % | 0.00 | % | $ | 138,282 | $ | 290,548 | |||||||||||||||||||||||||||||||
NASCAR Race Team | Medallion MotorSports, LLC | 75% of LLC units | 11/24/10 | None | 1 | 2 | % | 42.40 | % | $ | 2,820 | $ | 4,623 | |||||||||||||||||||||||||||||||
Art Dealer | Medallion Fine Art, Inc. | 100% of common stock | 12/03/12 | None | 1 | 1 | % | 0.00 | % | $ | 1,777 | $ | 3,878 | |||||||||||||||||||||||||||||||
Loan Servicing | Medallion Servicing Corp. | 100% of common stock | 11/05/10 | None | 1 | * | 0.00 | % | $ | 97 | $ | 97 | ||||||||||||||||||||||||||||||||
Professional Sports Team | LAX Group LLC | 44.97% of membership interests | 05/23/12 | None | 1 | 1 | % | 0.00 | % | $ | 251 | $ | 3,001 | |||||||||||||||||||||||||||||||
Media | Medallion Taxi Media, Inc. | 100% of common stock | 01/01/17 | None | 1 | * | 0.00 | % | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries, net | 6 | 105 | % | 0.83 | % | $ | 0 | $ | 0 | $ | 143,227 | $ | 302,147 | |||||||||||||||||||||||||||||||
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Equity investments | ||||||||||||||||||||||||||||||||||||||||||||
Commercial Finance | Convergent Capital, Ltd ** | | 7% of limited partnership interest | | 07/20/07 | None | 1 | * | 0.00 | % | $ | 733 | $ | 456 | ||||||||||||||||||||||||||||||
NASCAR Race Team | Rpac Racing LLC | | 1,000 shares of Series D | | 08/25/15 | None | 1 | 1 | % | 0.00 | % | $ | 0 | $ | 2,193 | |||||||||||||||||||||||||||||
Loan Servicing | Upgrade, Inc. | 666,668 shares of Series A-1 preferred stock | 09/30/16 | None | 1 | 1 | % | 0.00 | % | $ | 250 | $ | 1,455 | |||||||||||||||||||||||||||||||
Stuffed Toy Manufacturer | AA Plush Holdings, LLC d/b/a Animal Adventures | 1.6% Common Units | 08/15/14 | None | 1 | * | 0.00 | % | $ | 300 | $ | 300 | ||||||||||||||||||||||||||||||||
Advertising Services | ADSCO Opco, LLC | 7.9% Class A Series A-2 Units | 10/25/16 | None | 1 | * | 0.00 | % | $ | 400 | $ | 400 |
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||
Various Other && ## | 4.75% to 9.00% | Term Loan | | 04/28/08 to 07/30/15 | | | 01/03/17 to 09/01/23 | | 9 | 0 | % | 7.95 | % | $ | 0 | $ | 500 | $ | 482 | $ | 487 | |||||||||||||||||||
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Total medallion loans ($183,529 pledged as collateral under borrowing arrangements) | 648 | 73 | % | 4.41 | % | $ | 12,578 | $ | 231,112 | $ | 228,416 | $ | 208,279 | |||||||||||||||||||||||||||
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Commercial Loans | ||||||||||||||||||||||||||||||||||||||||
Secured mezzanine (22% North Carolina, 16% Minnesota, 7% Ohio, 6% Texas, 6% Delaware 6% California, 5% Oklahoma, 5% Oregon, 4% Kansas, 4% North Dakota, 4% Pennsylvania, and 15% all other states)(2) |
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Manufacturing (37% of the total) | Innovative Metal, Inc. dba Southwest Data Products (interest rate includes PIK interest of 2.00%) | Term Loan | 04/06/17 | 04/06/24 | 1 | 2 | % | 14.00 | % | $ | 5,000 | $ | 5,000 | $ | 5,000 | $ | 4,980 | |||||||||||||||||||||||
Stride Tool Holdings, LLC (interest rate includes PIK interest of 3.00%) | Term Loan | 04/05/16 | 04/05/21 | 1 | 1 | % | 15.00 | % | $ | 4,217 | $ | 4,217 | $ | 4,179 | ||||||||||||||||||||||||||
(capitalized interest of $217 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
AA Plush Holdings, LLC (interest rate includes PIK interest of 6.00%) | Term Loan | 08/15/14 | 08/15/19 | 1 | 1 | % | 14.00 | % | $ | 3,397 | $ | 3,397 | $ | 3,393 | ||||||||||||||||||||||||||
(capitalized interest of $397 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Pinnacle Products International, Inc. (interest rate includes PIK interest of 3.00%) | Term Loan | 10/09/15 | 10/09/20 | 1 | 1 | % | 15.00 | % | $ | 3,249 | $ | 3,249 | $ | 3,249 | ||||||||||||||||||||||||||
(capitalized interest of $449 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Liberty Paper Products Acquisition, LLC (interest rate includes PIK interest of 2.00%) | Term Loan | 06/09/16 | 06/09/21 | 1 | 1 | % | 14.00 | % | $ | 3,096 | $ | 3,096 | $ | 3,096 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security Type (all restricted unless otherwise noted) | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost (4) | Fair Value | |||||||||||||||||||||||||||||||
Baby Sleep Products | BB Opco, LLC d/b/a BreathableBaby, LLC | 3.6% Units | 08/01/14 | None | 1 | * | 0.00 | % | $ | 250 | $ | 250 | ||||||||||||||||||||||||||||||
IT Services | Centare Holdings, Inc. | 7.23% of common stock, 3.88% of preferred stock | 08/30/13 | None | 1 | * | 0.00 | % | $ | 103 | $ | 103 | ||||||||||||||||||||||||||||||
Wholesale Hobbyists’ Supplies | Classic Brands, LLC | Warrant for 300,000 Class A units | 01/08/16 | 01/08/26 | 1 | * | 0.00 | % | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||||
Engineering Design Services | DPIS Engineering LLC | Warrant for 180,000 Class C units | 12/01/14 | | 5th anniversary of note paid in full | | 1 | * | 0.00 | % | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||
Elevator Parts Manufacturer | EMI Porta HoldCo, LLC | 3.56% of SeriesA-2 Preferred Units | 12/11/17 | None | 1 | * | 0.00 | % | $ | 500 | $ | 500 | $ | 500 | ||||||||||||||||||||||||||||
Industrial Filters Manufacturer | Filter Holdings, Inc. | 7.14% of Common Stock, 7.14% of Preferred Stock | 05/05/17 | None | 2 | * | 0.00 | % | $ | 207 | $ | 207 | $ | 207 | ||||||||||||||||||||||||||||
Specialty Sand Products | Green Diamond Performance Materials, Inc. | 4.26% of Series A Preferred Stock | 09/08/17 | None | 1 | * | 0.00 | % | $ | 200 | $ | 200 | $ | 200 | ||||||||||||||||||||||||||||
Car Wash Equipment Manufacturer | Harrell’s Car Wash Systems, Inc. | 0.89% of Common Stock | 07/03/17 | None | 1 | * | 0.00 | % | $ | 104 | $ | 104 | $ | 104 | ||||||||||||||||||||||||||||
Sheet Metal Manufacturer | SWDP Acquisition Co., LLC | 9.9875% of LLC Units | 04/06/17 | None | 1 | * | 0.00 | % | $ | 400 | $ | 400 | $ | 400 | ||||||||||||||||||||||||||||
Paper Tapes Manufacturer | Liberty Paper Products Acquisition, LLC | 100% of Series A Preferred Units—12% TOTAL | 06/09/16 | None | 1 | * | 0.00 | % | $ | 350 | $ | 350 | ||||||||||||||||||||||||||||||
Environmental Consulting Services | Northern Technologies, LLC | 8.27% of LLC units | | 01/29/2016, 12/5/16 & 6/12/17 | | None | 3 | * | 0.00 | % | $ | 58 | $ | 408 | $ | 408 | ||||||||||||||||||||||||||
Space Heater Manufacturer | Pinnacle Products International, Inc. | 0.5% common stock | 10/09/15 | None | 1 | * | 0.00 | % | $ | 135 | $ | 135 | ||||||||||||||||||||||||||||||
Marketing Services | Portu-Sunberg Marketing LLC | 0.86% LLC units | 10/19/16 | None | 1 | * | 0.00 | % | $ | 50 | $ | 50 | ||||||||||||||||||||||||||||||
Portu-Sunberg Marketing LLC | Warrant for 2.85% of the outstanding stock | 12/31/12 | 07/24/20 | 1 | * | 0.00 | % | $ | 0 | $ | 0 | |||||||||||||||||||||||||||||||
Hand Tool Manufacturer | Stride Tool Holdings, LLC | 7.14% of LLC units | 04/05/16 | None | 1 | * | 0.00 | % | $ | 500 | $ | 500 | ||||||||||||||||||||||||||||||
Forensic Supplies | Tri-Tech Forensics, Inc. | 4.91% of Common Stock; 4.61% of Preferred Stock | 06/15/17 | None | 3 | * | 0.00 | % | $ | 192 | $ | 192 | $ | 192 | ||||||||||||||||||||||||||||
Weather Forecasting Services | Weather Decision Technologies, Inc. | 2.2% preferred stock | 12/11/15 | None | 1 | * | 0.00 | % | $ | 500 | $ | 500 | ||||||||||||||||||||||||||||||
Various Other # | + | ** | * Various | | 08/04/08 to 12/12/14 | | | None to 2/5/23 | | 5 | * | 0.00 | % | $ | 818 | $ | 818 | |||||||||||||||||||||||||
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Equity investments, net | 32 | 3 | % | 0.00 | % | $ | 1,661 | $ | 0 | $ | 6,400 | $ | 9,521 | |||||||||||||||||||||||||||||
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Investment securities | ||||||||||||||||||||||||||||||||||||||||||
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Investment securities, net | 0 | 0 | % | 0.00 | % | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||||||||||||||
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Net Investments ($183,529 pledged as collateral under borrowing arrangements) (3) |
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730 | 212 | % | 4.73 | % | $ | 45,991 | $ | 322,068 | $ | 468,854 | $ | 610,135 | ||||||||||||||||||||||||||||||
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(Dollars in thousands) | Obligor Name/Interest Rate Range | Security | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||
(capitalized interest of $101 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
EMI Porta Opco, LLC (interest rate includes PIK interest of 1.00%) | Term Loan | 12/11/17 | 03/11/23 | 1 | 1 | % | 13.00 | % | $ | 3,000 | $ | 3,002 | $ | 3,002 | $ | 3,002 | ||||||||||||||||||||||||
(capitalized interest of $2 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
BB Opco, LLC d/b/a BreathableBaby, LLC (interest rate includes PIK interest of 3.00%) | Term Loan | 08/01/14 | 08/01/19 | 1 | 1 | % | 15.00 | % | $ | 2,718 | $ | 2,718 | $ | 2,718 | ||||||||||||||||||||||||||
(capitalized interest of $218 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
EGC Operating Company, LLC (interest rate includes PIK interest of 1.00%) | Term Loan | 09/30/14 | 09/30/19 | 1 | 1 | % | 13.00 | % | $ | 1,959 | $ | 1,959 | $ | 1,959 | ||||||||||||||||||||||||||
(capitalized interest of $49 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
American Cylinder, Inc. d/b/a All Safe (interest rate includes PIK interest of 7.00%) | Term Loan | 07/03/13 | 09/30/18 | 1 | 1 | % | 19.00 | % | $ | 1,782 | $ | 1,782 | $ | 1,782 | ||||||||||||||||||||||||||
(capitalized interest of $282 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Tri-Tech Forensics, Inc. (interest rate includes PIK interest of 2.00%) | Term Loan | 06/15/17 | 06/15/22 | 1 | 1 | % | 14.00 | % | $ | 1,500 | $ | 1,500 | $ | 1,500 | $ | 1,500 | ||||||||||||||||||||||||
Orchard Holdings, Inc. & | Term Loan | 03/10/99 | 03/31/10 | 1 | * | 13.00 | % | $ | 1,390 | $ | 1,390 | $ | 1,390 | |||||||||||||||||||||||||||
Filter Holdings, Inc. (interest rate includes PIK interest of 2.00%) | Term Loan | 05/05/17 | 05/05/22 | 1 | * | 14.00 | % | $ | 1,250 | $ | 1,250 | $ | 1,250 | $ | 1,250 | |||||||||||||||||||||||||
Various Other 10.00% | Term Loan | 03/28/17 | 03/28/22 | 1 | * | 10.00 | % | $ | 200 | $ | 200 | $ | 200 | $ | 200 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||
Arts, Entertainment, and Recreation (19% of the total) | RPAC Racing LLC & (interest rate includes PIK interest of 2.00%) | Term Loan | 11/27/17 | 03/31/20 | 1 | 3 | % | 2.00 | % | $ | 7,827 | $ | 7,827 | $ | 7,827 | $ | 7,827 | |||||||||||||||||||||||
(capitalized interest of $15 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
RPAC Racing LLC & (interest rate includes PIK interest of 2.00%) | Term Loan | 06/22/16 | 03/31/20 | 1 | 1 | % | 2.00 | % | $ | 2,034 | $ | 2,034 | $ | 2,034 | ||||||||||||||||||||||||||
(capitalized interest of $278 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
RPAC Racing LLC & (interest rate includes PIK interest of 2.00%) | Term Loan | 09/14/16 | 03/31/20 | 1 | * | 2.00 | % | $ | 1,000 | $ | 1,000 | $ | 1,000 | |||||||||||||||||||||||||||
(capitalized interest of $120 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
RPAC Racing LLC & (interest rate includes PIK interest of 2.00%) | Term Loan | 11/19/10 | 03/30/20 | 1 | 2 | % | 2.00 | % | $ | 5,611 | $ | 5,611 | $ | 5,611 | ||||||||||||||||||||||||||
(capitalized interest of $2,572 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Professional, Scientific, and Technical Services (18% of the total) | Weather Decision Technologies, Inc. (interest rate includes PIK interest of 9.00%) | Term Loan | 12/11/15 | 12/11/20 | 1 | 1 | % | 18.00 | % | $ | 4,221 | $ | 4,221 | $ | 4,214 | |||||||||||||||||||||||||
(capitalized interest of $721 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Weather Decision Technologies, Inc. (interest rate includes PIK interest of 7.00%) | Term Loan | 11/08/17 | 06/30/18 | 1 | * | 14.00 | % | $ | 325 | $ | 327 | $ | 327 | $ | 327 | |||||||||||||||||||||||||
(capitalized interest of $2 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
ADSCO Opco, LLC (interest rate includes PIK interest of 2.00%) | Term Loan | 10/25/16 | 10/25/21 | 1 | 1 | % | 13.00 | % | $ | 3,687 | $ | 3,687 | $ | 3,677 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||
(capitalized interest of $87 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Northern Technologies, LLC (interest rate includes PIK interest of 1.00%) | Term Loan | 01/29/16 | 01/29/23 | 1 | 1 | % | 13.00 | % | $ | 3,670 | $ | 3,670 | $ | 3,670 | ||||||||||||||||||||||||||
(capitalized interest of $70 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
+ DPIS Engineering, LLC | Term Loan | 12/01/14 | 06/30/20 | 1 | 1 | % | 12.00 | % | $ | 2,000 | $ | 2,000 | $ | 1,998 | ||||||||||||||||||||||||||
+ Portu-Sunberg Marketing LLC | Term Loan | 10/21/16 | 02/21/22 | 1 | * | 12.00 | % | $ | 1,250 | $ | 1,250 | $ | 1,245 | |||||||||||||||||||||||||||
Various Other 14.00% | Term Loan | 05/21/15 | 05/21/22 | 1 | * | 14.00 | % | $ | 1,156 | $ | 1,156 | $ | 1,156 | |||||||||||||||||||||||||||
(capitalized interest of $11 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Information (9% of the total) | US Internet Corp. | Term Loan | 03/14/17 | 03/14/22 | 1 | 1 | % | 14.50 | % | $ | 5,650 | $ | 4,075 | $ | 4,075 | $ | 4,062 | |||||||||||||||||||||||
US Internet Corp. (interest rate includes PIK interest of 17.00%) | Term Loan | 03/14/17 | 03/14/22 | 1 | * | 19.00 | % | $ | 1,000 | $ | 1,147 | $ | 1,147 | $ | 1,147 | |||||||||||||||||||||||||
(capitalized interest of $147 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Centare Holdings, Inc. (interest rate includes PIK interest of 2.00%) | Term Loan | 08/30/13 | 08/30/18 | 1 | 1 | % | 14.00 | % | $ | 2,500 | $ | 2,500 | $ | 2,497 | ||||||||||||||||||||||||||
Wholesale Trade (6% of the total) | + Classic Brands, LLC | Term Loan | 01/08/16 | 04/30/23 | 1 | 1 | % | 12.00 | % | $ | 2,880 | $ | 2,880 | $ | 2,880 | |||||||||||||||||||||||||
Harrell’s Car Wash Systems, Inc. (interest rate includes PIK interest of 3.00%) | Term Loan | 07/03/17 | 09/03/22 | 1 | 1 | % | 15.00 | % | $ | 2,000 | $ | 2,532 | $ | 2,532 | $ | 2,529 | ||||||||||||||||||||||||
(capitalized interest of $32 per footnote 2) |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||
Mining, Quarrying, and Oil and Gas Extraction (5% of the total) | Green Diamond Performance Materials, Inc. (interest rate includes PIK interest of 4.50%) | Term Loan | 09/08/17 | 09/08/24 | 1 | 1 | % | 16.50 | % | $ | 4,000 | $ | 4,057 | $ | 4,057 | $ | 4,057 | |||||||||||||||||||||||
(capitalized interest of $57 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Transportation and Warehousing (4% of the total) | LLL Transport, Inc. (interest rate includes PIK interest of 3.00%) | Term Loan | 10/23/15 | 04/23/21 | 1 | 1 | % | 15.00 | % | $ | 3,914 | $ | 3,914 | $ | 3,912 | |||||||||||||||||||||||||
(capitalized interest of $410 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||
Construction (2% of the total) | HighlandCrossing-M, LLC (interest rate includes PIK interest of 11.50%) | Term Loan | 01/07/15 | 02/01/25 | 1 | 1 | % | 11.50 | % | $ | 1,445 | $ | 1,445 | $ | 1,444 | |||||||||||||||||||||||||
Accommodation and Food Services (0% of the total) | Various Other 9.25% | Term Loan | 11/05/10 | 11/05/20 | 1 | * | 9.25 | % | $ | 241 | $ | 241 | $ | 241 | ||||||||||||||||||||||||||
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Total secured mezzanine(2) | 33 | 31 | % | 12.09 | % | $ | 31,752 | $ | 88,334 | $ | 88,334 | $ | 88,226 | |||||||||||||||||||||||||||
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Other secured commercial (51% New York, 42% New Jersey and 7% all other states) |
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Retail Trade (81% of the total) | Medallion Fine Art Inc (interest rate includes PIK interest of 12%) | Term Loan | 12/17/12 | 03/17/18 | 1 | * | 12.00 | % | $ | 999 | $ | 999 | $ | 999 | ||||||||||||||||||||||||||
Various Other && 4.75% to 10.50% | Term Loan | | 10/28/08 to 12/23/15 | | | 05/09/18 to 03/03/20 | | 5 | * | 7.74 | % | $ | 835 | $ | 795 | $ | 604 | |||||||||||||||||||||||
Accommodation and Food Services (12% of the total) | Various Other && 6.75% to 9.00% | Term Loan | | 11/29/05 to 06/06/14 | | | 04/18/17 to 09/06/19 | | 3 | * | 8.26 | % | $ | 644 | $ | 544 | $ | 228 | ||||||||||||||||||||||
Transportation and Warehousing (4% of the total) | Various Other && 4.25% | Term Loan | 03/17/15 | 09/10/18 | 1 | * | 4.25 | % | $ | 75 | $ | 74 | $ | 75 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security Type (all | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||
Real Estate and Rental and Leasing (3% of the total) | Various Other && 5.00% | Term Loan | 03/31/15 | 03/31/20 | 1 | * | 5.00 | % | $ | 69 | $ | 65 | $ | 56 | ||||||||||||||||||||||||||
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Total Other Commercial Loans(2) | 11 | 1 | % | 9.39 | % | $ | 2,622 | $ | 2,477 | $ | 1,962 | |||||||||||||||||||||||||||||
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Total commercial loans (2) |
| 44 | 31 | % | 12.02 | % | $ | 31,752 | $ | 90,956 | $ | 90,811 | $ | 90,188 | ||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries |
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Commercial Banking | Medallion Bank ** | 100% of common stock | 05/16/02 | None | 1 | 101 | % | 0.00 | % | $ | 138,282 | $ | 290,548 | |||||||||||||||||||||||||||
NASCAR Race Team | Medallion MotorSports, LLC | 75% of LLC units | 11/24/10 | None | 1 | 2 | % | 42.40 | % | $ | 2,820 | $ | 4,623 | |||||||||||||||||||||||||||
Art Dealer | Medallion Fine Art, Inc. | 100% of common stock | 12/03/12 | None | 1 | 1 | % | 0.00 | % | $ | 1,777 | $ | 3,878 | |||||||||||||||||||||||||||
Loan Servicing | Medallion Servicing Corp. | 100% of common stock | 11/05/10 | None | 1 | * | 0.00 | % | $ | 97 | $ | 97 | ||||||||||||||||||||||||||||
Professional Sports Team | LAX Group LLC | 44.97% of membership interests | 05/23/12 | None | 1 | 1 | % | 0.00 | % | $ | 251 | $ | 3,001 | |||||||||||||||||||||||||||
Media | Medallion Taxi Media, Inc. | 100% of common stock | 01/01/17 | None | 1 | * | 0.00 | % | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries, net | 6 | 105 | % | 0.83 | % | $ | 0 | $ | 0 | $ | 143,227 | $ | 302,147 | |||||||||||||||||||||||||||
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Equity investments | ||||||||||||||||||||||||||||||||||||||||
Commercial Finance | Convergent Capital, Ltd ** | 7% of limited partnership interest | 07/20/07 | None | 1 | * | 0.00 | % | $ | 733 | $ | 456 | ||||||||||||||||||||||||||||
NASCAR Race Team | Rpac Racing LLC | 1,000 shares of Series D | 08/25/15 | None | 1 | 1 | % | 0.00 | % | $ | 0 | $ | 2,193 | |||||||||||||||||||||||||||
Loan Servicing | Upgrade, Inc. | 666,668 shares of Series A-1 preferred stock | 09/30/16 | None | 1 | 1 | % | 0.00 | % | $ | 250 | $ | 1,455 | |||||||||||||||||||||||||||
Stuffed Toy Manufacturer | AA Plush Holdings, LLC d/b/a Animal Adventures | 1.6% Common Units | 08/15/14 | None | 1 | * | 0.00 | % | $ | 300 | $ | 300 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security Type (all | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost (4) | Fair Value | |||||||||||||||||||||||||||||
Advertising Services | ADSCO Opco, LLC | 7.9% Class A SeriesA-2 Units | 10/25/16 | None | 1 | * | 0.00 | % | $ | 400 | $ | 400 | ||||||||||||||||||||||||||||
Baby Sleep Products | BB Opco, LLC d/b/a BreathableBaby, LLC | 3.6% Units | 08/01/14 | None | 1 | * | 0.00 | % | $ | 250 | $ | 250 | ||||||||||||||||||||||||||||
IT Services | Centare Holdings, Inc. | 7.23% of common stock, 3.88% of preferred stock | 08/30/13 | None | 1 | * | 0.00 | % | $ | 103 | $ | 103 | ||||||||||||||||||||||||||||
Wholesale Hobbyists’ Supplies | Classic Brands, LLC | Warrant for 300,000 Class A units | 01/08/16 | 01/08/26 | 1 | * | 0.00 | % | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||
Engineering Design Services | DPIS Engineering LLC | Warrant for 180,000 Class C units | 12/01/14 | | 5th anniversary of note paid in full | | 1 | * | 0.00 | % | $ | 0 | $ | 0 | ||||||||||||||||||||||||||
Elevator Parts Manufacturer | EMI Porta HoldCo, LLC | 3.56% of SeriesA-2 Preferred Units | 12/11/17 | None | 1 | * | 0.00 | % | $ | 500 | $ | 500 | $ | 500 | ||||||||||||||||||||||||||
Industrial Filters Manufacturer | Filter Holdings, Inc. | 7.14% of Common Stock, 7.14% of Preferred Stock | 05/05/17 | None | 2 | * | 0.00 | % | $ | 207 | $ | 207 | $ | 207 | ||||||||||||||||||||||||||
Specialty Sand Products | Green Diamond Performance Materials, Inc. | 4.26% of Series A Preferred Stock | 09/08/17 | None | 1 | * | 0.00 | % | $ | 200 | $ | 200 | $ | 200 | ||||||||||||||||||||||||||
Car Wash Equipment Manufacturer | Harrell’s Car Wash Systems, Inc. | 0.89% of Common Stock | 07/03/17 | None | 1 | * | 0.00 | % | $ | 104 | $ | 104 | $ | 104 | ||||||||||||||||||||||||||
Sheet Metal Manufacturer | SWDP Acquisition Co., LLC | 9.9875% of LLC Units | 04/06/17 | None | 1 | * | 0.00 | % | $ | 400 | $ | 400 | $ | 400 | ||||||||||||||||||||||||||
Paper Tapes Manufacturer | Liberty Paper Products Acquisition, LLC | 100% of Series A Preferred Units -12% TOTAL | 06/09/16 | None | 1 | * | 0.00 | % | $ | 350 | $ | 350 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2017
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security Type (all | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2017 Acquisitions (5) | Principal Outstanding | Cost(4) | Fair Value | |||||||||||||||||||||||||||||
Environmental Consulting Services | Northern Technologies, LLC | 8.27% of LLC units | | 01/29/2016, 12/5/16 & 6/12/17 | | None | 3 | * | 0.00 | % | $ | 58 | $ | 408 | $ | 408 | ||||||||||||||||||||||||
Space Heater Manufacturer | Pinnacle Products International, Inc. | 0.5% common stock | 10/09/15 | None | 1 | * | 0.00 | % | $ | 135 | $ | 135 | ||||||||||||||||||||||||||||
Marketing Services | Portu-Sunberg Marketing LLC | 0.86% LLC units | 10/19/16 | None | 1 | * | 0.00 | % | $ | 50 | $ | 50 | ||||||||||||||||||||||||||||
Portu-Sunberg Marketing LLC | Warrant for 2.85% of the outstanding stock | 12/31/12 | 07/24/20 | 1 | * | 0.00 | % | $ | 0 | $ | 0 | |||||||||||||||||||||||||||||
Hand Tool Manufacturer | Stride Tool Holdings, LLC | 7.14% of LLC units | 04/05/16 | None | 1 | * | 0.00 | % | $ | 500 | $ | 500 | ||||||||||||||||||||||||||||
Forensic Supplies | Tri-Tech Forensics, Inc. | 4.91% of Common Stock; 4.61% of Preferred Stock | 06/15/17 | None | 3 | * | 0.00 | % | $ | 192 | $ | 192 | $ | 192 | ||||||||||||||||||||||||||
Weather Forecasting Services | Weather Decision Technologies, Inc. | 2.2% preferred stock | 12/11/15 | None | 1 | * | 0.00 | % | $ | 500 | $ | 500 | ||||||||||||||||||||||||||||
Various Other # | + ** | * Various | | 08/04/08 to 12/12/14 | | | None to 2/5/23 | | 5 | * | 0.00 | % | $ | 818 | $ | 818 | ||||||||||||||||||||||||
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Equity investments, net | 32 | 3 | % | 0.00 | % | $ | 1,661 | $ | 0 | $ | 6,400 | $ | 9,521 | |||||||||||||||||||||||||||
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Investment securities, net | 0 | 0 | % | 0.00 | % | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||||||||||||
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Net Investments ($183,529 pledged as collateral under borrowing arrangements) (3) |
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730 | 212 | % | 4.73 | % | $ | 45,991 | $ | 322,068 | $ | 468,854 | $ | 610,135 | ||||||||||||||||||||||||||||
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(1) | Represents the actual or weighted average interest or dividend rate of the respective security or portfolio as of the date indicated. Investments without an interest rate or with a rate of 0.00% are considerednon-income producing. |
(2) | Included in secured mezzanine commercial loans and other commercial loans was $6,237 of interest income capitalized into the outstanding investment balances, and $1,579 of deferred interest income, in accordance with the terms of the investment contract. |
(3) | The ratio of restricted securities fair value to net assets is 212%. |
(4) | Gross unrealized appreciation, gross unrealized depreciation and net appreciation for federal income tax purposes totaled $220,597, $21,306 and $199,291, respectively. The tax cost of investments was $410,844. |
(5) | For revolving lines of credit the amount shown is the cost at December 31, 2017. |
* | Less than 1.0% |
** | Not an eligible portfolio company as such term is defined in Section 2(a)(46) of the 1940 Act. The percentage value of allnon-eligible portfolio companies to totaled assets of Medallion Financial on an unconsolidated basis was up to 59% and up to 48% on a consolidated basis. Under the 1940 Act, we may not acquire anynon-qualifying assets, unless at the time such acquisition is made, qualifying assets, which include securities of eligible portfolio companies, represent at least 70% of our total assets. The status of these assets under the 1940 Act are subject to change. We monitor the status of these assets on an ongoing basis. |
& | Loan is on nonaccrual status, or past due on contractual payments, and is therefore considerednon-income producing. |
&& | Some or all of the securities arenon-income producing as per & above. |
# | Publicly traded but sales subject to applicable Rule 144 limitations. |
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The Summary Schedule of Investments does not reflect the Company’s complete portfolio holdings. It includes the Company’s 50 largest holdings and each investment of any issuer that exceeds 1% of the Company’s net assets. “Various Other” represents all issues not required to be disclosed under the rules adopted by the U.S. Securities and Exchange Commission (“SEC”). Footnotes above may apply to securities that are included in “Various Other”. For further detail, the complete schedule of portfolio holdings is available (i) without charge, upon request, by calling (877) MEDALLION; and (ii) on the SEC’s website at http://www.sec.gov. Filed as Exhibit 99.1 to the Annual Report on Form10-K for the fiscal year ended December 31, 2017, filed on March 14, 2018 (FileNo. 814-00188)
Medallion Financial CorpCorp.
CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFIILIATES
As of and for the year ended December 31, 2017 under Investment Company Accounting
Name of issuer and title of issue | Number of shares (all restricted unless otherwise noted) | Equity in net profit and (loss) and change in fair value | Amount of dividends or interest(1) | Value as of 12/31/17 | Number of shares (all restricted unless otherwise noted) | Equity in net profit and (loss) and change in fair value | Amount of dividends or interest(1) | Value as of 12/31/17 | ||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Medallion Bank - common stock | 1,000,000 shares -100% of common stock | $ | 10,193 | $ | 0 | $ | 290,548 | 1,000,000 shares -100% of common stock | $ | 10,193 | $ | 0 | $ | 290,548 | ||||||||||||||
Medallion Motorsports, LLC - membership interest(2) | 75% of membership interest | (2,357 | ) | 1,201 | 4,623 | 75% of membership interest | (2,357 | ) | 1,201 | 4,623 | ||||||||||||||||||
Medallion Fine Art, Inc. - common stock (3) | 1,000 shares -100% of common stock | 231 | 0 | 3,878 | 1,000shares -100% of common stock | 231 | 0 | 3,878 | ||||||||||||||||||||
LAX Group LLC - membership interest | 45% of membership interest | 870 | 0 | 3,001 | 45% of membership interest | 870 | 0 | 3,001 | ||||||||||||||||||||
Medallion Servicing Corp. - common stock | 1,000 shares -100% of common stock | 546 | 0 | 97 | 1,000shares -100% of common stock | 546 | 0 | 97 | ||||||||||||||||||||
Medallion Taxi Media, Inc. - common stock | 1,000 shares -100% of common stock | 0 | 77 | 0 | 1,000shares -100% of common stock | �� | 0 | 77 | 0 | |||||||||||||||||||
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Total investments in Medallion Bank and other controlled subsidiaries | 9,483 | 1,278 | 302,147 | 9,483 | 1,278 | 302,147 | ||||||||||||||||||||||
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RPAC Racing LLC (2) | 100% of Series D units | 0 | 0 | 2,193 | 100% of Series D units | 0 | 0 | 2,193 | ||||||||||||||||||||
Stride Tool Holdings LLC (4) -membership interest | 7.14% of membership interest | 0 | 0 | 500 | ||||||||||||||||||||||||
Northern Technologies LLC - membership interest(5) | 8.3% of membership interest | 0 | 0 | 408 | ||||||||||||||||||||||||
Stride Tool Holdings, LLC (4) - membership interest | 7.14% of membership interest | 0 | 0 | 500 | ||||||||||||||||||||||||
Northern Technologies, LLC - membership interest(5) | 8.3% of membership interest | 0 | 0 | 408 | ||||||||||||||||||||||||
ADSCO Holdco LLC - membership interest (6) | 7.7% of Class A SeriesA-2 LLC units | 0 | 0 | 400 | 7.7% of Class A SeriesA-2 LLC units | 0 | 0 | 400 | ||||||||||||||||||||
SWDP Acquisition Co LLC. (7) | 10% of membership interest | 0 | 0 | 400 | ||||||||||||||||||||||||
Appliance Recycling Centers of America Inc. - common stock | 0% of common stock | 0 | 0 | 0 | ||||||||||||||||||||||||
Filter Holdings INC.(8) | 7.14% of common & preferred stock | 0 | 0 | 207 | ||||||||||||||||||||||||
SWDP Acquisition Co., LLC(7) | 10% of membership interest | 0 | 0 | 400 | ||||||||||||||||||||||||
Appliance Recycling Centers of America, Inc. - common stock | 0% of common stock | 0 | 0 | 0 | ||||||||||||||||||||||||
Filter Holdings, INC.(8) | 7.14% of common & preferred stock | 0 | 0 | 207 | ||||||||||||||||||||||||
Third Century JRT, Inc.(9) | 13% of common stock | 0 | 0 | 200 | 13% of common stock | 0 | 0 | 200 | ||||||||||||||||||||
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Total equity investments in affiliates | $ | 0 | $ | 0 | $ | 4,308 | $ | 0 | $ | 0 | $ | 4,308 | ||||||||||||||||
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(1) | Investments with an amount of $0 are considerednon-income producing. |
(2) | The Company and a controlled subsidiary of the Company have 4 loans due from RPAC, |
(3) | The Company has a loan due from Medallion Fine Art, Inc. in the amount of $999 as of December 31, 2017, and on which $165 of interest income was earned during the year ended December 31, 2017. |
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The table below provides a recap of the changes in the investment in the respective issuers for the year ended December 31, 2017.
Name of Issuer | Medallion Bank | Medallion Fine Art, Inc. (1) | Medallion Motorsports, LLC (2) | Appliance Recycling Centers of America, Inc. | Medallion Servicing Corp. | LAX Group, LLC | Medallion Taxi Media, Inc. | Third Century JRT, Inc. (3) | Northern Technologies, LLC (4) | Stride Tool Holding LLC (5) | ADSCO Holdco LLC (6) | RPAC Racing LLC (2) | Filter Holdings Inc.(7) | SWDP ACUQSITION Co LLC(8) | Medallion Bank | Medallion Fine Art, Inc. (1) | Medallion Motorsports, LLC (2) | Appliance Recycling Centers of America, Inc. | Medallion Servicing Corp. | LAX Group, LLC | Medallion Taxi Media, Inc. | Third Century JRT, Inc. (3) | Northern Technologies, LLC (4) | Stride Tool Holdings, LLC (5) | ADSCO Holdco LLC (6) | RPAC Racing, LLC (2) | Filter Holdings, Inc.(7) | SWDP ACUQSITION Co., LLC(8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Title of Issue | Common Stock | Common Stock | Membership Interest | Common Stock | Common Stock | Membership Interest | Common Stock | Common Stock | Membership Interest | Membership Interest | Membership Interest | Membership Interest | Common & Preferred Stock | Membership Interest | Common Stock | Common Stock | Membership Interest | Common Stock | Common Stock | Membership Interest | Common Stock | Common Stock | Membership Interest | Membership Interest | Membership Interest | Membership Interest | Common & Preferred Stock | Membership Interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Value as of 12/31/16 | $ | 280,589 | $ | 3,647 | $ | 6,980 | $ | 475 | $ | 454 | $ | 1,690 | $ | — | $ | 200 | $ | 351 | $ | 500 | $ | 400 | $ | 1,351 | $ | — | $ | — | $ | 280,589 | $ | 3,647 | $ | 6,980 | $ | 475 | $ | 454 | $ | 1,690 | $ | — | $ | 200 | $ | 351 | $ | 500 | $ | 400 | $ | 1,351 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross additions / investments | — | — | — | — | — | 441 | — | — | 57 | — | — | — | 207 | 400 | — | — | — | — | — | 441 | — | — | 57 | — | — | — | 207 | 400 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross reductions / distributions | (234 | ) | — | (1,201 | ) | (351 | ) | (903 | ) | — | (77 | ) | — | — | — | — | — | — | — | (234 | ) | — | (1,201 | ) | (351 | ) | (903 | ) | — | (77 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net equity in profit and loss, and unrealized appreciation and (depreciation) | 10,193 | 231 | (1,156 | ) | (124 | ) | 546 | 870 | 77 | — | — | — | — | 842 | — | — | 10,193 | 231 | (1,156 | ) | (124 | ) | 546 | 870 | 77 | — | — | — | — | 842 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Value as of | $ | 290,548 | $ | 3,878 | $ | 4,623 | $ | — | $ | 97 | $ | 3,001 | $ | — | $ | 200 | $ | 408 | $ | 500 | $ | 400 | $ | 2,193 | $ | 207 | $ | 400 | $ | 290,548 | $ | 3,878 | $ | 4,623 | $ | — | $ | 97 | $ | 3,001 | $ | — | $ | 200 | $ | 408 | $ | 500 | $ | 400 | $ | 2,193 | $ | 207 | $ | 400 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(1) | The Company has a loan due from Medallion Fine Art, Inc. in the amount of $999 as of December 31, 2017, $0 of which was advanced during 2017, and for which $2,325 was repaid. |
(2) | In addition to the equity ownership, the Company and a controlled subsidiary of the Company have four loans due from RPAC, |
(3) | The Company has a loan due from J. R. Thompson Company, LLC, an affiliate of Third Century JRT, |
(4) | The Company has a loan due from Northern Technologies, LLC in the amount of $3,670 as of December 31, 2017, $137 of which was advanced during 2017. |
(5) | The Company has a loan due from Stride Tool Holdings, LLC in the amount of $4,217 as of December 31, 2017, $126 of which was advanced during 2017. |
(6) | The Company has a loan due from ADSCO Holdco LLC in the amount of $3,687 as of December 31, 2017, $74 of which was advanced during 2017. |
(7) | The Company has a loan due from Filter Holdings, Inc. in the amount of $1,250 as of December 31, 2017, all of which was advanced during 2017. |
(8) | The Company has a loan due from Innovative Metals, Inc., an affiliate of SWDP Acquisition |
Consolidated Summary Schedule of Investments
December 31, 2016
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security Type (all restricted unless otherwise noted) | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2016 Acquisitions (5) | Principal Outstanding | Cost (4) | Fair Value | |||||||||||||||||||||||||||||||
Medallion Loans | ||||||||||||||||||||||||||||||||||||||||||
New York | 380 | 66 | % | 3.67 | % | $ | 15,068 | $ | 202,845 | $ | 202,469 | $ | 189,571 | |||||||||||||||||||||||||||||
Sean Cab Corp ## | Term Loan | 12/09/11 | 11/23/18 | 1 | 1 | % | 4.63 | % | $ | 3,270 | $ | 3,270 | $ | 3,270 | ||||||||||||||||||||||||||||
Real Cab Corp ## | Term Loan | 07/20/07 | 07/20/17 | 1 | 1 | % | 2.81 | % | $ | 2,545 | $ | 2,545 | $ | 2,545 | ||||||||||||||||||||||||||||
Real Cab Corp ## | Term Loan | 07/20/07 | 07/20/17 | 1 | * | 2.81 | % | $ | 350 | $ | 350 | $ | 350 | |||||||||||||||||||||||||||||
Real Cab Corp | Term Loan | 08/19/14 | 07/20/17 | 1 | * | 3.31 | % | $ | 338 | $ | 338 | $ | 338 | |||||||||||||||||||||||||||||
Slo Cab Corp ## | Term Loan | 07/20/07 | 07/20/17 | 1 | 1 | % | 2.81 | % | $ | 1,527 | $ | 1,527 | $ | 1,527 | ||||||||||||||||||||||||||||
Slo Cab Corp ## | Term Loan | 07/20/07 | 07/20/17 | 1 | * | 2.81 | % | $ | 210 | $ | 210 | $ | 210 | |||||||||||||||||||||||||||||
Slo Cab Corp ## | Term Loan | 08/19/14 | 07/20/17 | 1 | * | 3.31 | % | $ | 203 | $ | 203 | $ | 203 | |||||||||||||||||||||||||||||
Esg Hacking Corp ## | Term Loan | 03/12/14 | 03/12/17 | 1 | 1 | % | 3.50 | % | $ | 1,713 | $ | 1,713 | $ | 1,714 | ||||||||||||||||||||||||||||
Whispers Taxi Inc ## & | Term Loan | 05/28/13 | 05/28/16 | 1 | 1 | % | 3.35 | % | $ | 2,026 | $ | 2,014 | $ | 1,531 | ||||||||||||||||||||||||||||
Christian Cab Corp & | Term Loan | 11/27/12 | 11/27/18 | 1 | 1 | % | 3.75 | % | $ | 1,489 | $ | 1,489 | $ | 1,493 | ||||||||||||||||||||||||||||
Junaid Trans Corp ## {Annually-Prime plus 1.00%} | Term Loan | 04/30/13 | 04/29/19 | 1 | * | 4.50 | % | $ | 1,409 | $ | 1,409 | $ | 1,409 | |||||||||||||||||||||||||||||
Ocean Hacking Corp ## | Term Loan | 12/20/13 | 12/20/16 | 1 | * | 3.50 | % | $ | 1,379 | $ | 1,379 | $ | 1,379 | |||||||||||||||||||||||||||||
Jacal Hacking Corp ## | Term Loan | 12/20/13 | 12/20/16 | 1 | * | 3.50 | % | $ | 1,379 | $ | 1,379 | $ | 1,379 | |||||||||||||||||||||||||||||
Avi Taxi Corporation ## | Term Loan | 04/11/14 | 04/11/17 | 1 | * | 3.25 | % | $ | 1,366 | $ | 1,366 | $ | 1,366 | |||||||||||||||||||||||||||||
Apple Cab Corp ## | Term Loan | 04/11/14 | 04/11/17 | 1 | * | 3.25 | % | $ | 1,366 | $ | 1,366 | $ | 1,366 | |||||||||||||||||||||||||||||
Anniversary Taxi Corp ## | Term Loan | 04/11/14 | 04/11/17 | 1 | * | 3.25 | % | $ | 1,366 | $ | 1,366 | $ | 1,366 | |||||||||||||||||||||||||||||
Hj Taxi Corp ## | Term Loan | 04/11/14 | 04/11/17 | 1 | * | 3.25 | % | $ | 1,366 | $ | 1,366 | $ | 1,366 | |||||||||||||||||||||||||||||
Kby Taxi Inc ## | Term Loan | 04/11/14 | 04/11/17 | 1 | * | 3.25 | % | $ | 1,366 | $ | 1,366 | $ | 1,366 | |||||||||||||||||||||||||||||
Bunty & Jyoti Inc ## | Term Loan | 03/13/13 | 12/13/18 | 1 | * | 2.50 | % | $ | 1,336 | $ | 1,336 | $ | 1,336 | |||||||||||||||||||||||||||||
Penegali Taxi LLC ## | Term Loan | 12/11/14 | 12/10/17 | 1 | * | 3.75 | % | $ | 1,331 | $ | 1,331 | $ | 1,332 | |||||||||||||||||||||||||||||
Sonu-Seema Corp ## | Term Loan | 12/07/12 | 12/20/18 | 1 | * | 2.50 | % | $ | 1,313 | $ | 1,313 | $ | 1,313 | |||||||||||||||||||||||||||||
Uddin Taxi Corp ## | Term Loan | 11/05/15 | 11/05/18 | 1 | * | 4.75 | % | $ | 1,298 | $ | 1,297 | $ | 1,298 | |||||||||||||||||||||||||||||
Yosi Transit Inc ## | Term Loan | 07/20/07 | 07/20/17 | 1 | * | 2.81 | % | $ | 1,018 | $ | 1,017 | $ | 1,018 | |||||||||||||||||||||||||||||
Yosi Transit Inc ## | Term Loan | 07/20/07 | 07/20/17 | 1 | * | 2.81 | % | $ | 140 | $ | 140 | $ | 140 | |||||||||||||||||||||||||||||
Yosi Transit Inc ## | Term Loan | 08/19/14 | 07/20/17 | 1 | * | 3.31 | % | $ | 135 | $ | 135 | $ | 135 | |||||||||||||||||||||||||||||
Various New York && ## | 0.00% to 8.96% | Term Loan | | 03/23/01 to 12/27/16 | | | 05/28/16 to 12/21/26 | | 355 | 56 | % | 3.71 | % | $ | 15,068 | $ | 171,606 | $ | 171,244 | $ | 158,821 | |||||||||||||||||||||
Chicago | 111 | 10 | % | 4.54 | % | $ | 109 | $ | 38,320 | $ | 38,091 | $ | 28,850 | |||||||||||||||||||||||||||||
Sweetgrass Peach &Chadwick Cap ## | Term Loan | 08/28/12 | 02/24/18 | 1 | 1 | % | 5.00 | % | $ | 1,454 | $ | 1,454 | $ | 1,454 | ||||||||||||||||||||||||||||
Regal Cab Company Et Al ## | Term Loan | 08/29/13 | 08/27/18 | 1 | * | 5.00 | % | $ | 1,322 | $ | 1,322 | $ | 1,322 | |||||||||||||||||||||||||||||
Various Chicago && ## | 0.00% to 7.00% | Term Loan | | 01/22/10 to 08/08/16 | | | 03/12/16 to 12/29/20 | | 109 | 9 | % | 4.50 | % | $ | 109 | $ | 35,544 | $ | 35,315 | $ | 26,074 | |||||||||||||||||||||
Newark && ## | 111 | 8 | % | 5.27 | % | $ | 314 | $ | 23,291 | $ | 23,267 | $ | 23,157 | |||||||||||||||||||||||||||||
Viergella Inc ## | Term Loan | 02/20/14 | 02/20/18 | 1 | * | 4.75 | % | $ | 1,312 | $ | 1,312 | $ | 1,313 | |||||||||||||||||||||||||||||
Various Newark && ## | 4.50% to 7.00% | Term Loan | | 04/09/10 to 04/14/16 | | | 12/12/16 to 05/14/25 | | 110 | 8 | % | 5.30 | % | $ | 314 | $ | 21,979 | $ | 21,955 | $ | 21,844 | |||||||||||||||||||||
Boston && ## | 0.00% to 6.15% | Term Loan | | 06/12/07 to 12/09/16 | | | 12/07/15 to 11/06/25 | | 60 | 8 | % | 4.52 | % | $ | 1,214 | $ | 26,061 | $ | 25,857 | $ | 21,818 | |||||||||||||||||||||
Cambridge && ## | 3.75% to 5.50% | Term Loan | | 05/06/11 to 12/15/15 | | | 03/29/16 to 01/26/20 | | 13 | 1 | % | 4.47 | % | $ | 4,441 | $ | 4,401 | $ | 2,649 | |||||||||||||||||||||||
Various Other && ## | 4.75% to 9.00% | Term Loan | | 04/28/08 to 07/30/15 | | | 01/03/17 to 09/01/23 | | 9 | 0 | % | 7.26 | % | $ | 978 | $ | 965 | $ | 771 | |||||||||||||||||||||||
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Total medallion loans ($231,494 pledged as collateral under borrowing arrangements) |
| 684 | 93 | % | 4.01 | % | $ | 16,705 | $ | 295,936 | $ | 295,050 | $ | 266,816 | ||||||||||||||||||||||||||||
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Commercial Loans | ||||||||||||||||||||||||||||||||||||||||||
Secured mezzanine (22% Minnesota, 12% Ohio, 10% Oklahoma, 8% Texas, 7% Delaware, 7% Pennsylvania, 7% North Carolina, 5% Kansas, 5% North Dakota, 4% Massachusetts, 4% Colorado, and 9% all other states)(2) |
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Manufacturing (44% of the total) | Stride Tool Holdings, LLC (interest rate includes PIK interest of 3.00%) | Term Loan | 04/05/16 | 04/05/21 | 1 | 1 | % | 15.00 | % | $ | 4,000 | $ | 4,091 | $ | 4,091 | $ | 4,041 | |||||||||||||||||||||||||
(capitalized interest of $91 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
MicroGroup, Inc. | Term Loan | 06/29/15 | 06/29/21 | 1 | 1 | % | 12.00 | % | $ | 3,244 | $ | 3,244 | $ | 3,244 | ||||||||||||||||||||||||||||
(capitalized interest of $44 per footnote 2) |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2016
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security Type (all restricted unless otherwise noted) | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2016 Acquisitions (5) | Principal Outstanding | Cost (4) | Fair Value | |||||||||||||||||||||||||||||||||
AA Plush Holdings, LLC (interest rate includes PIK interest of 6.00%) | Term Loan | 08/15/14 | 08/15/19 | 1 | 1 | % | 14.00 | % | $ | 3,197 | $ | 3,197 | $ | 3,190 | ||||||||||||||||||||||||||||||
(capitalized interest of $197 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Liberty Paper Products Acquisition LLC (interest rate includes PIK interest of 2.00%) | Term Loan | 06/09/16 | 06/09/21 | 1 | 1 | % | 14.00 | % | $ | 3,000 | $ | 3,034 | $ | 3,034 | $ | 3,034 | ||||||||||||||||||||||||||||
(capitalized interest of $34 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Pinnacle Products International, Inc. (interest rate includes PIK interest of 3.00%) | Term Loan | 10/09/15 | 10/09/20 | 1 | 1 | % | 15.00 | % | $ | 2,907 | $ | 2,907 | $ | 2,907 | ||||||||||||||||||||||||||||||
(capitalized interest of $107 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
WRWP, LLC (interest rate includes PIK interest of 5.00%) | Term Loan | 12/30/14 | 12/30/19 | 1 | 1 | % | 17.00 | % | $ | 2,407 | $ | 2,407 | $ | 2,413 | ||||||||||||||||||||||||||||||
(capitalized interest of $165 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
WRWP, LLC (interest rate includes PIK interest of 6.00%) | Term Loan | 01/01/15 | 01/01/24 | 1 | * | 6.00 | % | $ | 252 | $ | 252 | $ | 252 | |||||||||||||||||||||||||||||||
(capitalized interest of $28 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
BB Opco, LLC d/b/a BreathableBaby, LLC (interest rate includes PIK interest of 3.00%) | Term Loan | 08/01/14 | 08/01/19 | 1 | 1 | % | 14.00 | % | $ | 2,637 | $ | 2,637 | $ | 2,640 | ||||||||||||||||||||||||||||||
(capitalized interest of $137 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Tech Cast Holdings, LLC | Term Loan | 12/12/14 | 12/12/19 | 1 | 1 | % | 15.00 | % | $ | 2,635 | $ | 2,635 | $ | 2,613 | ||||||||||||||||||||||||||||||
EGC Operating Company, LLC (interest rate includes PIK interest of 3.00%) | Term Loan | 09/30/14 | 09/30/19 | 1 | 1 | % | 15.00 | % | $ | 2,424 | $ | 2,424 | $ | 2,430 | ||||||||||||||||||||||||||||||
(capitalized interest of $14 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
American Cylinder, Inc. d/b/a All Safe (interest rate includes PIK interest of 7.00%) | Term Loan | 07/03/13 | 01/03/18 | 1 | 1 | % | 19.00 | % | $ | 1,693 | $ | 1,693 | $ | 1,692 | ||||||||||||||||||||||||||||||
(capitalized interest of $193 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
+ | Respiratory Technologies, Inc. | Term Loan | 04/25/12 | 04/25/17 | 1 | 1 | % | 12.00 | % | $ | 1,500 | $ | 1,500 | $ | 1,501 | |||||||||||||||||||||||||||||
Orchard Holdings, Inc. & | Term Loan | 03/10/99 | 03/31/10 | 1 | * | 13.00 | % | $ | 1,390 | $ | 1,390 | $ | 1,390 | |||||||||||||||||||||||||||||||
Quaker Bakery Brands, Inc. | Term Loan | 03/28/12 | 03/28/17 | 1 | * | 17.00 | % | $ | 1,300 | $ | 1,300 | $ | 1,299 | |||||||||||||||||||||||||||||||
+ | Various Other && 12.00% to 14.00% | Term Loan | | 03/31/06 to 03/06/14 | | | 03/31/18 to 03/06/19 | | 2 | * | 13.56 | % | $ | 369 | $ | 369 | $ | 245 | ||||||||||||||||||||||||||
Professional, Scientific, and Technical Services (21% of the total) | Weather Decision Technologies, Inc.{One-time on 1/1/18 to 15%} (interest rate includes PIK interest of 9.00%) | Term Loan | 12/11/15 | 12/11/20 | 1 | 1 | % | 18.00 | % | $ | 3,854 | $ | 3,854 | $ | 3,844 | |||||||||||||||||||||||||||||
(capitalized interest of $354 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
ADSCO Opco, LLC (interest rate includes PIK interest of 2.00%) | Term Loan | 10/25/16 | 10/25/21 | 1 | 1 | % | 13.00 | % | $ | 3,600 | $ | 3,613 | $ | 3,613 | $ | 3,601 | ||||||||||||||||||||||||||||
(capitalized interest of $13 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Northern Technologies, LLC (interest rate includes PIK interest of 1.00%) | Term Loan | 01/29/16 | 01/29/23 | 1 | 1 | % | 13.00 | % | $ | 3,500 | $ | 3,533 | $ | 3,533 | $ | 3,532 | ||||||||||||||||||||||||||||
(capitalized interest of $33 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
+ | DPIS Engineering, LLC | Term Loan | 12/01/14 | 06/30/20 | 1 | 1 | % | 12.00 | % | $ | 2,000 | $ | 2,000 | $ | 1,998 | |||||||||||||||||||||||||||||
J. R. Thompson Company LLC (interest rate includes PIK interest of 2.00%) | Term Loan | 05/21/15 | 05/21/22 | 1 | 1 | % | 14.00 | % | $ | 1,625 | $ | 1,625 | $ | 1,625 | ||||||||||||||||||||||||||||||
(capitalized interest of $14 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Portu-Sunberg Marketing LLC | Term Loan | 10/21/16 | 03/21/22 | 1 | * | 12.00 | % | $ | 1,250 | $ | 1,250 | $ | 1,250 | $ | 1,244 | |||||||||||||||||||||||||||||
Information (12% of the total) | US Internet Corp. | Term Loan | 06/12/13 | 09/18/20 | 1 | 1 | % | 14.50 | % | $ | 3,000 | $ | 3,000 | $ | 3,010 | |||||||||||||||||||||||||||||
US Internet Corp. | Term Loan | 02/05/16 | 02/11/23 | 1 | 1 | % | 14.50 | % | $ | 1,900 | $ | 1,900 | $ | 1,900 | $ | 1,890 | ||||||||||||||||||||||||||||
US Internet Corp. | Term Loan | 03/18/15 | 09/18/20 | 1 | 1 | % | 14.50 | % | $ | 1,750 | $ | 1,750 | $ | 1,743 | ||||||||||||||||||||||||||||||
Centare Holdings, Inc. (interest rate includes PIK interest of 2.00%) | Term Loan | 08/30/13 | 08/30/18 | 1 | 1 | % | 14.00 | % | $ | 2,500 | $ | 2,500 | $ | 2,494 | ||||||||||||||||||||||||||||||
Arts, Entertainment, and Recreation (7% of the total) | RPAC Racing, LLC (interest rate includes PIK interest of 10.00%) | Term Loan | 11/19/10 | 01/15/17 | 1 | 2 | % | 10.00 | % | $ | 5,555 | $ | 5,555 | $ | 5,555 | |||||||||||||||||||||||||||||
(capitalized interest of $2,516 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Administrative and Support Services (5% of the total) | Staff One, Inc. | Term Loan | 06/30/08 | 03/31/18 | 1 | 1 | % | 3.00 | % | $ | 2,776 | $ | 2,776 | $ | 2,776 | |||||||||||||||||||||||||||||
Staff One, Inc. (interest rate includes PIK interest of 7.00%) | Term Loan | 12/28/16 | 03/31/18 | 1 | * | 19.00 | % | $ | 643 | $ | 557 | $ | 557 | $ | 557 | |||||||||||||||||||||||||||||
Staff One, Inc. | Term Loan | 09/15/11 | 03/31/18 | 1 | * | 3.00 | % | $ | 347 | $ | 347 | $ | 347 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2016
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security Type (all restricted unless otherwise noted) | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2016 Acquisitions (5) | Principal Outstanding | Cost (4) | Fair Value | |||||||||||||||||||||||||||||||||
Transportation and Warehousing (5% of the total) | LLL Transport, Inc. (interest rate includes PIK interest of 3.00%) | Term Loan | 10/23/15 | 04/23/21 | 1 | 1 | % | 15.00 | % | $ | 3,622 | $ | 3,622 | $ | 3,620 | |||||||||||||||||||||||||||||
(capitalized interest of $122 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Wholesale Trade (4% of the total) | + | Classic Brands, LLC | Term Loan | 01/08/16 | 04/30/23 | 1 | 1 | % | 12.00 | % | $ | 2,880 | $ | 2,880 | $ | 2,880 | $ | 2,880 | ||||||||||||||||||||||||||
Construction (2% of the total) | HighlandCrossing-M, LLC | Term Loan | 01/07/15 | 02/01/25 | 1 | 1 | % | 11.50 | % | $ | 1,450 | $ | 1,450 | $ | 1,450 | |||||||||||||||||||||||||||||
Accommodation and Food Services (0% of the total) | Various Other && 9.25% to 10.00% | Term Loan | | 06/30/00 to 11/05/10 | | | 09/30/17 to 11/05/20 | | 3 | * | 9.77 | % | $ | 0 | $ | 1,108 | $ | 1,108 | $ | 455 | ||||||||||||||||||||||||
Retail Trade (0% of the total) | Various Other && 10.00% | Term Loan | 06/30/00 | 09/30/17 | 1 | * | 10.00 | % | $ | 0 | $ | 69 | $ | 69 | $ | 36 | ||||||||||||||||||||||||||||
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Total secured mezzanine(2) | 37 | 26 | % | 13.47 | % | $ | 20,773 | $ | 76,469 | $ | 76,469 | $ | 75,548 | |||||||||||||||||||||||||||||||
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Other secured commercial (46% New York, 38% North Carolina, 14% New Jersey and 2% all other states) |
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Retail Trade (54% of the total) | Medallion Fine Art Inc (interest rate includes PIK interest of 12%) | Term Loan | 12/17/12 | 12/17/17 | 1 | 1 | % | 12.00 | % | $ | 3,159 | $ | 3,159 | $ | 3,159 | |||||||||||||||||||||||||||||
(capitalized interest of $2,695 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Various Other && 4.75% to 10.50% | Term Loan | | 10/28/08 to 05/03/16 | | | 05/09/18 to 05/03/21 | | 7 | * | 7.92 | % | $ | 175 | $ | 1,570 | $ | 1,546 | $ | 1,254 | |||||||||||||||||||||||||
Arts, Entertainment, and Recreation (38% of the total) | RPAC Racing LLC (interest rate includes PIK interest of 8%) | Term Loan | 06/22/16 | 12/31/16 | 1 | 1 | % | 8.00 | % | $ | 2,000 | $ | 2,034 | $ | 2,034 | $ | 2,034 | |||||||||||||||||||||||||||
(capitalized interest of $34 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
RPAC Racing LLC (interest rate includes PIK interest of 8%) | Term Loan | 09/14/16 | 12/31/16 | 1 | * | 8.00 | % | $ | 1,000 | $ | 1,000 | $ | 1,000 | $ | 1,000 | |||||||||||||||||||||||||||||
Accommodation and Food Services (6% of the total) | Various Other && 6.75% to 9.00% | Term Loan | | 11/29/05 06/06/14 | | | 04/18/17 09/06/19 | | 3 | * | 8.29 | % | $ | 0 | $ | 690 | $ | 597 | $ | 459 | ||||||||||||||||||||||||
Transportation and Warehousing (1% of the total) | Various Other && 4.00% to 4.25% | Term Loan | | 09/19/14 03/17/15 | | | 03/31/17 09/10/18 | | 2 | * | 4.08 | % | $ | 0 | $ | 260 | $ | 252 | $ | 120 | ||||||||||||||||||||||||
Real Estate and Rental and Leasing (1% of the total) | Various Other && 5.00% | Term Loan | 03/31/15 | 03/31/20 | 1 | * | 5.00 | % | $ | 0 | $ | 72 | $ | 69 | $ | 60 | ||||||||||||||||||||||||||||
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Total Other Commercial Loans(2) | 16 | 3 | % | 9.33 | % | $ | 3,175 | $ | 8,785 | $ | 8,657 | $ | 8,086 | |||||||||||||||||||||||||||||||
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Total commercial loans (2) |
| 53 | 29 | % | 13.05 | % | $ | 23,948 | $ | 85,254 | $ | 85,126 | $ | 83,634 | ||||||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries |
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Commercial Banking | Medallion Bank ** | 100% of common stock | 05/16/02 | None | 1 | 98 | % | 2.20 | % | $ | 136,171 | $ | 280,590 | |||||||||||||||||||||||||||||||
NASCAR Race Team | Medallion MotorSports, LLC | 75% of LLC units | 11/24/10 | None | 1 | 2 | % | 0.00 | % | $ | 2,820 | $ | 6,980 | |||||||||||||||||||||||||||||||
Art Dealer | Medallion Fine Art, Inc. | 100% of common stock | 12/03/12 | None | 1 | 1 | % | 0.00 | % | $ | 724 | $ | 3,646 | |||||||||||||||||||||||||||||||
Loan Servicing | Medallion Servicing Corp. | 100% of common stock | 11/05/10 | None | 1 | * | 0.00 | % | $ | 455 | $ | 454 | ||||||||||||||||||||||||||||||||
Professional Sports Team | LAX Group LLC | | 45.74% of membership interests | | 05/23/12 | None | 1 | 1 | % | 0.00 | % | $ | 440 | $ | 1,690 | |||||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries, net | 5 | 103 | % | 2.13 | % | $ | 0 | $ | 0 | $ | 140,610 | $ | 293,360 | |||||||||||||||||||||||||||||||
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Equity investments | ||||||||||||||||||||||||||||||||||||||||||||
Commercial Finance | Convergent Capital, Ltd ** | 7% of limited partnership interest | 07/20/07 | None | 1 | * | 0.00 | % | $ | (794 | ) | $ | 1,100 | |||||||||||||||||||||||||||||||
NASCAR Race Team | RPAC Racing LLC | | 1,000 shares of Series D | | 08/25/15 | None | 1 | * | 0.00 | % | $ | 0 | $ | 1,351 | ||||||||||||||||||||||||||||||
Employee Leasing Services | Staff One, Inc. | | 46.4% preferred stock | | 06/30/08 | None | 2 | * | 0.00 | % | $ | 472 | $ | 1,172 |
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
December 31, 2016
(Dollars in thousands) | Obligor Name/Interest Rate Range | Security | Acquisition Date | Maturity Date | No. of Invest. | % of Net Assets | Interest Rate (1) | Original Cost of 2016 Acquisitions (5) | Principal Outstanding | Cost (4) | Fair Value | |||||||||||||||||||||||||||||||
Weather Forecasting Services | Weather Decision Technologies, Inc. | 2.2% preferred stock | 12/11/15 | None | 1 | * | 0.00 | % | $ | 500 | $ | 500 | ||||||||||||||||||||||||||||||
Hand Tool Manufacturer | Stride Tool Holdings, LLC | 7.14% of SeriesA-2 LLC units | 04/05/16 | None | 1 | * | 0.00 | % | $ | 500 | $ | 500 | $ | 500 | ||||||||||||||||||||||||||||
Services related to advertising | ADSCO Opco, LLC | 7.9% of LLC units of Class A SeriesA-2 | 10/25/16 | None | 1 | * | 0.00 | % | $ | 400 | $ | 400 | $ | 400 | ||||||||||||||||||||||||||||
Envirnomental Consulting Services | Northern Technologies, LLC | 7.98% of LLC units | | 01/29/2016 and 12/5/16 | | None | 2 | * | 0.00 | % | $ | 350 | $ | 350 | $ | 351 | ||||||||||||||||||||||||||
Paper Tapes Manufacturer | Liberty Paper Products Acquisition, LLC | 100% of Series A preferred LLC units - 12% total | 06/09/16 | None | 1 | * | 0.00 | % | $ | 350 | $ | 350 | $ | 350 | ||||||||||||||||||||||||||||
Stuffed Toy Manufacturer | AA Plush Holdings, LLC | 1.6% LLC common units | 08/15/14 | None | 1 | * | 0.00 | % | $ | 300 | $ | 300 | ||||||||||||||||||||||||||||||
Investment Castings | Tech Cast Holdings LLC | 4.14% LLC units | 12/12/14 | �� | 12/12/19 | 1 | * | 0.00 | % | $ | 300 | $ | 300 | |||||||||||||||||||||||||||||
Machine Shop | MicroGroup, Inc. | 5.5% common stock | 06/29/15 | None | 1 | * | 0.00 | % | $ | 300 | $ | 300 | ||||||||||||||||||||||||||||||
Baby Sleep Products | BB Opco, LLC d/b/a BreathableBaby, LLC | 3.6% LLC units | 08/01/14 | None | 1 | * | 0.00 | % | $ | 250 | $ | 250 | ||||||||||||||||||||||||||||||
Manufacture Space Heaters, etc. | Pinnacle Products International, Inc. | 0.5% common stock | 10/09/15 | None | 1 | * | 0.00 | % | $ | 135 | $ | 135 | ||||||||||||||||||||||||||||||
IT Services | Centare Holdings, Inc. | 7.23% of common stock, 3.88% of preferred stock | 08/30/13 | None | 1 | * | 0.00 | % | $ | 104 | $ | 104 | ||||||||||||||||||||||||||||||
Hobbyists’ Supplies Merch. Wholesale | Classic Brand, LLC | Warrant for 300,000 Class A units | 01/08/16 | 01/08/26 | 1 | * | 0.00 | % | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||
Various Other # | + | ** | * Various | | 09/10/98 to 7/24/15 | | | None to 2/5/23 | | 15 | * | 2.27 | % | $ | 300 | $ | 1,366 | $ | 1,355 | |||||||||||||||||||||||
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Equity investments, net | 32 | 3 | % | 0.00 | % | $ | 1,900 | $ | 0 | $ | 4,533 | $ | 8,468 | |||||||||||||||||||||||||||||
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Investment securities | ||||||||||||||||||||||||||||||||||||||||||
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Investment securities, net | 0 | 0 | % | $ | 0 | $ | 0 | |||||||||||||||||||||||||||||||||||
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Net Investments ($231,494 pledged as collateral under borrowing arrangements) (3) |
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774 | 228 | % | 4.94 | % | $ | 42,553 | $ | 381,190 | $ | 525,319 | $ | 652,278 | ||||||||||||||||||||||||||||||
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Medallion Financial Corp
CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
As of and for the year ended December 31, 2016
Name of issuer and title of issue | Number of shares (all restricted unless otherwise noted) | Equity in net profit and (loss) | Amount of dividends or interest(1) | Value as of 12/31/16 | ||||||||||
(Dollars in thousands) | ||||||||||||||
Medallion Bank—common stock | 1,000,000 shares —100% of common stock | $ | 128,385 | $ | 3,000 | $ | 280,589 | |||||||
Medallion Motorsports, LLC—membership interest(3) | 75% of membership interest | 4,465 | 0 | 6,980 | ||||||||||
Medallion Fine Art, Inc.—common stock (2) | 1,000 shares—100% of common stock | (587 | ) | 0 | 3,647 | |||||||||
LAX Group LLC—membership interest | 45.1% of membership interest | 700 | 0 | 1,690 | ||||||||||
Medallion Servicing Corp.—common stock | 1,000 shares—100% of common stock | 158 | 0 | 454 | ||||||||||
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Total investments in Medallion Bank and other controlled subsidiaries | 133,121 | 3,000 | 293,360 | |||||||||||
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RPAC Racing LLC(3) | 100% of Series D units | 0 | 0 | 1,351 | ||||||||||
Stride Tool Holdings LLC(4)—membership interest | 7.14% of Series A membership interest | 0 | 0 | 500 | ||||||||||
Appliance Recycling Centers of America Inc.—common stock | 8.86% of common stock | 0 | 0 | 475 | ||||||||||
ADSCO Holdco LLC(5) | 7.9% of membership interest | 0 | 0 | 400 | ||||||||||
Northern Technologies LLC—membership interest(6) | 7.7% of membership interest | 0 | 0 | 351 | ||||||||||
Micro Group, Inc.(7) | 5.50% of common stock | 0 | 0 | 300 | ||||||||||
Third Century JRT, Inc.(8) | 13% of common stock | 0 | 0 | 200 | ||||||||||
WRWP, LLC—membership interest(9) | 0.00% of membership interest | 0 | 0 | 0 | ||||||||||
Production Services Associates LLC(10) | 5.65% of membership interest | 0 | 0 | 0 | ||||||||||
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Total equity investments in affiliates | $ | 0 | $ | 0 | $ | 3,577 | ||||||||
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The table below provides a recap of the changes in the investment in the respective issuers for the year ended December 31, 2016.
Name of Issuer | Medallion Bank | Medallion Fine Art, Inc. | Medallion Motorsports, LLC(2) | Appliance Recycling Centers of America, Inc. | Medallion Servicing Corp. | LAX Group, LLC | Production Services Associates, LLC(3) | Micro Group, Inc. (4) | WRWP, LLC | Third Century JRT, Inc. (6) | Northern Technologies, LLC(7) | Stride Tool Holding LLC(8) | ADSCO Holdco LLC(9) | RPAC Racing LLC(2) | ||||||||||||||||||||||||||||||||||||||||||
Title of Issue | Common Stock | Common Stock(1) | Membership Interest | Common Stock | Common Stock | Membership Interest | Membership Interest | Common Stock | Membership Interest(5) | Common Stock | Membership Interest | Membership Interest | Membership Interest | Membership Interest | ||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Value as of 12/31/15 | $ | 152,166 | $ | 4,234 | $ | 2,527 | $ | 509 | $ | 631 | $ | 355 | $ | 1,179 | $ | 300 | $ | 224 | $ | 200 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||
Gross additions / investments | 4,265 | — | 1 | — | 160 | 635 | — | — | — | — | 351 | 500 | 400 | — | ||||||||||||||||||||||||||||||||||||||||||
Gross reductions / distributions | (4,272 | ) | — | (13 | ) | — | (495 | ) | — | (1,082 | ) | — | (224 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Net equity in profit and loss, and unrealized appreciation and (depreciation) | 128,385 | (587 | ) | 4,465 | (34 | ) | 158 | 700 | (97 | ) | — | — | — | — | — | — | 1,351 | |||||||||||||||||||||||||||||||||||||||
Other adjustments | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
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Value as of 12/31/16 | $ | 280,589 | $ | 3,647 | $ | 6,980 | $ | 475 | $ | 454 | $ | 1,690 | $ | — | $ | 300 | $ | — | $ | 200 | $ | 351 | $ | 500 | $ | 400 | $ | 1,351 | ||||||||||||||||||||||||||||
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(A wholly owned subsidiary of Medallion Financial Corp.)
Financial Statements for the years ended December 31, 2017, 2016, and 2015
Report of Independent Registered Public Accounting Firm
To the Shareholder and the Board of Directors of Medallion Bank
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Medallion Bank (the “Bank”) (a wholly owned subsidiary of Medallion Financial Corp.) as of December 31, 2017 and 2016, and the related statements of comprehensive income, changes in shareholder’s equity, and cash flows for each of the three years in the three-year period ended December 31, 2017, and the related notes (collectively the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on the Bank’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchanges Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Mazars USA LLP
We have served as the Bank’s auditor since 2005.
New York, New York
March 14, 2018
Medallion Bank
Statements of Comprehensive Income
For the years ended December 31,
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Interest income | ||||||||||||
Investments | $ | 1,288 | $ | 973 | $ | 793 | ||||||
Loan interest including fees | 109,993 | 102,481 | 90,228 | |||||||||
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Total interest income | 111,281 | 103,454 | 91,021 | |||||||||
Interest expense | 13,869 | 11,762 | 9,205 | |||||||||
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Net interest income | 97,412 | 91,692 | 81,816 | |||||||||
Provision for loan losses | 51,282 | 69,466 | 16,701 | |||||||||
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Net interest income after provision for loan losses | 46,130 | 22,226 | 65,115 | |||||||||
Noninterest income | 121 | 308 | 291 | |||||||||
Writedown of loan collateral in process of foreclosure | (6,259 | ) | (3 | ) | (2 | ) | ||||||
Gain/(loss) on sale of loans | 7,163 | 3,386 | — | |||||||||
Gain on sale of investment securities | — | — | 31 | |||||||||
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Total noninterest income | 1,025 | 3,691 | 320 | |||||||||
Noninterest expense | ||||||||||||
Loan servicing | 9,833 | 9,324 | 9,072 | |||||||||
Salaries and benefits | 6,575 | 5,784 | 5,299 | |||||||||
Professional fees | 1,469 | 2,006 | 2,594 | |||||||||
Computer expense | 491 | 494 | 155 | |||||||||
Collection costs | 2,437 | 2,123 | 1,362 | |||||||||
Regulatory fees | 2,410 | 1,287 | 877 | |||||||||
Affiliate services | 531 | 544 | 500 | |||||||||
Occupancy and equipment | 405 | 340 | 274 | |||||||||
Insurance | 254 | 212 | 201 | |||||||||
Credit reports | 296 | 239 | 204 | |||||||||
Director’s fees | 230 | 216 | 174 | |||||||||
Dues and subscriptions | 222 | 98 | 68 | |||||||||
Provision for losses on other assets | 1,476 | — | 1,150 | |||||||||
Other | 880 | 1,614 | 841 | |||||||||
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Total noninterest expense | 27,509 | 24,281 | 22,771 | |||||||||
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Income before income taxes | 19,646 | 1,636 | 42,664 | |||||||||
Provision (benefit) for income taxes | 15,093 | (326 | ) | 18,974 | ||||||||
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Net income | 4,553 | 1,962 | 23,690 | |||||||||
Other comprehensive income, net of tax | ||||||||||||
Net change in unrealized gains (losses) on investment securities | 159 | (245 | ) | (453 | ) | |||||||
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Total comprehensive income | $ | 4,712 | $ | 1,717 | $ | 23,237 | ||||||
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The accompanying notes are an integral part of these financial statements.
Medallion Bank
December 31,
(Dollars in thousands) | 2017 | 2016 | ||||||
Assets | ||||||||
Cash and cash equivalents, substantially all of which are federal funds sold | $ | 110,233 | $ | 30,881 | ||||
Investment securities,available-for-sale | 43,478 | 36,861 | ||||||
Loans, inclusive of net deferred loan acquisition costs | 928,232 | 1,019,901 | ||||||
Allowance for loan losses | (63,416 | ) | (54,819 | ) | ||||
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Loans, net | 864,816 | 965,082 | ||||||
Loan collateral in process of foreclosure | 27,706 | 1,197 | ||||||
Fixed assets, net | 314 | 234 | ||||||
Deferred and other tax assets, net | 10,181 | 23,333 | ||||||
Accrued interest receivable and other assets | 20,626 | 18,370 | ||||||
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Total assets | $ | 1,077,354 | $ | 1,075,958 | ||||
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Liabilities and shareholder’s equity | ||||||||
Liabilities | ||||||||
Funds borrowed | $ | 906,748 | $ | 908,442 | ||||
Accrued interest payable | 1,488 | 1,094 | ||||||
Other liabilities | 3,833 | 3,453 | ||||||
Due to affiliates | 1,055 | 1,084 | ||||||
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Total liabilities | 913,124 | 914,073 | ||||||
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Commitments and contingencies (Note 9) | — | — | ||||||
Shareholder’s equity | ||||||||
Preferred stock, $1.00 par value,26,303 shares at December 31, 2017 and 2016 authorized, issued, and outstanding | 26,303 | 26,303 | ||||||
Common stock, $1 par value, 7,000,000 shares authorized, 1,000,000 issued and outstanding | 1,000 | 1,000 | ||||||
Additional paid in capital | 77,500 | 77,500 | ||||||
Accumulated other comprehensive income/(loss), net of tax | (382 | ) | (541 | ) | ||||
Retained earnings | 59,809 | 57,623 | ||||||
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Total shareholder’s equity | 164,230 | 161,885 | ||||||
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Total liabilities and shareholder’s equity | $ | 1,077,354 | $ | 1,075,958 | ||||
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The accompanying notes are an integral part of these financial statements.
Medallion Bank
Statements of Changes in Shareholder’s Equity
For the years ended December 31, 2017, 2016, and 2015
(Dollars in thousands) | Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||
Shares Outstanding | Amount | Shares Outstanding | Amount | Additional Paid in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total Shareholder’s Equity | |||||||||||||||||||||||||
Balance at December 31, 2014 | 26,303 | $ | 26,303 | 1,000,000 | $ | 1,000 | $ | 66,500 | $ | 157 | $ | 55,484 | $ | 149,444 | ||||||||||||||||||
Capital contributions | — | — | — | — | 8,000 | — | — | 8,000 | ||||||||||||||||||||||||
Net income | 23,690 | 23,690 | ||||||||||||||||||||||||||||||
Dividends declared to parent | — | — | — | — | — | — | (18,000 | ) | (18,000 | ) | ||||||||||||||||||||||
Dividends declared to US Treasury | — | — | — | — | — | — | (263 | ) | (263 | ) | ||||||||||||||||||||||
Net change in unrealized losses on investment securities, net of tax | — | — | — | — | — | (453 | ) | — | (453 | ) | ||||||||||||||||||||||
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Balance at December 31, 2015 | 26,303 | 26,303 | 1,000,000 | 1,000 | 74,500 | (296 | ) | 60,911 | 162,418 | |||||||||||||||||||||||
Capital contributions | — | — | — | — | 3,000 | — | — | 3,000 | ||||||||||||||||||||||||
Net income | 1,962 | 1,962 | ||||||||||||||||||||||||||||||
Dividends declared to parent | — | — | — | — | — | — | (3,000 | ) | (3,000 | ) | ||||||||||||||||||||||
Dividends declared to US Treasury | — | — | — | — | — | — | (2,250 | ) | (2,250 | ) | ||||||||||||||||||||||
Net change in unrealized losses on investment securities, net of tax | — | — | — | — | — | (245 | ) | — | (245 | ) | ||||||||||||||||||||||
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Balance at December 31,2016 | 26,303 | 26,303 | 1,000,000 | 1,000 | 77,500 | (541 | ) | 57,623 | 161,885 | |||||||||||||||||||||||
Net income | 4,553 | 4,553 | ||||||||||||||||||||||||||||||
Dividends declared to US Treasury | — | — | — | — | — | — | (2,367 | ) | (2,367 | ) | ||||||||||||||||||||||
Net change in unrealized losses on investment securities, net of tax | — | — | — | — | — | 159 | — | 159 | ||||||||||||||||||||||||
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Balance at December 31, 2017 | 26,303 | $ | 26,303 | 1,000,000 | $ | 1,000 | $ | 77,500 | ($ | 382 | ) | $ | 59,809 | $ | 164,230 | |||||||||||||||||
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The accompanying notes are an integral part of these financial statements.
Medallion Bank
For the years ended December 31,
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Cash flows from operating activities | ||||||||||||
Net income from operations | $ | 4,553 | $ | 1,962 | $ | 23,690 | ||||||
Adjustments to reconcile net income to net cash flows provided by operating activities: | ||||||||||||
Depreciation and amortization | 5,065 | 5,056 | 4,816 | |||||||||
Deferred tax benefit | 4,731 | (11,889 | ) | (2,623 | ) | |||||||
Provision for loan losses | 51,282 | 69,466 | 16,701 | |||||||||
Provision for losses on other assets | 1,476 | — | 1,150 | |||||||||
Writedown of loan collateral in process of foreclosure and other assets, net | 6,261 | — | (1 | ) | ||||||||
Gain from sale of loans, net | (7,163 | ) | (3,386 | ) | — | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Interest receivable | (582 | ) | (197 | ) | (1,171 | ) | ||||||
Other tax assets | 8,236 | (6,210 | ) | 3,233 | ||||||||
Other assets | (4,564 | ) | (960 | ) | (1,926 | ) | ||||||
Interest payable | 394 | 82 | 317 | |||||||||
Other liabilities | 380 | 347 | 175 | |||||||||
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Net cash provided by operating activities | 70,069 | 54,271 | 44,361 | |||||||||
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Cash flows from investing activities | ||||||||||||
Increase in loans, net | (218,279 | ) | (188,826 | ) | (139,720 | ) | ||||||
Proceeds from sale of loans | 231,906 | 144,818 | — | |||||||||
Purchase of investments | (12,722 | ) | (6,496 | ) | (15,046 | ) | ||||||
Proceeds from maturity/sale of investments | 6,452 | 4,781 | 6,587 | |||||||||
Proceeds from sale of repossessed loan collateral | 6,234 | 5,510 | 4,514 | |||||||||
Purchase of fixed assets | (218 | ) | (263 | ) | (22 | ) | ||||||
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Net cash provided by (used in) investing activities | 13,373 | (40,476 | ) | (143,687 | ) | |||||||
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Cash flows from financing activities | ||||||||||||
Issuance of time deposits and other borrowed funds | 549,542 | 494,350 | 475,926 | |||||||||
Repayments of funds borrowed | (551,236 | ) | (494,805 | ) | (374,970 | ) | ||||||
Federal funds purchased | 28,000 | 42,000 | 35,043 | |||||||||
Repayments of federal funds purchased | (28,000 | ) | (42,000 | ) | (35,043 | ) | ||||||
Change in due to affiliates | (29 | ) | (303 | ) | (1,645 | ) | ||||||
Additionalpaid-in capital contributed by parent | — | 3,000 | 8,000 | |||||||||
Dividends paid to parent | — | (6,000 | ) | (15,000 | ) | |||||||
Dividends paid to US Treasury | (2,367 | ) | (2,250 | ) | (263 | ) | ||||||
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Net cash provided (used for) by financing activities | (4,090 | ) | (6,008 | ) | 92,048 | |||||||
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Net change in cash and cash equivalents | 79,352 | 7,787 | (7,278 | ) | ||||||||
Cash and cash equivalents, beginning of the year | 30,881 | 23,094 | 30,372 | |||||||||
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Cash and cash equivalents, end of the year | $ | 110,233 | $ | 30,881 | $ | 23,094 | ||||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||
Cash paid for interest | $ | 12,145 | $ | 10,311 | $ | 7,575 | ||||||
Cash paid for income taxes | 4,762 | 17,773 | 18,364 | |||||||||
Non-cash investing activities - loans transferred to loan collateral in process of foreclosure | 44,968 | 10,941 | 8,523 | |||||||||
Non-cash investing activities - loans transferred to other assets | — | — | 338 | |||||||||
Non-cash financing activity - dividends payable to parent | — | — | 3,000 |
The accompanying notes are an integral part of these financial statements.
Medallion Bank
December 31, 2017
1. Organization and summary of significant accounting policies
Description of business –Medallion Bank (the Bank) is a limited service industrial bank headquartered in Salt Lake City, Utah. The Bank was formed in May 2002 for the purpose of obtaining an industrial bank (IB) charter pursuant to the laws of the State of Utah. The Bank is a wholly owned subsidiary of Medallion Financial Corp. (Medallion). The Bank originates consumer loans on a national basis for the purchase of recreational vehicles (“RVs”), boats and trailers and to finance home improvements such as replacement windows and roofs. Prior to 2014 the Bank originated medallion commercial loans to finance the purchase of taxi medallions, of which are serviced by the Bank’s affiliates who have extensive experience in this asset group. The loans are financed primarily with time certificates of deposits which are originated nationally through a variety of brokered deposit relationships.
Basis of presentation –The Bank’s financial statements are presented in accordance with accounting principles generally accepted in the US and prevailing industry practices, which require management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Estimates, by their nature, are based upon judgment and available information. Actual results could differ materially from those estimates.
Cash and cash equivalents –The Bank considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Anon-interest bearing compensating balance of $100,000 is maintained at a correspondent bank. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that frequently exceed the federally insured limits.
Investment securities –FASB ASC Topic 320, “Investments – Debt and Equity Securities,” requires that all applicable investments be classified as trading securities,available-for-sale securities, orheld-to-maturity securities. Investment securities are purchased fromtime-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. At December 31, 2017 and 2016, the net premium on investment securities totaled $265,000 and $238,000, and $81,000, $82,000, and $83,000 was amortized to interest income for the years ended December 31, 2017, 2016, and 2015. The Bank had $43,478,000 and $36,861,000 ofavailable-for-sale securities at fair value as of December 31, 2017 and 2016. The Topic further requires thatheld-to-maturity securities be reported at amortized cost andavailable-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. The Bank had $369,000 and $797,000 of pretax net unrealized loss onavailable-for-sale securities as of December 31, 2017 and 2016. 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.
Loans –Loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan.
Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At December 31, 2017 and 2016, net loan origination costs were $11,093,000 and $12,371,000. Net amortization expense for the years ended December 31, 2017, 2016, and 2015 was $3,513,000, $3,489,000, and $3,354,000.
Interest income is recognized on an 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. In 2017, the Bank adopted a policy tocharge-off all taxicab medallion loans which reached 120 days past due down to their net realizable value and then generally moves the remaining balances to repossessed loan collateral on the balance sheet. The consumer portfolio has different characteristics compared to commercial loans, 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 Bank 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 beencharged-off, to be impaired. These loans are placed on nonaccrual, when they become 90 days past due, or earlier if they enter bankruptcy, and are charged off in their entirety when deemed uncollectible, or when they become 120 days past due (loans in bankruptcy are notcharged-off at 120 days), whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. Other loans are charged off when management determines that a loss has occurred. All interest accrued but not collected for loans that are
charged off is reversed against interest income. 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 $16,115,000, $42,269,000, and $17,153,000 at December 31, 2017, 2016, and 2015, or 1.8%, 4.2%, and 1.7% of the total loan portfolio.
At December 31, 2017, $5,367,000 or 1% of consumer loans, no commercial loans, and $27,332,000 or 12% of medallion loans were on nonaccrual, compared to $4,179,000 or 1% of consumer loans, no commercial loans, and $47,841,000 or 16% medallion loans on nonaccrual at December 31, 2016, and $3,381,000 or 1% of consumer loans, no commercial loans, and $21,722,000 or 6% medallion loans on nonaccrual at December 31, 2015. The amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $1,487,000 ($1,221,000 of which had been applied to principal), $106,000, and $183,000 as of December 31, 2017, 2016, and 2015.
Commercial loans are reserved down to fair value and placed on nonaccrual status. Fair value is determined based upon comparable market prices for substantially similar collateral plus management’s estimate of disposal costs. All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash basis and applied to principal until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Troubled Debt Restructurings (TDRs) –In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession for other than an insignificant period of time to the borrower that the Bank would not otherwise consider, the related loan is classified as a TDR. The Bank strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before it reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize the economic loss to the Bank and to avoid foreclosure or repossession of the collateral. For modifications where the Bank forgives principal, the entire amount of such principal forgiveness is immediately charged off. Loans classified as TDRs are considered impaired loans.
When the Bank identifies a loan as impaired, the Bank measures the impairment based on the present value of expected future cash flows, discounted at the loan’s effective interest rate. When collateral is the sole source of repayment for the loan, the Bank may measure impairment based on the fair value of the collateral. If foreclosure is probable, the Bank uses the current fair value of the collateral less selling costs, instead of discounted cash flows.
If the Bank determines that the value of an impaired loan is less than the recorded investment in the loan (net of previous chargeoffs, deferred loan fees or costs and unamortized premium or discount), the Bank recognizes impairment. When the value of an impaired loan is calculated by discounting expected cash flows, interest income is recognized using the loan’s effective interest rate over the remaining life of the loan.
Allowance for loan losses – In analyzing the adequacy of the allowance for loan losses, the Bank uses historical delinquency and actual loss rates with a three year lookback period for medallion loans and a one year lookback period for consumer loans. 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. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.
Fixed assets –Fixed assets are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense while significant improvements are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Capitalized leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the remaining lease term.
Income taxes –The Bank uses the asset and liability method in providing income taxes on all transactions that have been recognized in the financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their existing tax bases. The Bank files its tax returns on a consolidated company basis with Medallion.
Other comprehensive income (loss) –The Bank had $159,000, $(245,000), and $(453,000) of net unrealized gains/(loss) due to the change in fair value ofavailable-for-sale securities for the years ended December 31, 2017, 2016, and 2015.
Restrictions on dividends, loans, and advances –Banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to Medallion. The total amount of dividends that may be paid at any date is generally limited to the retained earnings of the Bank. However, dividends paid by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum standards.
Financial instruments –FASB ASC Topic 825, “Financial Instruments,” requires disclosure of fair value information about certain financial instruments, whether assets, liabilities, oroff-balance-sheet commitments, if practicable.
Fair value of assets and liabilities –The Bank follows FASB ASC 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 entities 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 Note 12 to the financial statements.
Reclassifications – Certain reclassifications have been made to prior year balances to conform with the current year presentation. These reclassifications have no effect on the previously reported results of operations.
Recently issued accounting standards — In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)2018-02, Income Statement- Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The objective of this update is to allow a reclassification from accumulated income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Acts and will update certain disclosures about stranded tax effects. Early adoption is permitted. The Bank has assessed the impact of the update and has determined it will not have a material effect on its financial condition and results of operations.
In May 2017, the FASB issued Accounting Standards Update (ASU)2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The objective of this update is to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance of Topic 718. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. . The Bank has assessed the impact of the update and has determined it will not have a material effect on its financial condition and results of operations.
In January 2017, the FASB issued Accounting Standards Update (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 Bank does not believe this update will have a material impact on its financial condition.
In August 2016, the FASB issued Accounting Standards Update (ASU)2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Bank has assessed the impact of the update and has determined it will not have a material effect on its financial condition and results of operations.
In June 2016, the FASB issued ASU2016-13, “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. Effective dates vary according to business entity type, and early adoption is permitted for all entities. 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. ASU2016-13 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 Bank is assessing the impact the update will have on its financial statement, but expects the update to have a significant impact on how the Bank expects to account for estimated credit losses on its loans.
In February 2016, the FASB issued Accounting Standards Update (ASU)2016-02, “Leases (Topic 842)”. ASU2016-02 requires the recognition of lease assets and lease liabilities by lessees for leases classified as operating under current GAAP. ASU2016-02 applies to all entities and is effective for fiscal years beginning after December 15, 2018 for public entities and is effective for fiscal years beginning after December 15, 2019 for all other entities, with early adoption permitted. The Bank is assessing the impact the update will have on its financial condition.
In January 2016, the FASB issued ASU2016-01, “Financial Instruments—Overall (Topic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The main objective of this Update is to enhance the reporting model for financial instruments and provide users of financial statements with more decision-useful information. ASU2016-01 requires equity investments to be measured at fair value, simplifies the impairment assessment of equity investment without readily determinable fair value, eliminates the requirements to disclose the fair value of financial instruments measured at amortized cost, and requires public business entities to use the exit price notion when measuring the fair value of financial instruments. The update, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Bank has assessed the impact of the update and has determined it will not have a material effect on its financial condition and results of operations.
2. Investment securities
Fixed maturity securitiesavailable-for-sale at December 31 consisted of the following.
(Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
2017 | ||||||||||||||||
Mortgage-backed securities, principally obligations of US federal agencies | $ | 32,749 | $ | 47 | $ | 354 | $ | 32,442 | ||||||||
State and municipalities | 11,098 | 52 | 114 | 11,036 | ||||||||||||
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Total | $ | 43,847 | $ | 99 | $ | 468 | $ | 43,478 | ||||||||
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2016 | ||||||||||||||||
Mortgage-backed securities, principally obligations of US federal agencies | $ | 27,619 | $ | 90 | $ | 540 | $ | 27,169 | ||||||||
State and municipalities | 10,039 | 9 | 356 | 9,692 | ||||||||||||
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Total | $ | 37,658 | $ | 99 | $ | 896 | $ | 36,861 | ||||||||
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The amortized cost and estimated market value of investment securities as of December 31, 2017 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 | Market Value | ||||||
Due in one year or less | $ | — | $ | — | ||||
Due after one year through five years | 7,602 | 7,541 | ||||||
Due after five years through ten years | 15,134 | 15,038 | ||||||
Due after ten years | 21,111 | 20,899 | ||||||
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Total | $ | 43,847 | $ | 43,478 | ||||
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Information pertaining to securities with gross unrealized losses at December 31, 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 | ||||||||||||
2017 | ||||||||||||||||
Mortgage-backed securities, principally obligations of US federal agencies | $ | 192 | $ | 19,432 | $ | 162 | $ | 7,068 | ||||||||
State and municipalities | 16 | 3,445 | 98 | 4,234 | ||||||||||||
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Total | $ | 208 | $ | 22,877 | $ | 260 | $ | 11,302 | ||||||||
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2016 | ||||||||||||||||
Mortgage-backed securities, principally obligations of US federal agencies | $ | 540 | $ | 24,292 | $ | — | $ | — | ||||||||
State and municipalities | 310 | 8,573 | 46 | 757 | ||||||||||||
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Total | $ | 850 | $ | 32,865 | $ | 46 | $ | 757 | ||||||||
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Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, and the Bank 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.
3. Loans and allowance for loan losses
Loans are summarized as follows at December 31,
Loans (Dollars in thousands) | 2017 | 2016 | ||||||
Consumer(1) | $ | 693,289 | $ | 708,527 | ||||
Medallion(2) | 222,252 | 296,436 | ||||||
Other commercial(2) | 1,598 | 2,567 | ||||||
Deferred loan acquisition costs, net | 11,093 | 12,371 | ||||||
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Total loans | $ | 928,232 | $ | 1,019,901 | ||||
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Changes in the allowance for loan losses are summarized as follows.
(Dollars in thousands) | Medallion (1) | Asset-based and commercial(1) | Consumer (2) | Total | ||||||||||||
Balance at 12/31/14 | $ | 1,841 | $ | 1,296 | $ | 14,662 | $ | 17,799 | ||||||||
Provision for loan losses | 4,295 | 335 | 12,071 | 16,701 | ||||||||||||
Loan charge-offs | — | (1,013 | ) | (12,667 | ) | (13,680 | ) | |||||||||
Recoveries | — | — | 3,261 | 3,261 | ||||||||||||
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Balance at 12/31/15 | 6,136 | 618 | 17,327 | 24,081 | ||||||||||||
Provision for loan losses | 56,239 | (612 | ) | 13,841 | 69,466 | |||||||||||
Loan charge-offs | (27,646 | ) | — | (15,749 | ) | (43,395 | ) | |||||||||
Recoveries | — | — | 4,667 | 4,667 | ||||||||||||
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Balance at 12/31/16 | 34,729 | 4 | 20,086 | 54,819 | ||||||||||||
Provision for loan losses | 36,491 | (1 | ) | 14,792 | 51,282 | |||||||||||
Loan charge-offs | (30,121 | ) | — | (19,608 | ) | (49,729 | ) | |||||||||
Recoveries | 1,285 | — | 5,759 | 7,044 | ||||||||||||
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Balance at 12/31/17 | $ | 42,384 | $ | 3 | $ | 21,029 | $ | 63,416 | ||||||||
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There were no loans acquired with deteriorated credit quality.
See Note 1 to the financial statements which describes the nature of the portfolios, their collection and income recognition processes, and the methodology used to assess the adequacy of the allowance.
Other commercial or construction loans are infrequent, and made on a case by case basis, after performing thorough borrower review, credit, and collateral checks. The risk associated with these types of loans is individual to that particular credit, and they are monitored and tracked closely.
The consumer loan portfolio is primarily customer driven, whereby borrowers are assessed a score based on income level, home ownership, FICO score, and other factors weighted in a credit scoring model that determines whether a borrower is qualified. Loan losses in this portfolio fluctuate with economic conditions, and can range widely over time. The consumer loan portfolio is analyzed and evaluated in the aggregate, as a pool of loans.
Allocations for the allowance for credit losses may be made for specific loans, but the allowance is general in nature and is available to absorb losses from any loan type.
The following table provides a summary of the loan portfolio by its performance status and by type.
Performing | Nonperforming | Total | ||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Medallion | $ | 175,527 | $ | 240,616 | $ | 46,725 | $ | 55,820 | $ | 222,252 | $ | 296,436 | ||||||||||||
Asset-based and commercial | 1,598 | 2,567 | — | — | 1,598 | 2,567 | ||||||||||||||||||
Consumer | 687,800 | 704,120 | 5,489 | 4,408 | 693,289 | 708,527 | ||||||||||||||||||
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Total | $ | 864,925 | $ | 947,303 | $ | 52,214 | $ | 60,228 | $ | 917,139 | $ | 1,007,530 | ||||||||||||
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The following tables provide additional information on attributes of the nonperforming loan portfolio.
(Dollars in thousands) December 31, 2017 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded | ||||||||||||||||||||
Medallion | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Asset-based and commercial | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
With an allowance recorded | ||||||||||||||||||||
Medallion | 46,725 | 46,725 | 23,164 | 37,983 | 1,221 | |||||||||||||||
Asset–based and commercial | — | — | — | — | — | |||||||||||||||
Consumer | 5,489 | 5,489 | 170 | 4,200 | 320 | |||||||||||||||
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Total | ||||||||||||||||||||
Medallion | 46,725 | 46,725 | 23,164 | 37,983 | 1,221 | |||||||||||||||
Asset–based and commercial | — | — | — | — | — | |||||||||||||||
Consumer | $ | 5,489 | $ | 5,489 | $ | 170 | $ | 4,200 | $ | 320 |
(Dollars in thousands) December 31, 2016 With no related allowance recorded Medallion Asset–based and commercial Consumer With an allowance recorded Medallion Asset–based and commercial Consumer Total Medallion Asset –based and commercial Consumer Recorded
Investment Unpaid Principal
Balance Related
Allowance Average Recorded
Investment Interest Income
Recognized $ — $ — $ — $ — $ — — — — — — — — — — — 55,820 55,820 22,576 39,142 520 — — — — — 4,408 4,408 136 3,292 264 55,820 55,820 22,576 39,142 520 — — — — — $ 4,408 $ 4,408 $ 136 $ 3,292 $ 264
The table below shows the aging of all loan types as of December 31,
(Dollars in thousands) | Days Past Due | Recorded Investment >90 Days and Accruing | ||||||||||||||||||||||||||
2017 | 31-60 | 61-90 | 91 + | Total Past Due | Current | Total | ||||||||||||||||||||||
Medallion | $ | 13,859 | $ | 11,167 | $ | 12,170 | $ | 37,196 | $ | 185,056 | $ | 222,252 | $ | — | ||||||||||||||
Asset–based and | — | — | — | — | 1,598 | 1,598 | — | |||||||||||||||||||||
Consumer | 16,252 | 5,021 | 3,945 | 25,218 | 668,071 | 693,289 | — | |||||||||||||||||||||
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Total | $ | 30,111 | $ | 16,188 | $ | 16,115 | $ | 62,414 | $ | 854,725 | $ | 917,139 | $ | — | ||||||||||||||
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(Dollars in thousands) | Days Past Due | Recorded Investment >90 Days and Accruing | ||||||||||||||||||||||||||
2016 | 31-60 | 61-90 | 91 + | Total Past Due | Current | Total | ||||||||||||||||||||||
Medallion | $ | 7,910 | $ | 21,929 | $ | 38,973 | $ | 68,812 | $ | 227,624 | $ | 296,436 | $ | — | ||||||||||||||
Asset–based and commercial | — | — | 218 | 218 | 2,349 | 2,567 | — | |||||||||||||||||||||
Consumer | 13,517 | 4,546 | 3,078 | 21,141 | 687,386 | 708,527 | — | |||||||||||||||||||||
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Total | $ | 21,427 | $ | 26,475 | $ | 42,269 | $ | 90,171 | $ | 917,359 | $ | 1,007,530 | $ | — | ||||||||||||||
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Other assets
A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount was divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company’s liquidation. In May 2013, the bankruptcy court presiding over the third party finance company’s case entered an order converting the involuntary chapter 7 case to a chapter 11 case. The Bank has placed these loans on nonaccrual, and reversed interest income. In addition, the Bank has established valuation allowances against the outstanding balances. On May 31, 2013, the Bank commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the third party finance company’s assets. The third party finance company and bank lenders are contesting the Bank’s position. In April 2014, the Bank received a decision from the court granting summary judgment in the Bank’s favor with respect to the issue of whether the Bank’s loan participations are true participations. In March 2015, the Bank received a decision from the court finding that the bank lenders generally held a first lien on the Bank’s loan participations subject to, among other things, defenses still pending prosecution by the parties and adjudication by the court. The Bank is appealing the decision. The remaining issues are still being litigated. Although the Bank believes the claims raised by the third party finance company and the bank lenders are without merit and will vigorously defend against them, the Bank cannot at this time predict the outcome of this litigation or determine our potential exposure.
At December 31, 2017, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. One loan was charged off in September 2014. In September 2015, one loan was sold at a discount to a third party, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. The balances related to the paid off loans have been reclassified to other assets on the balance sheet. The table below summarizes these receivables and their status with the Bank as of December 31, 2017.
(Dollars in thousands) | Medallion Bank | |||
Loans outstanding | $ | 1,953 | ||
Loans charged off (1) | (1,953 | ) | ||
Valuation allowance | — | |||
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Net loans outstanding | — | |||
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Other receivables | 11,062 | |||
Valuation allowance | (5,901 | ) | ||
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Net other receivables | 5,161 | |||
Total net outstanding | 5,161 | |||
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Income foregone in 2017 | — | |||
Total income foregone | $ | 108 | ||
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The table below shows loans that were modified during 2017 and 2016.
(Dollars in thousands) | Troubled Debt Restructuring | Troubled Debt Restructuring that Subsequently Defaulted | ||||||||||||||||||
Number of Loans | Pre- Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | Number of Loans | Recorded Investments | ||||||||||||||||
2017 | ||||||||||||||||||||
Troubled debt restructuring | ||||||||||||||||||||
Medallion | 41 | $ | 29,190 | $ | 29,186 | 8 | $ | 4,563 | ||||||||||||
Commercial | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
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2016 | ||||||||||||||||||||
Troubled debt restructuring | ||||||||||||||||||||
Medallion | 21 | $ | 14,384 | $ | 14,396 | — | $ | — | ||||||||||||
Commercial | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — |
4. Fixed assets
Fixed assets and their related useful lives at December 31 were as follows:
(Dollars in thousands) | Useful lives | 2017 | 2016 | |||||||||
Computer software | 3 years | $ | 431 | $ | 259 | |||||||
Equipment | 5 years | 25 | 61 | |||||||||
Furniture and fixtures | 5-10 years | 81 | 87 | |||||||||
Leasehold improvements | 3-5 years | 9 | 13 | |||||||||
Telephone equipment | 3 years | 25 | 33 | |||||||||
Deposit system | 3 years | — | 14 | |||||||||
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571 | 467 | |||||||||||
Less accumulated depreciation and amortization |
| (257 | ) | (233 | ) | |||||||
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Net fixed assets | $ | 314 | $ | 234 | ||||||||
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Depreciation expense was $138,000, $115,000, and $56,000 for the years ended December 31, 2017, 2016, and 2015.
5. Deposits and other borrowings
At December 31, 2017, the scheduled maturities of all borrowed funds, which were primarily composed of brokered certificates of time deposit as follows.
(Dollars in thousands) | ||||
2018 | $ | 424,115 | ||
2019 | 260,872 | |||
2020 | 91,136 | |||
2021 | 76,884 | |||
2022 | 53,741 | |||
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Total | $ | 906,748 | ||
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All time deposits are in denominations of less than $250,000 and have been originated through Certificate of Deposit Broker relationships. The weighted average interest rate of deposits outstanding at December 31, 2017 was 1.51%.
Deposits are raised through the use of investment brokerage firms who package deposits qualifying for FDIC insurance into pools that are sold to Medallion 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%, and which is capitalized and amortized to interest expense over the life of the respective pool. The total amount capitalized at December 31, 2017 and 2016 was $1,941,000 and $1,996,000, and $1,330,000, $1,369,000, and $1,314,000 was amortized to interest expense during 2017, 2016, and 2015. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity.
At December 31, 2017, the Bank had unsecured and undrawn Federal Funds lines with correspondent banks of $25,000,000.
6. Income taxes
The components of the provisions for income taxes were as follows for the years ended December 31,
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Current | ||||||||||||
Federal | $ | 10,145 | $ | 8,772 | $ | 15,997 | ||||||
State | 218 | 2,791 | 5,600 | |||||||||
Deferred | ||||||||||||
Federal | (2,255 | ) | (9,021 | ) | (1,849 | ) | ||||||
Change in federal tax rate | 7,396 | — | — | |||||||||
State | (411 | ) | (2,868 | ) | (774 | ) | ||||||
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Net provision for income taxes | $ | 15,093 | $ | (326 | ) | $ | 18,974 | |||||
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The following table reconciles the provision for income taxes to the US federal statutory income tax rate for the years ended December 31, 2017, 2016, and 2015.
2017 | 2016 | 2015 | ||||||||||
Statutory Federal Income tax at 35% | $ | 6,876 | $ | 573 | $ | 14,932 | ||||||
State and local income taxes, net of federal income tax | 766 | 64 | 1,664 | |||||||||
Change in state tax nexus | — | (770 | ) | 1,579 | ||||||||
Change in federal tax rate | 7,396 | — | — | |||||||||
Other | 55 | (193 | ) | 799 | ||||||||
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Total | $ | 15,093 | $ | (326 | ) | $ | 18,974 | |||||
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On December 22, 2017, the U.S. Government signed into law the “Tax Cuts and Jobs Act” which, starting in 2018, reduces the Company’s corporate statutory income tax rate from 35% to 21%, but eliminates or increases certain permanent differences. As of the date of enactment, the Company has adjusted its deferred tax assets and liabilities for the new statutory rate which resulted in a $7.4 million income tax benefit for the year ended December 31, 2017.
Historically, the Bank filed its 2015 tax returns on a separate company basis, however Medallion did not qualify for RIC status for 2016 and 2017, and therefore filed consolidated 2016 tax returns with the Bank and expects to do the same for 2017.
Deferred tax and other asset balances reflected in the balance sheet were as follows as of December 31,
(Dollars in thousands) | 2017 | 2016 | ||||||
Provision for loan losses | $ | 16,962 | $ | 23,408 | ||||
Deferred loan acquisition costs | (2,899 | ) | (4,812 | ) | ||||
Unrealized gains on investments | 141 | 327 | ||||||
Other | 403 | 600 | ||||||
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Net deferred tax asset | 14,607 | 19,523 | ||||||
Prepaid (accrued) taxes | (4,426 | ) | 3,810 | |||||
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Net deferred tax and other assets | $ | 10,181 | $ | 23,333 | ||||
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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 Topic 740, “Income Taxes.” Management considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management’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 on these considerations, no valuation allowance was deemed necessary as of December 31, 2017 and 2016.
The Bank has filed US Federal tax returns as well as tax returns with various states. Generally, tax years 2014 through the present are open for examination. Currently the Bank is undergoing a state tax examination covering the years 2009 to 2011 and 2013 to 2015. In 2017, the Bank’s state tax accruals have decreased due to changes in the state nexus rules in a state and locality where the Bank conducts business. In addition, the Bank began accruing additional state income tax due to a change in their determination regarding nexus in certain other states where the Bank conducts business.
7. Other transactions with affiliates
The Bank’s taxi medallion, and commercial loans aggregated $223,000,000 and $298,293,000 at December 31, 2017 and 2016. These loans are sourced and serviced by its affiliates. The Bank paid $2,000, $2,000, and $8,000 for loan servicing fees to Medallion for 2017, 2016, and 2015, and also in 2017, 2016, and 2015, paid $5,272,000, $5,421,000, and $5,658,000 to another Medallion affiliate. Origination fees of $0, $110,000, and $198,000 were paid to Medallion for 2017, 2016, and 2015. Amortization costs were $92,000, $99,000, and $367,000 for 2017, 2016, and 2015.
At December 31, 2017 and 2016, the Bank owed $1,055,000 and $1,084,000 to affiliates for origination fees, monthly servicing fees on loans, charges for corporate overhead, and legal and business development expenses due to the affiliates, partially offset by payments due the Bank from collection of loan payments by affiliates. The Bank reimbursed the parent for expenses incurred on its behalf of $865,000, $1,006,000, and $775,000 for 2017, 2016, and 2015.
8. 401(k) plan
The Bank participates in the 401(k) plan offered by Medallion. The 401(k) Plan covers all full and part-time employees of the Bank who have attained the age of 21 and have a minimum of one year of service. Under the 401(k) Plan, an employee may elect to defer not less than 1% and no more than 15% of the total annual compensation that would otherwise be paid to the employee, provided however, that employees’ contributions may not exceed certain maximum amounts determined under the Internal Revenue Code. Employee contributions are invested in various mutual funds according to the directions of the employee. At the discretion of Medallion’s Board of Directors, the Bank can provide for employer matching contributions. Medallion has elected to match employee contributions up toone-third of the employee’s contribution, but not greater than 2% of the portion of the employee’s annual salary eligible for 401(k) benefits. For the years ended December 31, 2017, 2016, and 2015, the Bank provided $70,000, $55,000, and $55,000 in employer matching, which amount is included in salaries and benefits expense in the accompanying statement of comprehensive income.
9. Commitments and contingencies
Loans –At December 31, 2017, the Bank had commitments to extend credit of $720,000 to taxi medallion customers for unfunded amounts.
Leases –The Bank leases office space under twonon-cancelable operating leases that expire in August 2021 and November 2022. Rental expense related to the leases was $267,000, $225,000, and $217,000 for the years ended December 31, 2017, 2016, and 2015.
Future minimum lease payments under these operating leases as of December 31, 2017 were as follows:
(Dollars in thousands) | ||||
2018 | $ | 298 | ||
2019 | 326 | |||
2020 | 336 | |||
2021 | 346 | |||
2022 | 324 | |||
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Total | $ | 1,630 | ||
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10. Capital requirements
The 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 certainoff-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.
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 December 31, 2017, the Bank’s Tier 1 leverage capital ratio was 14.5%. The Bank’s actual capital amounts and ratios as of December 31, 2017 and 2016, and the regulatory minimum ratios are presented in the following tables.
(Dollars in thousands) | As of December 31, 2017 | As of December 31, 2016 | Minimum Ratio for Capital Adequacy Purposes | Minimum Ratio To be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||||||||||
Tier 1 Capital (to average assets) | $ | 163,797 | 14.5 | % | $ | 156,461 | 14.5 | % | 4.0 | % | 5.0 | % | ||||||||||||
Common Equity Tier 1 (to risk-weighted assets) | 137,494 | 13.8 | 130,158 | 12.2 | 4.5 | 6.5 | ||||||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 163,797 | 16.5 | 156,461 | 14.7 | 6.0 | 8.0 | ||||||||||||||||||
Total Capital (to risk-weighted assets) | 176,876 | 17.8 | 170,385 | 16.0 | 8.0 | 10.0 |
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%.
11. Fair value of financial instruments
FASB ASC Topic 825, “Financial Instruments,” requires disclosure of fair value information about certain financial instruments, whether assets, liabilities, oroff-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) Loans –Current fair value most closely approximates book value.
(b) Investments—The Bank’s investments are recorded at the estimated fair value of such investments.
(c) Cash and cash equivalents – Book value equals market value.
(d) Floating rate borrowings—Due to the short-term nature of these instruments, the carrying amount approximates fair value.
(e) Commitments to extend credit—The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At December 31, 2017 and 2016, the estimated fair value of theseoff-balance-sheet instruments was not material.
(f) Fixed rate borrowings –Due to the short-term nature of these instruments, the carrying amount approximates fair value.
December 31, 2017 | December 31, 2016 | |||||||||||||||
(Dollars in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial Assets | ||||||||||||||||
Loans | $ | 864,816 | $ | 864,816 | $ | 965,082 | $ | 965,082 | ||||||||
Investment securities | 43,478 | 43,478 | 36,861 | 36,861 | ||||||||||||
Cash | 110,233 | 110,233 | 30,881 | 30,881 | ||||||||||||
Accrued interest receivable | 6,740 | 6,740 | 6,160 | 6,160 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Funds borrowed | 906,748 | 906,748 | 908,442 | 908,442 | ||||||||||||
Accrued interest payable | 1,488 | 1,488 | 1,094 | 1,094 |
12. Fair value of assets and liabilities
The Bank 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 Bank 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).
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 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 Bank 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:
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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).
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.
The following tables present the Bank’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016.
2017(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Available-for-sale investment securities(1) | $ | — | $ | 43,478 | $ | — | $ | 43,478 |
2016(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Available-for-sale investment securities(1) | $ | — | $ | 36,861 | $ | — | $ | 36,861 |
The following tables present the Bank’s fair value hierarchy for those assets and liabilities measured at fair value on anon-recurring basis as of December 31, 2017 and 2016.
2017(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets (1) | ||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 19,356 | $ | 19,356 | ||||||||
Loan collateral in process of foreclosure | 27,706 | 27,706 | ||||||||||||||
Other receivables | 5,161 | 5,161 | ||||||||||||||
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Total | $ | — | $ | — | $ | 52,223 | $ | 52,223 | ||||||||
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2016(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets (1) | ||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 31,247 | $ | 31,247 | ||||||||
Loan collateral in process of foreclosure | 1,197 | 1,197 | ||||||||||||||
Other receivables | 6,637 | 6,637 | ||||||||||||||
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Total | $ | — | $ | — | $ | 39,081 | $ | 39,081 | ||||||||
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13. Small Business Lending Fund Program (SBLF) and Troubled Assets Relief Program (TARP)
On February 27, 2009 and December 22, 2009, Medallion Bank issued, and the US Treasury purchased under the TARP Capital Purchase Program (the CPP) Medallion Bank’s fixed ratenon-cumulative Perpetual Preferred Stock, Series A, B, C, and D for an aggregate purchase price of $21,498,000 in cash. On July 21, 2011, Medallion Bank issued, and the US Treasury purchased 26,303 shares of SeniorNon-Cumulative Perpetual Preferred Stock, Series E (Series E) for an aggregate purchase price of $26,303,000 under the SBLF. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. In connection with the issuance of the Series E, the Bank exited the CPP by redeeming the Series A, B, C, and D; and received approximately $4,000,000, net of dividends due on the repaid securities. The Bank previously paid a dividend rate of 1% on the Series E, which increased to 9% in first quarter of 2016.
14. Subsequent Events
We have evaluated subsequent events that have occurred through March 14, 2018, the date of financial statement issuance.
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