UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended quarterly period ended September 30, 20172021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file number814-00188001-37747
MEDALLION FINANCIAL CORP.CORP.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Its Charter)
Delaware | 04-3291176 |
(State of Incorporation) | (IRS Employer Identification No.) |
437 MADISON AVENUE, 38th Floor
NEW YORK, New York10022
(Address of Principal Executive Offices) (Zip Code)
(212) 328-2100
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of | each class |
| Trading symbols | Name of each exchange
| |
Common Stock, par value $0.01 per share | MFIN | NASDAQ Global Select Market |
437 MADISON AVENUE, 38th Floor,
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212)328-2100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the 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. YESYes ☒ 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 Registrantregistrant was required to submit and post such files). YES ☐Yes ☒ NO ☐
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”,filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and “emerging growth company” inRule 12b-2 of the Exchange Act. (check one):
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
Emerging growth company | ☐ |
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule12b-2 of the Exchange Act). YES ☐ NO ☒
The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of November 8, 20175, 2021 was 24,274,951.25,078,944.
MEDALLION FINANCIAL CORP.
FORM10-Q
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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. In connection with certain forward-looking statements contained in this Form 10-Q and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward-looking statements contained in this Form 10-Q were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict, and many of which are beyond control of the Company. In particular, any forward-looking statements are subject to the risks and great uncertainties associated with the ongoing COVID-19 pandemic and the related impact on the US and global economies, as well as risks related to the ongoing SEC investigation described in this report.
All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statements. The statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form 10-Q should consider these facts in evaluating the information contained herein. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-Q. The inclusion of the forward-looking statements contained in this Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-Q will be achieved.
In light of the foregoing, readers of this Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein. You should consider these risks and those described under Risk Factors in the Company’s Annual Report on Form 10-K, in this Quarterly Report on Form 10-Q, and others that are detailed in the other reports that the Company files from time to time with the Securities and Exchange Commission.
Page 2 of 9459
PART I – FINANCIAL INFORMATION
BASIS OF PREPARATION
We, Medallion Financial Corp., or the Company, are aclosed-end,non-diversified management investment finance company organized as a Delaware corporation. We have elected to be treatedcorporation with Medallion Bank, a Utah industrial bank, as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. 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 primary operating subsidiary. In recent years, 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 trailershome improvements, along with providing loan origination and other services to fintech partners. We historically have had a leading position in originating, acquiring, and servicing loans that finance small-scale home improvements. taxi medallions and various types of commercial businesses.
Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 18%. 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 3% (6% and 3% on a managed basis when combined with Medallion Bank)17%. In January 2017, we announced our plans to transform our overall strategy. We are transitioningtransition away from medallion lending and placingplace our strategic focus on ourthis 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 partythird-party investors, were $1,646,000,000$1.8 billion as of September 30, 2017,2021 and $1,632,000,000 and $1,634,000,000 as of December 31, 2016 and September 30, 2016,2020, 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 paid/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:
We formed a wholly-owned portfolio company, Medallion Servicing Corporation, or MSC, to provide 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 and commercial 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.
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 conductsOur 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 $507,198,000 as of September 30, 2017. MSC earns referral and servicing fees for these activities. As anon-investment company, Medallion Bank is not consolidated with the Company, which is an investment company under the 1940 Act.
Our diversified investments in other controlled subsidiaries are comprised of Medallion Fine Art, Inc., CDI-LP Holdings, Inc., Medallion Motorsports, LLC, Medallion Taxi Media, Inc., and LAX Group, LLC.RPAC Racing LLC, or RPAC. In addition, we make other both marketable and nonmarketable equity investments.investments, primarily as a function of our mezzanine lending business.
The financial information is divided into two sections. The first section, Item 1, includes our unaudited consolidated financial statements including related footnotes. The second section, Item 2, consists of Management’s Discussion and Analysis of Financial Condition and Results of Operations for the quarter ended September 30, 2017.
Our consolidated balance sheet as of September 30, 2017,2021, and the related consolidated statements of operations, changes in net assets,consolidated statements of other comprehensive income/(loss), consolidated statements of stockholders’ equity and cash flows for the three and nine months then ended September 30, 2017 and 2016 included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the US have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the three and nine months ended September 30, 2017 and 2016, or for any other interim period,2021 may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form10-K for the year ended December 31, 2016.
Page 3 of 9459
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONSBALANCE SHEETS
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest income on investments | $ | 3,768 | $ | 4,290 | $ | 10,153 | $ | 13,676 | ||||||||
Dividend income from controlled subsidiaries | 1,256 | — | 1,256 | 3,000 | ||||||||||||
Interest income from affiliated investments | 453 | 815 | 1,844 | 2,153 | ||||||||||||
Interest income from controlled subsidiaries | 39 | 99 | 165 | 504 | ||||||||||||
Medallion lease income | 40 | 53 | 159 | 481 | ||||||||||||
Dividend income from affiliated investment | — | — | — | 201 | ||||||||||||
Dividends and interest income on short-term investments | 11 | 12 | 27 | 76 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investment income(1) | 5,567 | 5,269 | 13,604 | 20,091 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total interest expense(2) | 3,543 | 3,373 | 10,285 | 9,273 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net interest income | 2,024 | 1,896 | 3,319 | 10,818 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total noninterest income | 8 | 104 | 22 | 165 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Salaries and benefits | 2,224 | 3,039 | 5,086 | 8,816 | ||||||||||||
Professional fees | 567 | 575 | 1,875 | 1,341 | ||||||||||||
Occupancy expense | 275 | 294 | 802 | 702 | ||||||||||||
Other operating expenses(3) | 610 | 698 | 1,820 | 2,093 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating expenses | 3,676 | 4,606 | 9,583 | 12,952 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net investment loss before income taxes(4) | (1,644 | ) | (2,606 | ) | (6,242 | ) | (1,969 | ) | ||||||||
Income tax (provision) benefit | (846 | ) | — | 2,024 | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net investment loss after income taxes | (2,490 | ) | (2,606 | ) | (4,218 | ) | (1,969 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net realized gains (losses) on investments(5) | 944 | 2,499 | 3,785 | (7 | ) | |||||||||||
Income tax benefit | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total net realized gains (losses) on investments | 944 | 2,499 | 3,785 | (7 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net change in unrealized appreciation on Medallion Bank and other controlled subsidiaries | 2,035 | 25,913 | 11,089 | 44,221 | ||||||||||||
Net change in unrealized depreciation on investments other than securities | — | (14,107 | ) | — | (18,862 | ) | ||||||||||
Net change in unrealized appreciation (depreciation) on | (6,871 | ) | (6,656 | ) | (26,843 | ) | (6,925 | ) | ||||||||
Income tax benefit | 7,001 | — | 13,120 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net unrealized appreciation (depreciation) on investments | 2,165 | 5,150 | (2,634 | ) | 18,434 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net realized/unrealized gains on investments | 3,109 | 7,649 | 1,151 | 18,427 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in net assets resulting from operations | $ | 619 | $ | 5,043 | $ | (3,067 | ) | $ | 16,458 | |||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in net assets resulting from operations per common share | ||||||||||||||||
Basic | $ | 0.03 | $ | 0.21 | $ | (0.13 | ) | $ | 0.68 | |||||||
Diluted | 0.03 | 0.21 | (0.13 | ) | 0.68 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Distributions declared per share | $ | — | $ | 0.05 | $ | — | $ | 0.35 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 23,930,086 | 24,136,807 | 23,916,334 | 24,173,898 | ||||||||||||
Diluted | 24,083,919 | 24,184,518 | 23,916,334 | 24,227,068 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
(Dollars in thousands, except share and per share data) |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Assets |
|
|
|
|
|
| ||
Cash and cash equivalents(1) |
| $ | 30,688 |
|
| $ | 54,743 |
|
Federal funds sold |
|
| 54,686 |
|
|
| 57,297 |
|
Investment securities |
|
| 47,511 |
|
|
| 46,792 |
|
Equity investments |
|
| 10,214 |
|
|
| 9,746 |
|
Loans |
|
| 1,419,681 |
|
|
| 1,229,838 |
|
Allowance for loan losses |
|
| (47,448 | ) |
|
| (57,548 | ) |
Net loans receivable |
|
| 1,372,233 |
|
|
| 1,172,290 |
|
Goodwill |
|
| 150,803 |
|
|
| 150,803 |
|
Intangible assets, net |
|
| 50,007 |
|
|
| 51,090 |
|
Loan collateral in process of foreclosure(2) |
|
| 42,544 |
|
|
| 54,560 |
|
Property, equipment, and right-of-use lease asset, net |
|
| 11,741 |
|
|
| 12,404 |
|
Accrued interest receivable |
|
| 9,646 |
|
|
| 10,338 |
|
Income tax receivable |
|
| 540 |
|
|
| 1,757 |
|
Other assets |
|
| 24,621 |
|
|
| 20,591 |
|
Total assets |
| $ | 1,805,234 |
|
| $ | 1,642,411 |
|
Liabilities |
|
|
|
|
|
| ||
Deposits(3) |
| $ | 1,196,508 |
|
| $ | 1,065,398 |
|
Long-term debt(4) |
|
| 213,858 |
|
|
| 153,718 |
|
Deferred tax liabilities, net |
|
| 12,703 |
|
|
| 807 |
|
Operating lease liabilities |
|
| 9,346 |
|
|
| 11,018 |
|
Short-term borrowings |
|
| 8,054 |
|
|
| 87,334 |
|
Accrued interest payable |
|
| 3,047 |
|
|
| 4,673 |
|
Accounts payable and accrued expenses(5) |
|
| 23,106 |
|
|
| 14,902 |
|
Total liabilities |
|
| 1,466,622 |
|
|
| 1,337,850 |
|
Commitments and contingencies(6) |
|
|
|
|
|
| ||
Stockholders’ equity |
|
|
|
|
|
| ||
Preferred stock (1,000,000 shares of $0.01 par value stock |
|
| — |
|
|
| — |
|
Common stock (50,000,000 shares of $0.01 par value stock |
|
| 280 |
|
|
| 278 |
|
Additional paid in capital |
|
| 279,454 |
|
|
| 277,539 |
|
Treasury stock (2,951,243 shares at September 30, 2021 |
|
| (24,919 | ) |
|
| (24,919 | ) |
Accumulated other comprehensive income |
|
| 1,293 |
|
|
| 2,012 |
|
Retained earnings (accumulated deficit) |
|
| 11,136 |
|
|
| (23,502 | ) |
Total stockholders’ equity |
|
| 267,244 |
|
|
| 231,408 |
|
Non-controlling interest in consolidated subsidiaries |
|
| 71,368 |
|
|
| 73,153 |
|
Total equity |
|
| 338,612 |
|
|
| 304,561 |
|
Total liabilities and equity |
| $ | 1,805,234 |
|
| $ | 1,642,411 |
|
Number of shares outstanding |
|
| 25,082,161 |
|
|
| 24,877,628 |
|
Book value per share |
| $ | 10.65 |
|
| $ | 9.30 |
|
The accompanying notes should be read in conjunction with these consolidated financial statements.
Page 4 of 9459
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS
(UNAUDITED)
| UNAUDITED | ||||||||
(Dollars in thousands, except per share data) | September 30, 2017 | December 31, 2016 | ||||||
Assets | ||||||||
Medallion loans, at fair value | $ | 224,580 | $ | 266,816 | ||||
Commercial loans, at fair value | 53,866 | 53,120 | ||||||
Commercial loans to affiliated entities, at fair value | 27,727 | 27,355 | ||||||
Commercial loans to controlled subsidiaries, at fair value | 1,167 | 3,159 | ||||||
Investment in Medallion Bank and other controlled subsidiaries, at fair value | 303,861 | 293,360 | ||||||
Equity investments, at fair value | 6,422 | 4,891 | ||||||
Equity investments in affiliated entities, at fair value | 3,562 | 3,577 | ||||||
|
|
|
| |||||
Netinvestments($219,976atSeptember30,2017 and $231,494 at December 31, 2016 pledged as collateral under borrowing arrangements) | 621,185 | 652,278 | ||||||
Cash and cash equivalents($7,850atSeptember30,2017 and $7,840 at December 31, 2016 restricted as to use by lender(1)) | 19,281 | 20,962 | ||||||
Accrued interest receivable | 560 | 769 | ||||||
Fixed assets, net | 235 | 267 | ||||||
Investments other than securities(2) | 9,510 | 9,510 | ||||||
Other assets, net | 4,649 | 5,591 | ||||||
|
|
|
| |||||
Total assets | $ | 665,420 | $ | 689,377 | ||||
|
|
|
| |||||
Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 4,932 | $ | 5,425 | ||||
Accrued interest payable | 3,138 | 2,883 | ||||||
Deferred and other tax liabilities, net(3) | 33,632 | 45,900 | ||||||
Funds borrowed | 330,138 | 349,073 | ||||||
|
|
|
| |||||
Total liabilities | 371,840 | 403,281 | ||||||
|
|
|
| |||||
Commitments and contingencies | ||||||||
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 –27,226,799sharesatSeptember30,2017 and 26,976,064 shares at December 31, 2016 issued) | 272 | 270 | ||||||
Treasury stock at cost(2,951,243sharesatSeptember30,2017 and at December 31, 2016) | (24,919 | ) | (24,919 | ) | ||||
Capital in excess of par value | 273,483 | 272,934 | ||||||
Accumulated undistributed net investment loss | (23,545 | ) | (33,993 | ) | ||||
Accumulated undistributed net realized gains on investments | — | — | ||||||
Net unrealized appreciation on investments, net of tax | 58,289 | 71,804 | ||||||
|
|
|
| |||||
Total shareholders’ equity (net assets) | 283,580 | 286,096 | ||||||
|
|
|
| |||||
Total liabilities and shareholders’ equity | $ | 655,420 | $ | 689,377 | ||||
|
|
|
| |||||
Number of common shares outstanding | 24,275,556 | 24,024,821 | ||||||
Net asset value per share | $ | 11.68 | $ | 11.91 | ||||
|
|
|
| |||||
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
(Dollars in thousands, except share and per share data) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Interest and fees on loans |
| $ | 41,250 |
|
| $ | 37,201 |
|
| $ | 115,237 |
|
| $ | 107,544 |
|
Interest and dividends on investment securities |
|
| 247 |
|
|
| 239 |
|
|
| 716 |
|
|
| 973 |
|
Medallion lease income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 53 |
|
Total interest income(1) |
|
| 41,497 |
|
|
| 37,440 |
|
|
| 115,953 |
|
|
| 108,570 |
|
Interest on deposits |
|
| 4,189 |
|
|
| 5,454 |
|
|
| 13,366 |
|
|
| 17,315 |
|
Interest on short-term borrowings |
|
| 39 |
|
|
| 520 |
|
|
| 690 |
|
|
| 1,565 |
|
Interest on long-term debt |
|
| 3,198 |
|
|
| 2,410 |
|
|
| 9,662 |
|
|
| 7,339 |
|
Total interest expense(2) |
|
| 7,426 |
|
|
| 8,384 |
|
|
| 23,718 |
|
|
| 26,219 |
|
Net interest income |
|
| 34,071 |
|
|
| 29,056 |
|
|
| 92,235 |
|
|
| 82,351 |
|
Provision (benefit) for loan losses |
|
| (337 | ) |
|
| 39,749 |
|
|
| 2,000 |
|
|
| 73,231 |
|
Net interest income (loss) after provision (benefit) for loan losses |
|
| 34,408 |
|
|
| (10,693 | ) |
|
| 90,235 |
|
|
| 9,120 |
|
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sponsorship and race winnings, net |
|
| 3,335 |
|
|
| 8,962 |
|
|
| 10,153 |
|
|
| 15,161 |
|
Gain (loss) on equity investments |
|
| 4,101 |
|
|
| 137 |
|
|
| 7,306 |
|
|
| (3,423 | ) |
Write-down of loan collateral in process of foreclosure |
|
| (438 | ) |
|
| (8,559 | ) |
|
| (5,385 | ) |
|
| (15,828 | ) |
Gain on extinguishment of debt |
|
| — |
|
|
| 23 |
|
|
| 4,626 |
|
|
| 23 |
|
Other income (loss) |
|
| 208 |
|
|
| 397 |
|
|
| 209 |
|
|
| 1,303 |
|
Total other income (loss), net |
|
| 7,206 |
|
|
| 960 |
|
|
| 16,909 |
|
|
| (2,764 | ) |
Other expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
|
| 7,957 |
|
|
| 7,081 |
|
|
| 21,542 |
|
|
| 20,716 |
|
Race team related expenses |
|
| 2,424 |
|
|
| 2,636 |
|
|
| 7,219 |
|
|
| 6,584 |
|
Loan servicing fees |
|
| 1,684 |
|
|
| 1,729 |
|
|
| 5,062 |
|
|
| 5,070 |
|
Professional fees |
|
| 1,963 |
|
|
| 1,651 |
|
|
| 4,694 |
|
|
| 6,559 |
|
Collection costs |
|
| 1,136 |
|
|
| 1,516 |
|
|
| 4,010 |
|
|
| 4,206 |
|
Rent expense |
|
| 481 |
|
|
| 676 |
|
|
| 1,780 |
|
|
| 2,004 |
|
Regulatory fees |
|
| 488 |
|
|
| 348 |
|
|
| 1,383 |
|
|
| 949 |
|
Amortization of intangible assets |
|
| 362 |
|
|
| 362 |
|
|
| 1,083 |
|
|
| 1,084 |
|
Travel, meals, and entertainment |
|
| 175 |
|
|
| 64 |
|
|
| 404 |
|
|
| 303 |
|
Other expenses |
|
| 2,053 |
|
|
| 2,618 |
|
|
| 6,008 |
|
|
| 6,663 |
|
Total other expenses |
|
| 18,723 |
|
|
| 18,681 |
|
|
| 53,185 |
|
|
| 54,138 |
|
Income (loss) before income taxes |
|
| 22,891 |
|
|
| (28,414 | ) |
|
| 53,959 |
|
|
| (47,782 | ) |
Income tax (provision) benefit |
|
| (6,167 | ) |
|
| 8,381 |
|
|
| (16,573 | ) |
|
| 12,483 |
|
Net income (loss) after taxes |
|
| 16,724 |
|
|
| (20,033 | ) |
|
| 37,386 |
|
|
| (35,299 | ) |
Less: income attributable to the non-controlling interest |
|
| 784 |
|
|
| 3,597 |
|
|
| 2,748 |
|
|
| 5,951 |
|
Total net income (loss) attributable to Medallion |
| $ | 15,940 |
|
| $ | (23,630 | ) |
| $ | 34,638 |
|
| $ | (41,250 | ) |
Basic net income (loss) per share |
| $ | 0.65 |
|
| $ | (0.97 | ) |
| $ | 1.41 |
|
| $ | (1.69 | ) |
Diluted net income (loss) per share |
| $ | 0.64 |
|
| $ | (0.97 | ) |
| $ | 1.39 |
|
| $ | (1.69 | ) |
Distributions declared per share |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 24,634,845 |
|
|
| 24,461,488 |
|
|
| 24,583,573 |
|
|
| 24,440,067 |
|
Diluted |
|
| 24,990,226 |
|
|
| 24,461,488 |
|
|
| 24,945,707 |
|
|
| 24,440,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
The accompanying notes should be read in conjunction with these consolidated financial statements.
Page 5 of 9459
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETSOTHER COMPREHENSIVE INCOME/(LOSS)
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net investment loss after income taxes | $ | (2,490 | ) | $ | (2,606 | ) | $ | (4,218 | ) | $ | (1,969 | ) | ||||
Net realized gains (losses) on investments, net of tax | 944 | 2,499 | 3,785 | (7 | ) | |||||||||||
Net unrealized appreciation (depreciation) on investments, | 2,165 | 5,150 | (2,634 | ) | 18,434 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in net assets resulting from operations | 619 | 5,043 | (3,067 | ) | 16,458 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Investment income, net | — | (5 | ) | — | (57 | ) | ||||||||||
Return of capital | — | (1,206 | ) | — | (13,311 | ) | ||||||||||
Realized gains from investment transactions, net | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Distributions to shareholders (1) | — | (1,211 | ) | — | (13,368 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Stock-based compensation expense | 222 | 137 | 551 | 422 | ||||||||||||
Exercise of stock options | — | — | — | 19 | ||||||||||||
Treasury stock acquired | — | (837 | ) | — | (837 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Capital share transactions | 222 | (700 | ) | 551 | (396 | ) | ||||||||||
Other, distributions not paid on forfeited restricted stock grants | — | — | — | 1 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total increase (decrease) in net assets | 841 | 3,132 | (2,516 | ) | 2,695 | |||||||||||
Net assets at the beginning of the period | 282,739 | 277,651 | 286,096 | 278,088 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net assets at the end of the period(2) | $ | 283,580 | $ | 280,783 | $ | 283,580 | $ | 280,783 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Capital share activity | ||||||||||||||||
Common stock issued, beginning of period | 27,227,291 | 26,928,313 | 26,976,064 | 26,936,762 | ||||||||||||
Exercise of stock options | — | — | — | 2,100 | ||||||||||||
Issuance (forfeiture) of restricted stock, net | (492 | ) | 6,291 | 250,735 | (4,258 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Common stock issued, end of period | 27,226,799 | 26,934,604 | 27,226,799 | 26,934,604 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Treasury stock, beginning of period | (2,951,243 | ) | (2,590,069 | ) | (2,951,243 | ) | (2,590,069 | ) | ||||||||
Treasury stock acquired | — | (161,174 | ) | — | (161,174 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Treasury stock, end of period | (2,951,243 | ) | (2,751,243 | ) | (2,951,243 | ) | (2,751,243 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Common stock outstanding | 24,275,556 | 24,183,361 | 24,275,556 | 24,183,361 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Net income (loss) after taxes |
| $ | 16,724 |
|
| $ | (20,033 | ) |
| $ | 37,386 |
|
| $ | (35,299 | ) |
Other comprehensive income (loss), net of tax |
|
| (141 | ) |
|
| (53 | ) |
|
| (719 | ) |
|
| 1,075 |
|
Total comprehensive income (loss) |
|
| 16,583 |
|
|
| (20,086 | ) |
|
| 36,667 |
|
|
| (34,224 | ) |
Less comprehensive income attributable to the non-controlling interest |
|
| 784 |
|
|
| 3,597 |
|
|
| 2,748 |
|
|
| 5,951 |
|
Total comprehensive income (loss) attributable to Medallion Financial Corp. |
| $ | 15,799 |
|
| $ | (23,683 | ) |
| $ | 33,919 |
|
| $ | (40,175 | ) |
The accompanying notes should be read in conjunction with these consolidated financial statements.
Page 6 of 9459
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||
(Dollars in thousands) | 2017 | 2016 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net increase (decrease) in net assets resulting from operations | $ | (3,067 | ) | $ | 16,458 | |||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | ||||||||
Investments originated(1) | (16,775 | ) | (316,405 | ) | ||||
Proceeds from principal receipts, sales, and maturities of investments(1) | 35,272 | 379,061 | ||||||
Capital returned by (investment in) Medallion Bank and other controlled subsidiaries, net | 588 | (3,964 | ) | |||||
Depreciation and amortization | 410 | 346 | ||||||
Decrease in deferred and other tax liability, net | (12,268 | ) | — | |||||
Amortization (accretion) of origination fees, net | 55 | (71 | ) | |||||
Net change in unrealized depreciation on investments | 26,843 | 6,925 | ||||||
Net change in unrealized depreciation on investment other than securities | — | 18,862 | ||||||
Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries | (11,089 | ) | (44,221 | ) | ||||
Net realized (gains) losses on investments | (3,785 | ) | 7 | |||||
Stock-based compensation expense | 551 | 422 | ||||||
Decrease in accrued interest receivable | 209 | 306 | ||||||
Decrease (increase) in other assets, net | 548 | 871 | ||||||
Increase (decrease) in accounts payable and accrued expenses | (354 | ) | 1,103 | |||||
Increase in accrued interest payable | 255 | 626 | ||||||
|
|
|
| |||||
Net cash provided by (used for) operating activities | 17,393 | 60,326 | ||||||
|
|
|
| |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from funds borrowed | — | 294,650 | ||||||
Repayments of funds borrowed | (18,935 | ) | (346,994 | ) | ||||
Proceeds from exercise of stock options | — | 19 | ||||||
Purchase of treasury stock at cost | — | (837 | ) | |||||
Payments of declared distributions | (139 | ) | (13,368 | ) | ||||
|
|
|
| |||||
Net cash provided by (used for) financing activities | (19,074 | ) | (66,530 | ) | ||||
|
|
|
| |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (1,681 | ) | (6,204 | ) | ||||
Cash and cash equivalents, beginning of period | 20,962 | 30,912 | ||||||
|
|
|
| |||||
Cash and cash equivalents, end of period | $ | 19,281 | $ | 24,708 | ||||
|
|
|
| |||||
SUPPLEMENTAL INFORMATION | ||||||||
Cash paid during the period for interest | $ | 9,692 | $ | 8,387 | ||||
Cash paid during the period for income taxes | 48 | — | ||||||
|
|
|
| |||||
(Dollars in thousands) |
| Common |
|
| Common |
|
| Capital in |
|
| Treasury |
|
| Treasury |
|
| Retained |
|
| Accumulated |
|
| Total |
|
| Non- |
|
| Total |
| ||||||||||
Balance at December 31, 2020 |
|
| 27,828,871 |
|
| $ | 278 |
|
| $ | 277,539 |
|
|
| (2,951,243 | ) |
| $ | (24,919 | ) |
| $ | (23,502 | ) |
| $ | 2,012 |
|
| $ | 231,408 |
|
| $ | 73,153 |
|
| $ | 304,561 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,431 |
|
|
| — |
|
|
| 8,431 |
|
|
| 640 |
|
|
| 9,071 |
|
Distributions to non-controlling interest |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,511 | ) |
|
| (1,511 | ) |
Stock-based compensation expense |
|
| — |
|
|
| 2 |
|
|
| 496 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 498 |
|
|
| 0 |
|
|
| 498 |
|
Issuance of restricted stock, net |
|
| 163,561 |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Forfeiture of restricted stock, net |
|
| (7,602 | ) |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Exercise of stock options |
|
| 768 |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Net change in unrealized gains on investments, net of tax |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| (605 | ) |
|
| (605 | ) |
|
| — |
|
|
| (605 | ) |
Balance at March 31, 2021 |
|
| 27,985,598 |
|
|
| 280 |
|
|
| 278,035 |
|
|
| (2,951,243 | ) |
|
| (24,919 | ) |
|
| (15,071 | ) |
|
| 1,407 |
|
|
| 239,732 |
|
|
| 72,282 |
|
|
| 312,014 |
|
Net income (loss) |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 10,267 |
|
|
| 0 |
|
|
| 10,267 |
|
|
| 1,325 |
|
|
| 11,592 |
|
Distributions to non-controlling |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,511 | ) |
|
| (1,511 | ) |
Stock-based compensation |
|
| — |
|
|
| 0 |
|
|
| 576 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 576 |
|
|
| 0 |
|
|
| 576 |
|
Issuance of restricted stock, net |
|
| 15,514 |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Forfeiture of restricted stock, net |
|
| (10,332 | ) |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Exercise of stock options |
|
| 22,227 |
|
|
| 0 |
|
|
| 116 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 116 |
|
|
| 0 |
|
|
| 116 |
|
Net change in unrealized gains on investments, net of tax |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 27 |
|
|
| 27 |
|
|
| 0 |
|
|
| 27 |
|
Balance at June 30, 2021 |
|
| 28,013,007 |
|
|
| 280 |
|
|
| 278,727 |
|
|
| (2,951,243 | ) |
|
| (24,919 | ) |
|
| (4,804 | ) |
|
| 1,434 |
|
|
| 250,718 |
|
|
| 72,096 |
|
|
| 322,814 |
|
Net income (loss) |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 15,940 |
|
|
| 0 |
|
|
| 15,940 |
|
|
| 784 |
|
|
| 16,724 |
|
Distributions to non-controlling interest |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,512 | ) |
|
| (1,512 | ) |
Stock-based compensation |
|
| — |
|
|
| 0 |
|
|
| 602 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 602 |
|
|
| 0 |
|
|
| 602 |
|
Issuance of restricted stock, net |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Forfeiture of restricted stock, net |
|
| (678 | ) |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Exercise of stock options |
|
| 21,075 |
|
|
| 0 |
|
|
| 125 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 125 |
|
|
| 0 |
|
|
| 125 |
|
Net change in unrealized gains on investments, net of tax |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| (141 | ) |
|
| (141 | ) |
|
| 0 |
|
|
| (141 | ) |
Balance at September 30, 2021 |
|
| 28,033,404 |
|
| $ | 280 |
|
| $ | 279,454 |
|
|
| (2,951,243 | ) |
| $ | (24,919 | ) |
| $ | 11,136 |
|
| $ | 1,293 |
|
| $ | 267,244 |
|
| $ | 71,368 |
|
| $ | 338,612 |
|
The accompanying notes should be read in conjunction with these consolidated financial statements.
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
(Dollars in thousands) |
| Common |
|
| Common |
|
| Capital in |
|
| Treasury |
|
| Treasury |
|
| Retained |
|
| Accumulated |
|
| Total |
|
| Non-controlling |
|
| Total |
| ||||||||||
Balance at December 31, 2019 |
|
| 27,597,802 |
|
| $ | 276 |
|
| $ | 275,511 |
|
|
| (2,951,243 | ) |
| $ | (24,919 | ) |
| $ | 11,281 |
|
| $ | 999 |
|
| $ | 263,148 |
|
| $ | 71,320 |
|
| $ | 334,468 |
|
Net income (loss) |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| (13,643 | ) |
|
| 0 |
|
|
| (13,643 | ) |
|
| 642 |
|
|
| (13,001 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,507 | ) |
|
| (1,507 | ) |
Page 7 of 9459
Stock-based compensation expense |
|
| — |
|
|
| 2 |
|
|
| 464 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 466 |
|
|
| — |
|
|
| 466 |
|
Issuance of restricted stock, net |
|
| 165,674 |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Forfeiture of restricted stock, net |
|
| (5,577 | ) |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Net change in unrealized gains on investments, net of tax |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 147 |
|
|
| 147 |
|
|
| 0 |
|
|
| 147 |
|
Balance at March 31, 2020 |
|
| 27,757,899 |
|
|
| 278 |
|
|
| 275,975 |
|
|
| (2,951,243 | ) |
|
| (24,919 | ) |
|
| (2,362 | ) |
|
| 1,146 |
|
|
| 250,118 |
|
|
| 70,455 |
|
|
| 320,573 |
|
Net income (loss) |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| (3,977 | ) |
|
| 0 |
|
|
| (3,977 | ) |
|
| 1,712 |
|
|
| (2,265 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,512 | ) |
|
| (1,512 | ) |
Stock-based compensation |
|
| — |
|
|
| 0 |
|
|
| 520 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 520 |
|
|
| 0 |
|
|
| 520 |
|
Issuance of restricted stock, net |
|
| 10,416 |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Forfeiture of restricted stock, net |
|
| (696 | ) |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Net change in unrealized losses on investments, net of tax |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 981 |
|
|
| 981 |
|
|
| 0 |
|
|
| 981 |
|
Balance at June 30, 2020 |
|
| 27,767,619 |
|
|
| 278 |
|
|
| 276,495 |
|
|
| (2,951,243 | ) |
|
| (24,919 | ) |
|
| (6,339 | ) |
|
| 2,127 |
|
|
| 247,642 |
|
|
| 70,655 |
|
|
| 318,297 |
|
Net income |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| (23,630 | ) |
|
| 0 |
|
|
| (23,630 | ) |
|
| 3,597 |
|
|
| (20,033 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,512 | ) |
|
| (1,512 | ) |
Stock-based compensation |
|
| — |
|
|
| 0 |
|
|
| 508 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 508 |
|
|
| 0 |
|
|
| 508 |
|
Issuance of restricted stock, net |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Forfeiture of restricted stock, net |
|
| (2,273 | ) |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Net change in unrealized losses on investments, net of tax |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| (53 | ) |
|
| (53 | ) |
|
| 0 |
|
|
| (53 | ) |
Balance at September 30, 2020 |
|
| 27,765,346 |
|
| $ | 278 |
|
| $ | 277,003 |
|
|
| (2,951,243 | ) |
| $ | (24,919 | ) |
| $ | (29,969 | ) |
| $ | 2,074 |
|
| $ | 224,467 |
|
| $ | 72,740 |
|
| $ | 297,207 |
|
The accompanying notes should be read in conjunction with these consolidated financial statements.
Page 8 of 59
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| For the Nine Months Ended September 30, |
| |||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net income (loss) |
| $ | 37,386 |
|
| $ | (35,299 | ) |
Adjustments to reconcile net income (loss) from operations to net cash provided by |
|
|
|
|
|
| ||
Provision for loan losses |
|
| 2,000 |
|
|
| 73,231 |
|
Paid-in-kind interest |
|
| (682 | ) |
|
| (940 | ) |
Depreciation and amortization |
|
| 5,289 |
|
|
| 5,060 |
|
Increase (decrease) in deferred and other tax liabilities |
|
| 13,113 |
|
|
| (11,113 | ) |
Amortization of origination fees, net |
|
| 5,770 |
|
|
| 4,572 |
|
Net change in value of loan collateral in process of foreclosure |
|
| 8,501 |
|
|
| 21,235 |
|
Net realized (gains) losses on investments |
|
| (7,436 | ) |
|
| 3,754 |
|
Stock-based compensation expense |
|
| 1,674 |
|
|
| 1,495 |
|
Gain on extinguishment of debt |
|
| (4,626 | ) |
|
| — |
|
Decrease (increase) in accrued interest receivable |
|
| 692 |
|
|
| (1,928 | ) |
Increase in other assets |
|
| (1,577 | ) |
|
| (7,878 | ) |
Increase in accounts payable and accrued expenses |
|
| 3,498 |
|
|
| 4,883 |
|
Increase (decrease) in accrued interest payable |
|
| (1,626 | ) |
|
| (504 | ) |
Net cash provided by operating activities |
|
| 61,976 |
|
|
| 56,568 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
| ||
Loans originated |
|
| (564,914 | ) |
|
| (404,006 | ) |
Proceeds from principal receipts, sales, and maturities of loans |
|
| 342,718 |
|
|
| 222,592 |
|
Purchases of investments |
|
| (17,979 | ) |
|
| (11,480 | ) |
Proceeds from principal receipts, sales, and maturities of investments |
|
| 21,389 |
|
|
| 12,983 |
|
Proceeds from the sale and principal payments on loan collateral in process of foreclosure |
|
| 16,661 |
|
|
| 8,303 |
|
Net cash used for investing activities |
|
| (202,125 | ) |
|
| (171,608 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
| ||
Proceeds from time deposits and funds borrowed |
|
| 587,945 |
|
|
| 515,982 |
|
Repayments of time deposits and funds borrowed |
|
| (470,168 | ) |
|
| (414,501 | ) |
Distributions to non-controlling interests |
|
| (4,534 | ) |
|
| (4,531 | ) |
Proceeds from the exercise of stock options |
|
| 240 |
|
|
| — |
|
Net cash provided by financing activities |
|
| 113,483 |
|
|
| 96,950 |
|
NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
|
| (26,666 | ) |
|
| (18,090 | ) |
Cash, cash equivalents, and restricted cash, beginning of period(1) |
|
| 112,040 |
|
|
| 67,821 |
|
Cash, cash equivalents, and restricted cash, end of period(1) |
| $ | 85,374 |
|
| $ | 49,731 |
|
SUPPLEMENTAL INFORMATION |
|
|
|
|
|
| ||
Cash paid during the period for interest |
| $ | 23,418 |
|
| $ | 24,769 |
|
Cash paid during the period for income taxes |
|
| 3,150 |
|
|
| 100 |
|
NON-CASH INVESTING |
|
|
|
|
|
| ||
Loans transferred to loan collateral in process of foreclosure, net |
| $ | 13,145 |
|
| $ | 25,569 |
|
Loans transferred to other foreclosed property |
|
| 0 |
|
|
| 1,800 |
|
The accompanying notes should be read in conjunction with these consolidated financial statements.
Page 9 of 59
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERSeptember 30, 20172021
(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES
Medallion Financial Corp. (the Company), or 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), a Small Business Investment Company (SBIC) which originates and services taxicab medallion and commercial loans.
A wholly-owned portfolio investment, MedallionBank, or the Bank, a Federal Deposit Insurance Corporation, (FDIC)or FDIC, insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activities (see Note 3). Medallionactivities. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and undergoes examinations by those agencies. MedallionThe 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 in May 2002 for the primary purpose of originatingobtaining an industrial bank charter pursuant to the laws of the State of Utah. The Bank originates consumer loans on a national basis for the purchase of recreational vehicles (“RVs”), boats and other consumer recreational equipment and to finance home improvements such as replacement windows and roofs . Prior to 2014, the Bank originated commercial loans in three categories: 1) loans to finance the purchase of taxicabtaxi medallions, 2) asset-based commercial loans, and 3) SBA 7(a) loans. The loansall of which are marketed and serviced by Medallion Bank’s affiliates who have extensive prior experience in these asset groups. Subsequent to its formation, Medallion Bank began originating consumer loans to finance the purchases of RVs, boats, and other related items, and to finance small scale home improvements.
The Company formed a wholly-owned portfolio company, Medallion Servicing Corporation (MSC), to provide loan services to Medallion Bank, also a portfolio company wholly-owned by the Company. The Company has assigned allloans are financed primarily with time certificates of its loan servicing rights for Medallion Bank,deposits which consistsare originated nationally through a variety of servicing taxi 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.brokered deposit relationships.
The Company also conducts business through its subsidiaries Medallion Capital, Inc. (MCI), anor MCI, a Small Business Investment Company, or SBIC, which conducts a mezzanine financing business, and Freshstart Venture Capital Corp. (FSVC),business; Medallion Funding LLC, or MFC, an SBIC, which originates and services taxicabmedallion and commercial loans; and Freshstart Venture Capital Corp., or FSVC, an SBIC that originated and services medallion and commercial loans. MCI, MFC, MCI, and FSVC, as SBICs, are regulated by the Small Business Administration, (SBA).or SBA. MCI and FSVC are financed in part by the SBA.
MFC establishedThe Company has a wholly-owned subsidiary, controlling ownership stake in Medallion Motorsports, LLC, the primary owner of RPAC Racing, LLC, or RPAC, a professional car racing team that competes in the NASCAR Cup Series, both of which are consolidated with the Company.
In 2019, the Bank began building a strategic partnership program that targets relationships with financial technology, or fintech, companies. The Bank entered into an initial partnership in 2020 and a second partnership in 2021, and continues to explore opportunities with additional fintech companies.
Taxi Medallion Loan Trust III, (Trust III),or Trust III, was established for the purpose of owning medallion loans originated by MFC or others. Trust III iswas a separate legalvariable interest entity, or VIE, and corporate entityMFC was the primary beneficiary until the 2018 fourth quarter. As a result, the Company consolidated Trust III in its financial results until consummation of a restructuring in the 2018 fourth quarter. During the 2021 third quarter, the Company entered into an agreement with its own creditors who, in any liquidationthe lender to Trust III, whereby, ownership of Trust III will be entitledwas transferred to be satisfied outa third party. For a discussion of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders.the restructuring and disposition, see Note 15. The assets of Trust III aggregating $106,188,000 at September 30, 2017, arewere not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party arewere not available to pay obligations of Trust III. Trust III’s loans arewere serviced by MFC.MFC, until September 30, 2021.
The Company established a wholly-owned subsidiary, Medallion Financing Trust I, (Fin Trust)or Fin Trust, for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,145,000aggregating $36,083,000 at SeptemberSeptember 30, 2017,2021, 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,together, Medallion Chicago),Chicago, purchased $8,689,000$8,689,000 of City of Chicago taxicabtaxi medallions out of foreclosure, some of which are leased to fleet operators while being held for sale.operators. The 159 taxi medallions are carried at a fairnet realizable value of $9,510,000$1,069,875 in other assets on the Company’s consolidated balance sheet at September 30, 2017,2021, compared to $9,510,000 and $19,020,000a net realizable value of $2,932,000 at December 31, 2016 and September 30, 2016, and are considerednon-qualifying assets under the 1940 Act.2020.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the US, or GAAP, requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and assumptions are those that management considers to be the most critical to an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. All of
Page 8 of 94
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
Page 10 of 59
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,loan collateral 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 subsidiaries, except for Medallion Bank and other portfolio investments.controlled subsidiaries. All significant intercompany transactions, balances, and profits (losses) have been eliminated in consolidation. As
The consolidated financial statements have been prepared in accordance with GAAP. The Company consolidates all entities it controls through anon-investment company, Medallion Bank majority voting interest, a controlling interest through other contractual rights, or as being identified as the primary beneficiary of VIEs. The primary beneficiary is notthe party who has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (2) an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated withentities that are less than wholly owned, the Company, whichthird-party’s holding is an investment company under the 1940 Act. See Note 3 for the presentation of financial information for Medallion Bank and other controlled subsidiaries.recorded as non-controlling interest.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that exceed the federally insured limits, andlimits. Cash includes $0 and $500,000 related to compensating balance requirements of regional banking institutions, and $7,850,000 and $7,840,000 pledged to a lender$2,970,000 of an affiliate asinterest reserve associated with the private placements of September 30, 2017debt in March and December 31, 2016.August 2019, which cannot be used for any other purpose until March 2022. Cash also includes $1,250,000 of interest-bearing funds deposited in other banks, that are mainly callable, with terms of 4 to 7 years.
Fair Value of Assets and Liabilities
The Company follows the Financial Accounting Standards Board, or FASB, FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, (FASBor FASB ASC 820),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, 12 and 13 to the consolidated financial statements.
Equity Investments
Investment Valuation
The Company’s loans, net of participations and any unearned discount, are considered investmentCompany follows FASB ASC Topic 321, Investments – Equity Securities, or ASC 321, which requires all applicable investments in equity securities under the 1940 Act and are recorded at fair value. As part of thewith a readily determinable fair value methodology, loansto be valued as such, and those without a readily determinable fair value, are valuedmeasured at cost, adjusted forless 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 condition for loans (e.g. values used by other lenders andimpairment plus or minus 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, are valued similarly.
observable price changes. Equity investments (commonof $10,214,000 and $9,746,000 at September 30, 2021 and December 31, 2020, comprised mainly of nonmarketable stock and stock warrants, including certain controlled subsidiary portfolio investments) and investment securities (US Treasuries and mortgage backed bonds), in total representing 51% and 46%are recorded at cost less any impairment plus or minus observable price changes. As of the investment portfolio at September 30, 20172021 and December 31, 2016, are recorded2020, the Company determined that there was no impairment or observable price change.
The Company sold 1,166,667 and 500,000 shares of its investment in Upgrade, Inc. during the second and third quarters of 2021 for proceeds of $3,816,000 and $3,000,000, respectively, and a recognized a gain on the sales of $3,179,000 and $2,727,000, during the period. The Company continued to hold 1,000,000 shares of Upgrade, Inc. at fair value, representeda cost of $546,000 as cost, plus or minus unrealized appreciation or depreciation. The fair value of investments that have no ready market are 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 equity investments were marketable securities of $16,000 and $537,000 at September 30, 2017 and December 31, 2016, andnon-marketable2021.
In the 2021 first quarter, the Company purchased $2,000,000 of equity securities of $9,968,000 and $7,931,000 in the comparable periods. The $303,861,000 and $293,360,000 related to portfolio investments in controlled subsidiaries at September 30, 2017 and December 31, 2016 were allnon-marketable in each period. 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 hadwith a ready market for the investments existed, and the differences could be material.
The Company’s investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments ofreadily determinable fair value. The Company conductsAs a thorough valuation analysis as described previously,result, all unrealized gains and also receives an opinion regarding the valuation from an independent third party to assist the Board of Directorslosses are included in its determination ofearnings, and the fair value of Medallion Bank on at least an annual basis. The Company’s analysis includes factors suchthese securities of $1,969,000 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 ActSeptember 30, 2021 are included in other assets on the acquisitionconsolidated balance sheet.
The table below presents the unrealized portion related to the equity securities held as of controlSeptember 30, 2021.
(Dollars in thousands) |
| Three Months Ended |
|
| Nine Months Ended |
| ||
Net losses recognized during the period on equity securities |
| $ | 0 |
|
| $ | (31 | ) |
Less: Net gains (losses) recognized during the period on equity |
|
| 0 |
|
|
| 0 |
|
Unrealized losses recognized during the reporting period on |
| $ | 0 |
|
| $ | (31 | ) |
Page 11 of an industrial bank by a “commercial firm” (a59
Investment Securities
Page 9 of 94
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 second quarter of 2015, the Company first became aware of external interest in Medallion Bank and its portfolio’s 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 in the Medallion Bank’s fair value analysis and the Board of Directors determinedfollows FASB ASC Topic 320, Investments – Debt Securities, or ASC 320, which requires that Medallion Bank had a fair value in excess of book value. In addition, in the 2016 third quarter there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016, and $563,000 was recorded in 2017. See Note 3 for additional information about Medallion Bank.
A majority of the Company’s investments consist of long-term loans to persons defined by SBA regulations as small business concerns. Approximately 36% and 41% of the Company’s investment portfolio at September 30, 2017 and December 31, 2016 had arisen in connection with the financing of taxicab medallions, taxicabs, and related assets, of which 68% and 69% were in New York City at September 30, 2017 and December 31, 2016. These loans are secured by 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 (13% at September 30, 2017 and December 31, 2016) represents loans to various commercial enterprises in a wide variety of industries, including manufacturing, retail trade, information, recreation, and various other industries. Approximately 51% of these loans are made primarily in the Midwest and 4% in the metropolitan New York City area, with the balance widely scattered across the United States. Investments in controlled unconsolidated subsidiaries, equity investments, and investment securities were 49%, 2%, and 0% at September 30, 2017, and were 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 September 30, 2017 and December 31, 2016 (78% and 76% in New York City), commercial loans were 6% and 6%, and consumer loans were 52% and 46% in all 50 states collateralized by recreational vehicles, boats, motorcycles, trailers, and home improvements. Investment securities were 3% and 2% at September 30, 2017 and December 31, 2016, and equity investments (includingapplicable investments in controlled subsidiaries) were 11% and 11%.
Investment Transactions and Income Recognition
Loan origination fees and certain direct origination costs are deferred and recognizeddebt securities be classified as an adjustment to the yield of the related loans. At September 30, 2017 and December 31, 2016, net loan origination costs were $104,000 and $175,000. Net (accretion) amortization to income for the three months ended September 30, 2017 and 2016 was ($17,000) and ($66,000), and was ($55,000) and ($71,000) for the comparable nine month periods.
trading securities, available-for-sale securities, or held-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. The net premium on investment securities totaled $301,000 at September 30, 2021 and $278,000 at December 31, 2020, and $40,000 and $121,000 was amortized to interest income for the three and nine months ended September 30, 2021 and $85,000 and $219,000 was amortized to interest income for the three and nine months ended September 30, 2020. ASC 320 further requires that held-to-maturity securities be reported at amortized cost and available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the consolidated financial statements, and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity, net of the effect of income taxes, until they are sold. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in stockholders’ equity, which were recorded net of the income tax effect, will be reversed.
Loans
The Company’s loans are currently reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan. Effective April 2, 2018, the Company withdrew its previous election to be regulated as a business development company under the Investment Company Act of 1940, and therefore changed the Company’s financial reporting from investment company accounting to bank holding company accounting. As a result, the existing loan balances were adjusted to fair value in connection with the change in reporting, and balances, net of reserves and fees, became the opening balances.
Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At September 30, 20172021 and December 31, 2016, there2020, net loan origination costs were no premiums or discounts on investment securities,$25,658,000 and their related$20,684,000. Net amortization to income accretion or amortizationfor the three and nine months ended September 30, 2021 was immaterial$2,037,000 and $5,757,000 and $1,681,000 and $4,572,000 for 2017the three and 2016.nine months ended September 30, 2020.
Interest income is recorded on the accrual basis. Taxicab medallionMedallion 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 loan portfolio has different characteristics, typified by a larger number of smaller dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is unlikely the Company will be able to collect all amounts due according to the contractual terms of the original loan agreement. Management considers loans that are in bankruptcy status, but have not been charged-off, to be impaired. Consumer 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 recovery efforts against both the borrower and the underlying collateral are initiated. For the recreation loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged-off. If the collateral is repossessed, a loss is recorded by writing 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 recoveries. Total loans 90 days or more past due were $4,109,000 at September 30, 2017,2021, or 0.29% of the total loan portfolio, compared to $6,878,000, or 0.57% at December 31, 2016,2020.
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants concessions to the borrower for other than an insignificant period of time that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring, or TDR. The Company strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before they reach nonaccrual status. These modified terms may include rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize the economic loss to the Company and to avoid foreclosure or repossession of the collateral. For modifications where the Company forgives principal, the entire amount of such principal forgiveness is immediately charged off. Loans classified as TDRs are considered impaired loans. Beginning in the third quarter 2019, all consumer loans which are party to a Chapter 13 bankruptcy are immediately classified as TDRs. The Company’s policy with regard to bankrupt recreation loans is to take an immediate 40% write down of the loan balance. As a result of the Consolidated Appropriations Act, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, relief period was extended to the later of January 1, 2022 or 60 days after the date which the coronavirus, or COVID-19, national emergency terminates. During the relief period, companies may elect to (a) suspend the requirements of GAAP for loan modifications related to COVID-19 that would otherwise be categorized as TDRs and (b) suspend any determination of a loan modified as a result of the effects of COVID-19 as a TDR, including impairment for accounting purposes. Any such suspension is applicable for the term of the loan modification, but solely with respect to any modification that occurs during the applicable period for a loan that was not more
Page 12 of 59
than 30 days past due as of December 31, 2019, and shall not apply to any adverse impact on the credit of a borrower that is not related to COVID-19. As of September 30, 2016, total nonaccrual loans2021, there were $132,316,000, $77,161,000, and $65,656,000, and represented 36%, 20%, and 17% of the grossno consumer or medallion and commercial loan portfolio at each period end, and were primarily concentrated in the taxi medallion portfolio. The amount of interest income on nonaccrual loansmodifications related to COVID-19 that would have otherwise been recognized ifclassified as TDRs, and therefore there was no need for the Company to elect this relief under the CARES Act during 2020 and 2021. However, the Company may have loan modifications related to COVID-19 that would apply under this provision of the CARES Act in the future.
Loan collateral in process of foreclosure primarily includes medallion loans that have reached 120 days past due and have been charged-down to their net realizable value, in addition to consumer repossessed collateral in the process of being sold. The medallion loan component reflects that the collection activities on the loans have transitioned from working with the borrower, to the liquidation of the collateral securing the loans.
The Company had been paying in accordance with their original terms was $16,286,000 ($9,750,000$0 and $15,367,000 of which had been applied to principal), $10,658,000, and $10,344,000net loans pledged as ofcollateral under borrowing arrangements at September 30, 2017,2021 and December 31, 2016, and September 30, 2016, of which $1,845,000 ($574,000 of which had been applied to principal) and $1,220,000 would have been recognized in the quarters ended September 30, 2017 and 2016, and $4,691,000 ($1,926,000 of which had been applied to principal) and $2,230,000 would have been recognized in the comparable nine months.
Page 10 of 94
Loan Sales and Servicing Fee Receivable
The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing, (FASBor FASB ASC 860)860, which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, the Company hashad elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $342,521,000 and $352,191,000$20,477,000 at September 30, 20172021 and $107,131,000 at December 31, 2016, and included $314,974,000 and $325,751,000 of loans serviced for Medallion Bank.2020. 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 Medallion Bank, and determined that no material servicing asset or liability existsexisted as of September 30, 20172021 and December 31, 2016. 2020.
Allowance for Loan Losses
The Company has assigned its servicing rightsallowance 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 Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. The costsadequacy of servicing are allocated to MSC bythe allowance for loan losses, the Company uses historical delinquency and actual loss rates with a one-year lookback period for consumer loans. For commercial loans deemed nonperforming, the servicing fee incomehistorical loss experience and other projections are looked at. For medallion loans, delinquent nonperforming loans are valued at collateral value for the most recent quarter. Collateral value for the medallion loans is billed to and collected from Medallion Bank by MSC. During 2016,generally determined utilizing factors deemed relevant under the Company exited the asset based lending business and sold the entire portfolio of $45,023,000, including $42,919,000 on the books of Medallion Bank, to a third party bank for a gain of $2,701,000, before deductions for closing costs.
Unrealized Appreciation (Depreciation) and Realized Gains (Losses) on Investments
Unrealized appreciation (depreciation) on investments is the amount by which the fair value estimated by the Company is greater (less) than the cost basiscircumstances of the investment portfolio. Realized gains or losses on investmentsmarket including but not limited to: actual transfers, pending transfers, median and average sales prices, discounted cash flows, market direction and sentiment, and general economic trends for the industry and economy. This evaluation is inherently subjective, as it requires estimates that 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 (depreciation) on investments was $100,732,000, $127,367,000, and $53,509,000susceptible to significant revision as of September 30, 2017, December 31, 2016, and September 30, 2016. 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 analysis 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.more information becomes available. As a result of this valuationCOVID-19, there was an increase in the reserve percentages of 50 basis points on the recreation subprime loan sub-portfolios during 2020. In addition, the Company determined that anticipated payment activity on the medallion portfolio was impossible to quantify upon exit of the six-month deferral period with borrowers, and therefore deemed all such loans as impaired in the third quarter of 2020. As a result, all medallion loans were placed on nonaccrual and reserved down to collateral value, net of liquidation costs, of $79,500 for New York City medallions. The Company continues to monitor the impact of COVID-19 on the consumer, commercial, and medallion loans. Had there been no payment deferrals offered to borrowers under the CARES Act, potential loans 90 days or more past due would have resulted in increased reserves and/or charge-offs. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.
Goodwill and Intangible Assets
The Company’s goodwill and intangible assets arose as a result of the excess of fair value over book value for several of the Company’s previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under the Company’s new reporting, and was subject to a purchase price accounting allocation process conducted by an independent third-party expert to arrive at the current categories and amounts. Goodwill is not amortized, but is subject to quarterly review by management to determine whether additional impairment testing is needed, and such testing is performed at least on an annual basis. Intangible assets are amortized over their useful life of approximately 20 years. As of September 30, 2021 and December 31, 2020, the Company had previously used Medallion Bank’s actual resultsgoodwill of operations as$150,803,000, which all related to 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, the Company became first aware of external interest in Medallion Bank, and its portfoliointangible assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers$50,007,000 and interested parties has continued through 2016 and 2017.$51,090,000. The Company incorporated these new factors inrecognized $362,000 and $1,083,000 of amortization expense 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 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016, and $563,000 was recorded in 2017. See Note 3 for additional information about Medallion Bank.
Page 11 of 94
The following tables set forth thepre-tax changes in the Company’s unrealized appreciation (depreciation) on investments for the 2017 and 2016 quarters shown below.
(Dollars in thousands) | Medallion Loans | Commercial Loans | Investment in Subsidiaries | Equity Investments | Investment Securities | Investments Other Than Securities | Total | |||||||||||||||||||||
Balance December 31, 2016 | ($ | 28,523 | ) | ($ | 1,378 | ) | $ | 152,750 | $ | 3,934 | $ | — | $ | 584 | $ | 127,367 | ||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 3,751 | 1,261 | — | — | 5,012 | |||||||||||||||||||||
Depreciation on investments | (8,670 | ) | (332 | ) | — | — | — | — | (9,002 | ) | ||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (2,093 | ) | — | — | (2,093 | ) | |||||||||||||||||||
Losses on investments | 825 | — | — | 486 | — | — | 1,311 | |||||||||||||||||||||
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Balance March 31, 2017 | (36,368 | ) | (1,710 | ) | 156,501 | 3,588 | — | 584 | 122,595 | |||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | (771 | ) | 120 | — | — | (651 | ) | |||||||||||||||||||
Depreciation on investments | (12,425 | ) | (118 | ) | — | — | — | — | (12,543 | ) | ||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | — | — | — | — | |||||||||||||||||||||
Losses on investments | 337 | 636 | — | — | — | — | 973 | |||||||||||||||||||||
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Balance June 30, 2017 | (48,456 | ) | (1,192 | ) | 155,730 | 3,708 | — | 584 | 110,374 | |||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | (2,771 | ) | (361 | ) | — | — | (3,132 | ) | ||||||||||||||||||
Depreciation on investments | (6,669 | ) | 75 | — | — | — | (15 | ) | (6,609 | ) | ||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (272 | ) | — | — | (272 | ) | |||||||||||||||||||
Losses on investments | 311 | 60 | — | — | — | — | 371 | |||||||||||||||||||||
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Balance September 30, 2017 | ($ | 54,814 | ) | ($ | 1,057 | ) | $ | 152,959 | $ | 3,075 | $ | — | $ | 569 | $ | 100,732 | ||||||||||||
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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 | — | — | 6,115 | (7 | ) | — | (1,585 | ) | 4,523 | |||||||||||||||||||
Depreciation on investments | (2,359 | ) | 173 | 305 | 12 | (47 | ) | — | (1,916 | ) | ||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | — | 12 | — | 12 | |||||||||||||||||||||
Losses on investments | — | 348 | — | — | — | — | 348 | |||||||||||||||||||||
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Balance March 31, 2016 | (5,797 | ) | (1,718 | ) | 25,060 | 2,587 | (53 | ) | 27,371 | 47,450 | ||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 2,213 | 1,538 | 7 | (3,170 | ) | 588 | ||||||||||||||||||||
Depreciation on investments | (2,758 | ) | 245 | — | (8 | ) | 52 | — | (2,469 | ) | ||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | — | — | — | — | |||||||||||||||||||||
Losses on investments | 2,346 | 195 | — | — | — | — | 2,541 | |||||||||||||||||||||
Other | — | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||||||
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Balance June 30, 2016 | (6,209 | ) | (1,278 | ) | 27,273 | 4,117 | — | 24,201 | 48,104 | |||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 26,169 | (111 | ) | — | (14,107 | ) | 11,951 | |||||||||||||||||||
Depreciation on investments | (6,051 | ) | (65 | ) | — | (3 | ) | — | — | (6,119 | ) | |||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (600 | ) | — | — | (600 | ) | |||||||||||||||||||
Losses on investments | 173 | — | — | — | — | — | 173 | |||||||||||||||||||||
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Balance September 30, 2016 | ($ | 12,087 | ) | ($ | 1,343 | ) | $ | 53,442 | $ | 3,403 | $ | — | $ | 10,094 | $ | 53,509 | ||||||||||||
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Page 12 of 94
The table below summarizespre-tax components of unrealized and realized gains and losses in the investment portfoliointangible assets for the three and nine months ended September 30, 20172021 and 2016.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net change in unrealized appreciation (depreciation) on investments | ||||||||||||||||
Unrealized appreciation | $ | (361 | ) | $ | (110 | ) | $ | 1,132 | $ | 1,429 | ||||||
Unrealized depreciation | (6,594 | ) | (6,119 | ) | (28,253 | ) | (10,829 | ) | ||||||||
Net unrealized appreciation on investments in Medallion Bank and other controlled subsidiaries | 2,035 | 25,913 | 11,089 | 44,221 | ||||||||||||
Realized gains | (272 | ) | (600 | ) | (2,363 | ) | (588 | ) | ||||||||
Realized losses | 371 | 173 | 2,656 | 3,063 | ||||||||||||
Net unrealized losses on investments other than securities and other assets | (15 | ) | (14,107 | ) | (15 | ) | (18,862 | ) | ||||||||
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Total | $ | (4,836 | ) | $ | 5,150 | $ | (15,754 | ) | $ | 18,434 | ||||||
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Net realized gains (losses) on investments | ||||||||||||||||
Realized gains | $ | 272 | $ | — | $ | 2,363 | $ | — | ||||||||
Realized losses | (371 | ) | (173 | ) | (2,656 | ) | (3,063 | ) | ||||||||
Other gains | 1,187 | 2,904 | 4,189 | 3,308 | ||||||||||||
Direct chargeoffs | (144 | ) | (232 | ) | (111 | ) | (252 | ) | ||||||||
Realized gains on investments other than securities and other assets | — | — | — | — | ||||||||||||
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Total | $ | 944 | $ | 2,499 | $ | 3,785 | $ | (7 | ) | |||||||
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Page 13$362,000 and $1,084,000 of 94
The following table provides additional information on attributes of the nonperforming loan portfolio as of September 30, 2017, December 31, 2016, and September 30, 2016.
(Dollars in thousands) | Recorded Investment (1) (2) | Unpaid Principal Balance | Average Recorded Investment | |||||||||
September 30, 2017 | ||||||||||||
Medallion(3) | $ | 120,716 | $ | 123,199 | $ | 124,944 | ||||||
Commercial(3) | 11,600 | 18,867 | 11,951 | |||||||||
December 31, 2016 | ||||||||||||
Medallion(3) | $ | 73,192 | $ | 74,078 | $ | 87,999 | ||||||
Commercial(3) | 3,969 | 11,118 | 4,695 | |||||||||
September 30, 2016 | ||||||||||||
Medallion(3) | $ | 61,508 | $ | 62,001 | $ | 63,490 | ||||||
Commercial(3) | 4,148 | 11,127 | 4,024 | |||||||||
The following tables show the aging of medallion and commercial loans as of September 30, 2017 and December 31, 2016.
| September 30, 2017 | Days Past Due | Recorded Investment > 90 Days and | ||||||||||||||||||||||||||
(Dollars in thousands) | 31-60 | 61-90 | 91 + | Total | Current | Total | Accruing | |||||||||||||||||||||
Medallion loans | $ | 13,660 | $ | 32,787 | $ | 98,442 | $ | 144,889 | $ | 134,301 | $ | 279,190 | $ | — | ||||||||||||||
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Commercial loans | ||||||||||||||||||||||||||||
Secured mezzanine | — | — | 2,117 | 2,117 | 79,073 | 81,190 | — | |||||||||||||||||||||
Other secured commercial | — | — | 758 | 758 | 1,969 | 2,727 | — | |||||||||||||||||||||
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Total commercial loans | — | — | 2,875 | 2,875 | 81,042 | 83,917 | — | |||||||||||||||||||||
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Total | $ | 13,660 | $ | 32,787 | $ | 101,317 | $ | 147,764 | $ | 215,343 | $ | 363,107 | $ | — | ||||||||||||||
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| December 31, 2016 | Days Past Due | Recorded Investment > 90 Days and | ||||||||||||||||||||||||||
(Dollars in thousands) | 31-60 | 61-90 | 91 + | Total | Current | Total | Accruing | |||||||||||||||||||||
Medallion loans | $ | 12,350 | $ | 13,064 | $ | 71,976 | $ | 97,390 | $ | 197,660 | $ | 295,050 | $ | 4,665 | ||||||||||||||
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Commercial loans | ||||||||||||||||||||||||||||
Secured mezzanine | — | — | 1,390 | 1,390 | 75,079 | 76,469 | — | |||||||||||||||||||||
Other secured commercial | 69 | 472 | 734 | 1,275 | 7,382 | 8,657 | — | |||||||||||||||||||||
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Total commercial loans | 69 | 472 | 2,124 | 2,665 | 82,461 | 85,126 | — | |||||||||||||||||||||
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Total | $ | 12,419 | $ | 13,536 | $ | 74,100 | $ | 100,055 | $ | 280,121 | $ | 380,176 | $ | 4,665 | ||||||||||||||
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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. The Company and Medallion Bank have placed these loans on nonaccrual, and reversed interest income. In
Page 14 of 94
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 lienamortization expense on the Company’s and Medallion Bank’s loan participations subject to, among other things, defenses still pending prosecution byintangible assets for 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 September 30, 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 September 30, 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 quarter ended September 30, 2017.
(Dollars in thousands) | Number of Loans | Pre- Modification Investment | Post-Modification Investment | |||||||||
Medallion loans | 7 | $ | 2,994 | $ | 2,994 | |||||||
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Commercial loans | — | — | — | |||||||||
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Total | 7 | $ | 2,994 | $ | 2,994 | |||||||
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The following table shows troubled debt restructurings which the Company entered into during the nine months ended September 30, 2017.
(Dollars in thousands) | Number of Loans | Pre- Modification Investment | Post-Modification Investment | |||||||||
Medallion loans | 54 | $ | 34,905 | $ | 34,831 | |||||||
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Commercial loans | 2 | 6,547 | 6,547 | |||||||||
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Total | 56 | $ | 41,452 | $ | 41,378 | |||||||
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During the twelve months ended September 30, 2017, sixteen loans modified as troubled debt restructurings were in default and had an investment value of $5,027,000 as of September 30, 2017, net of $4,495,000 of unrealized depreciation.
Page 15 of 94
The following table shows troubled debt restructurings which the Company entered into during the quarterthree and nine months ended September 30, 2016.
(Dollars in thousands) | Number of Loans | Pre- Modification Investment | Post-Modification Investment | |||||||||
Medallion loans | 1 | $ | 229 | $ | 229 | |||||||
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Commercial loans | — | — | — | |||||||||
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Total | 1 | $ | 229 | $ | 229 | |||||||
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During2020. Additionally, loan portfolio premiums of $12,387,000 were determined as of April 2, 2018, of which $685,000 and $2,717,000 were outstanding at September 30, 2021 and December 31, 2020, and of which $150,000 and $2,032,000 was amortized to interest income for the twelvethree and nine months ended September 30, 2016, two loans modified as troubled debt restructurings were in default2021 and $893,000 and $1,401,000 was amortized to interest income for the three and nine months ended September 30, 2020.The Company engaged an expert to assess the goodwill and intangibles for impairment at December 31, 2020, who concluded there was 0 impairment on the Bank and on the RPAC intangible asset. The Company reviewed the goodwill related to the Bank and the RPAC intangible assets, considered whether
Page 13 of 59
the current COVID-19 pandemic had an investment value of $1,989,000any effect on such goodwill, and concluded that there was 0 additional impairment as of September 30, 2016.2021.
The table below shows the details of the intangible assets as of the dates presented.
(Dollars in thousands) |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Brand-related intellectual property |
| $ | 18,150 |
|
| $ | 18,974 |
|
Home improvement contractor relationships |
|
| 5,692 |
|
|
| 5,951 |
|
Race organization |
|
| 26,165 |
|
|
| 26,165 |
|
Total intangible assets, net |
| $ | 50,007 |
|
| $ | 51,090 |
|
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation and amortization, and are depreciated on a straight-line basis over their estimated useful lives of 3 to 10 years.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 $23,000$79,000 and $28,000$238,000 for the quartersthree and nine months ended September 30, 2017 and 2016,2021 and was $71,000$142,000 and $85,000$403,000 for the comparablethree and nine months.months ended September 30, 2020.
Deferred Costs
Deferred financing costs included in other assets, representsrepresent costs associated with obtaining the Company’s borrowing facilities, and are amortized on a straight line basis over the lives of the related financing agreements.agreements and life of the respective pool. Amortization expense was $229,000$576,000 and $233,000$1,814,000 for the quartersthree and nine months ended September 30, 2017 and 2016,2021 and was $697,000$648,000 and $486,000$1,957,000 for the comparablethree and nine months recorded as interest expense on the Consolidated Statement of Operations.ended September 30, 2020. 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 amountsamount on the Company’s balance sheet for all of these purposes were $3,295,000, $4,003,000,$7,098,000 and $4,161,000$5,805,000 as of September 30, 2017,2021 and December 31, 2016, and September 30, 2016.2020.
Income Taxes
Income taxes are accounted for using the asset and liability approach in accordance with FASB ASC Topic 740, Income Taxes, (“or ASC 740”).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 ourthe Company’s valuation allowance include expectations of future earnings of the appropriate tax character, recent historical financial results, tax planning strategies, the length of statutory carryforward periods and the expected timing of the reversal of temporary differences. 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 sponsorship and race winnings revenue under FASB ASC Topic 606, Revenue from Contracts with Customers. Sponsorship revenue is recognized when the Company qualified to be taxed as a RIC underCompany’s performance obligations are completed in accordance with the Code. Generally, a RICcontract terms of the sponsorship contract. 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 perPage 14 of 59
Earnings (Loss) Per Share (EPS)
Basic earnings (loss) per share are computed by dividing net increase in net assetsincome (loss) resulting from operations available to common shareholdersstockholders 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.
Page 16 of 94
The table below shows the calculation of basic and diluted EPS.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Dollars in thousands, except share and per share data) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Net income (loss) resulting from operations |
| $ | 15,940 |
|
| $ | (23,630 | ) |
| $ | 34,638 |
|
| $ | (41,250 | ) |
Weighted average common shares |
|
| 24,634,845 |
|
|
| 24,461,488 |
|
|
| 24,583,573 |
|
|
| 24,440,067 |
|
Effect of dilutive stock options |
|
| 98,906 |
|
|
| — |
|
|
| 82,522 |
|
|
| — |
|
Effect of restricted stock grants |
|
| 256,475 |
|
|
| — |
|
|
| 279,612 |
|
|
| — |
|
Adjusted weighted average common shares |
|
| 24,990,226 |
|
|
| 24,461,488 |
|
|
| 24,945,707 |
|
|
| 24,440,067 |
|
Basic income (loss) per share |
| $ | 0.65 |
|
| $ | (0.97 | ) |
| $ | 1.41 |
|
| $ | (1.69 | ) |
Diluted income (loss) per share |
|
| 0.64 |
|
|
| (0.97 | ) |
|
| 1.39 |
|
|
| (1.69 | ) |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net increase in net assets resulting from operations available to common shareholders | $ | 619 | $ | 5,043 | $ | (3,067 | ) | $ | 16,458 | |||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average common shares outstanding applicable to basic EPS | 23,930,086 | 24,136,807 | 23,916,334 | 24,173,898 | ||||||||||||
Effect of dilutive stock options | — | — | — | 307 | ||||||||||||
Effect of restricted stock grants | 153,833 | 47,711 | — | 52,863 | ||||||||||||
|
|
|
|
|
|
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| |||||||||
Adjusted weighted average common shares outstanding applicable to diluted EPS | 24,083,919 | 24,184,518 | 23,916,334 | 24,227,068 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Basic earnings per share | $ | 0.03 | $ | 0.21 | $ | (0.13 | ) | $ | 0.68 | |||||||
Diluted earnings per share | 0.03 | 0.21 | (0.13 | ) | 0.68 | |||||||||||
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| |||||||||
Potentially dilutive common shares excluded from the above calculations aggregated 359,00026,000 and 347,000834,684 shares as of September 30, 20172021 and 2016.2020.
Stock Compensation
The Company follows FASB Accounting Standard CodificationASC Topic 718, (ASC 718), “Compensationor ASC 718, Compensation – Stock Compensation”,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 isare reflected in net increase in net assetsincome 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 increase in net assetsincome resulting from operations for any new grants using the grant date fair value of the shares granted, expensed over the vesting period of the underlying stock.
During the nine months ended September 30, 20172021 and 2016,2020, the Company issued 258,232 restricted shares163,561 and 6,266165,674 restricted shares of stock-based compensation awards, issued 317,398and 23,333 and 12,000335,773 shares of other stock-based compensation awards, and issued 16,803 and 47,156 restricted stock units; and recognized $222,000$602,000 and $551,000,$1,676,000, or $0.01$0.02 and $0.02$0.07 per diluted common share, for the 2017 third quarterthree and nine months ended September 30, 2021, and $137,000$508,000 and $422,000,$1,495,000, or $0.01$0.02 and $0.02$0.06 per share infor the comparable 2016 periods,three and nine months ended September 30, 2020, ofnon-cash stock-based compensation expense related to the grants. As of September 30, 2017,2021, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $367,000,$2,866,000, which is expected to be recognized over the next 12 quarters (see Note 6).14 quarters.
Regulatory Capital
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 up to December 2018. The caps provide for payments to the Company if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases were generally fully expensed when paid, including $0 and $19,000 for the three and nine months ended September 30, 2017 and $10,000 for the comparable 2016 periods, and all are carried at $0 on the balance sheet at September 30, 2017.
Reclassifications
Certain reclassifications have been made to prior year balances to conform with the current quarter’s presentation. These reclassifications have no effect on the previously reported results of operations.
Page 17 of 94
(3) INVESTMENT 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 three and nine months ended September 30, 2017 and 2016.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Statement of comprehensive income | ||||||||||||||||
Investment income | $ | 29,259 | $ | 26,165 | $ | 82,247 | $ | 76,982 | ||||||||
Interest expense | 3,660 | 3,027 | 9,952 | 8,730 | ||||||||||||
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Net interest income | 25,599 | 23,138 | 72,295 | 68,252 | ||||||||||||
Noninterest income | 28 | 102 | 99 | 271 | ||||||||||||
Operating expenses | 6,668 | 5,966 | 19,368 | 17,415 | ||||||||||||
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Net investment income before income taxes | 18,959 | 17,274 | 53,026 | 51,108 | ||||||||||||
Income tax benefit (provision) | (2,940 | ) | 1,528 | (7,035 | ) | (7,964 | ) | |||||||||
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Net investment income after income taxes | 16,019 | 18,802 | 45,991 | 43,144 | ||||||||||||
Net realized/unrealized losses of Medallion Bank | (10,859 | ) | (19,111 | ) | (34,586 | ) | (28,555 | ) | ||||||||
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Net increase in net assets resulting from operations of Medallion Bank | 5,160 | (309 | ) | 11,405 | 14,589 | |||||||||||
Unrealized appreciation (depreciation) on Medallion Bank (1) | (592 | ) | 26,409 | (1,212 | ) | 23,942 | ||||||||||
Net realized/unrealized gains (losses) on controlled subsidiaries other than Medallion Bank | (2,533 | ) | (187 | ) | 896 | 5,690 | ||||||||||
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Net increase in net assets resulting from operations of Medallion Bank and other controlled subsidiaries | $ | 2,035 | $ | 25,913 | $ | 11,089 | $ | 44,221 | ||||||||
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The following table presents Medallion Bank’s balance sheets and the net investment in other controlled subsidiaries as of September 30, 2017 and December 31, 2016.
(Dollars in thousands) | 2017 | 2016 | ||||||
Loans | $ | 993,729 | $ | 965,082 | ||||
Investment securities, at fair value | 38,423 | 36,861 | ||||||
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Net investments(1) | 1,032,152 | 1,001,943 | ||||||
Cash | 32,431 | 30,881 | ||||||
Other assets, net | 59,111 | 43,134 | ||||||
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Total assets | $ | 1,123,694 | $ | 1,075,958 | ||||
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Other liabilities | $ | 5,818 | $ | 3,453 | ||||
Due to affiliates | 996 | 1,084 | ||||||
Deposits and other borrowings, including accrued interest payable | 945,365 | 909,536 | ||||||
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Total liabilities | 952,179 | 914,073 | ||||||
Medallion Bank equity(2) | 171,515 | 161,885 | ||||||
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Total liabilities and equity | $ | 1,123,694 | $ | 1,075,958 | ||||
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Investment in other controlled subsidiaries | $ | 13,203 | $ | 12,771 | ||||
TotalinvestmentinMedallionBankandothercontrolledsubsidiaries (3) | $ | 303,861 | $ | 293,360 | ||||
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Page 18 of 94
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 September 30, 2017 and December 31, 2016, the net premium on investment securities totaled $250,000 and $238,000, and $21,000 and $61,000 was amortized into interest income for the quarter and nine months ended September 30, 2017, and $19,000 and $61,000 was amortized in the comparable 2016 periods.
Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At September 30, 2017 and December 31, 2016, net loan origination costs were $13,347,000 and $12,371,000. Net amortization expense for the quarter and nine months ended September 30, 2017 was $918,000 and $2,581,000, and was $947,000 and $2,688,000 for the comparable 2016 periods.
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 September 30, 2017, $4,751,000 or less than 1% of consumer loans, no commercial loans, and $34,875,000 or 15% 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 $3,467,000 or 1% of consumer loans, no commercial loans, and $47,403,000 or 15% of medallion loans on nonaccrual at September 30, 2016. 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 $1,278,000 (including $1,102,000 of interest paid on nonaccrual loans has been applied to principal), $514,000, and $1,161,000 as of September 30, 2017, December 31, 2016, and September 30, 2016. See also the paragraph and table on page 58 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 September 30, 2017 and December 31, 2016 was $2,142,000 and $1,996,000, and $338,000 and $983,000 was amortized to interest expense during the quarter and nine months ended September 30, 2017, and $345,000 and $1,035,000 was amortized in the comparable 2016 periods. 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 Fiscal Year Ending September 30, | September 30, | December 31, | Interest | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | 2017 | 2016 | Rate(1) | |||||||||||||||||||||||||||
Deposits and other borrowings | $ | 444,318 | $ | 268,028 | $ | 106,036 | $ | 55,375 | $ | 70,344 | $ | — | $ | 944,101 | $ | 908,442 | 1.47 | % | ||||||||||||||||||
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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, and certainoff-balance 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.
Page 19 of 94
FDIC-insured banks, including Medallionthe 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, Medallionthe Bank is subject to certain restrictions on any extensions of credit to, or other covered transactions with, such as certain purchases of assets, with the Company or its affiliates.
Page 15 of 59
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 capital to total assets ratio, (Tier 1 capital to average assets)as defined, be not less than 15%15%, a level which could preclude its ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As a result, to facilitate maintenance of September 30, 2021, the capitalBank’s Tier 1 leverage ratio requirement and to provide the necessary capital for continued growth, the Company has periodically made capital contributions to Medallion Bank, including $3,000,000 in 2016. Separately, Medallion Bank declared dividends to the Company of $3,000,000 in the 2016 nine months.
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 18.21%. 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 the 2016 first quarter.
The following table represents Medallion Bank’s actual capital amounts and relatedratios, and the regulatory minimum ratios are presented in the following table.
|
| Regulatory |
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| |||||||
(Dollars in thousands) |
| Minimum |
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| Well- |
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||||
Common equity Tier 1 capital |
|
| 0 |
|
|
| 0 |
|
| $ | 188,459 |
|
| $ | 148,507 |
|
Tier 1 capital |
|
| 0 |
|
|
| 0 |
|
|
| 257,247 |
|
|
| 217,295 |
|
Total capital |
|
| 0 |
|
|
| 0 |
|
|
| 275,460 |
|
|
| 233,460 |
|
Average assets |
|
| 0 |
|
|
| 0 |
|
|
| 1,412,494 |
|
|
| 1,283,664 |
|
Risk-weighted assets |
|
| 0 |
|
|
| 0 |
|
|
| 1,422,321 |
|
|
| 1,243,783 |
|
Leverage ratio(1) |
|
| 4.0 | % |
|
| 5.0 | % |
|
| 18.2 | % |
|
| 16.9 | % |
Common equity Tier 1 capital ratio(2) |
|
| 7.0 |
|
|
| 6.5 |
|
|
| 13.3 |
|
|
| 11.9 |
|
Tier 1 capital ratio(3) |
|
| 8.5 |
|
|
| 8.0 |
|
|
| 18.1 |
|
|
| 17.5 |
|
Total capital ratio(3) |
|
| 10.5 |
|
|
| 10.0 |
|
|
| 19.4 |
|
|
| 18.8 |
|
In the table above, the minimum risk-based ratios as of September 30, 20172021 and December 31, 2016, compared to required2020 reflect the capital conservation buffer of 2.5%. The minimum regulatory minimumrequirements, inclusive of the capital ratiosconservation buffer, were the binding requirements for the risk-based requirements, and the ratios required“well-capitalized” requirements were the binding requirements for Tier 1 leverage capital as of both September 30, 2021 and December 31, 2020.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, or Topic 326: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. Under the 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 considered well capitalized. supplemented with “reasonable and supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 2019 for public entities, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022. The Company is assessing the impact the update will have on its financial statements, and expects the update to have a material impact on the Company’s accounting for estimated credit losses on its loans.
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements, or Topic 205: Depository and Lending, or Topic 942: and Financial Services – Investment Companies, or Topic 946: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This new standard amends certain SEC paragraphs from the Codification in response to the issuance of SEC Final Rule No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses and SEC Rule No.
Page 16 of 59
33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The Company has assessed the impact the update and determined it does not have a material impact on the accompanying 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.
(3) INVESTMENT SECURITIES
Fixed maturity securities available for sale at September 30, 2021 and December 31, 2020 consisted of the following:
September 30, 2021 |
| Amortized |
|
| Gross |
|
| Gross |
|
| Fair Value |
| ||||
Mortgage-backed securities, principally obligations of US |
| $ | 37,846 |
|
| $ | 918 |
|
| $ | (275 | ) |
| $ | 38,489 |
|
State and municipalities |
|
| 9,027 |
|
|
| 74 |
|
|
| (79 | ) |
|
| 9,022 |
|
Total |
| $ | 46,873 |
|
| $ | 992 |
|
| $ | (354 | ) |
| $ | 47,511 |
|
December 31, 2020 |
| Amortized Cost |
|
| Gross |
|
| Gross |
|
| Fair Value |
| ||||
Mortgage-backed securities, principally obligations of US |
| $ | 34,929 |
|
| $ | 1,495 |
|
| $ | (45 | ) |
| $ | 36,379 |
|
State and municipalities |
|
| 10,226 |
|
|
| 189 |
|
|
| (2 | ) |
|
| 10,413 |
|
Total |
| $ | 45,155 |
|
| $ | 1,684 |
|
| $ | (47 | ) |
| $ | 46,792 |
|
The amortized cost and estimated market value of investment securities at September 30, 2021 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 |
| $ | 933 |
|
| $ | 939 |
|
Due after one year through five years |
|
| 9,969 |
|
|
| 10,266 |
|
Due after five years through ten years |
|
| 10,316 |
|
|
| 10,659 |
|
Due after ten years |
|
| 25,655 |
|
|
| 25,647 |
|
Total |
| $ | 46,873 |
|
| $ | 47,511 |
|
The following tables show information pertaining to securities with gross unrealized losses at September 30, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position.
|
| Less than Twelve Months |
|
| Twelve Months and Over |
| ||||||||||
September 30, 2021 |
| Gross Unrealized |
|
| Fair Value |
|
| Gross Unrealized |
|
| Fair Value |
| ||||
Mortgage-backed securities, principally obligations of US |
| $ | (275 | ) |
| $ | 13,060 |
|
| $ | — |
|
| $ | — |
|
State and municipalities |
|
| (78 | ) |
|
| 3,989 |
|
|
| (1 | ) |
|
| 63 |
|
Total |
| $ | (353 | ) |
| $ | 17,049 |
|
| $ | (1 | ) |
| $ | 63 |
|
|
| Less than Twelve Months |
|
| Twelve Months and Over |
| ||||||||||
December 31, 2020 |
| Gross Unrealized |
|
| Fair Value |
|
| Gross Unrealized |
|
| Fair Value |
| ||||
Mortgage-backed securities, principally obligations of US |
| $ | (45 | ) |
| $ | 4,028 |
|
| $ | — |
|
| $ | — |
|
State and municipalities |
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| 196 |
|
Total |
| $ | (45 | ) |
| $ | 4,028 |
|
| $ | (2 | ) |
| $ | 196 |
|
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.
Page 17 of 59
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table shows the major classification of loans, inclusive of capitalized loan origination costs, at September 30, 2021 and December 31, 2020.
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||||||||||
(Dollars in thousands) |
| Amount |
|
| As a Percent of |
|
| Amount |
|
| As a Percent of |
| ||||
Recreation |
| $ | 933,790 |
|
|
| 66 | % |
| $ | 792,686 |
|
|
| 65 | % |
Home improvement |
|
| 398,774 |
|
|
| 28 |
|
|
| 334,033 |
|
|
| 27 |
|
Commercial |
|
| 72,088 |
|
|
| 5 |
|
|
| 65,327 |
|
|
| 5 |
|
Medallion |
|
| 14,934 |
|
|
| 1 |
|
|
| 37,768 |
|
|
| 3 |
|
Strategic partnership |
|
| 95 |
|
|
| — |
|
|
| 24 |
|
|
| — |
|
Total gross loans |
|
| 1,419,681 |
|
|
| 100 | % |
|
| 1,229,838 |
|
|
| 100 | % |
Allowance for loan losses |
|
| (47,448 | ) |
|
|
|
|
| (57,548 | ) |
|
|
| ||
Total net loans |
| $ | 1,372,233 |
|
|
|
|
| $ | 1,172,290 |
|
|
|
| ||
The following tables show the activity of the gross loans for the three and nine months ended September 30, 2021and 2020.
Three Months Ended September 30, 2021 |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| Strategic Partnership |
|
| Total |
| ||||||
Loans – June 30, 2021 |
| $ | 886,206 |
|
| $ | 368,257 |
|
| $ | 69,520 |
|
| $ | 16,514 |
|
| $ | 70 |
|
| $ | 1,340,567 |
|
Loan originations |
|
| 118,407 |
|
|
| 68,692 |
|
|
| 5,700 |
|
|
| — |
|
|
| 2,969 |
|
|
| 195,768 |
|
Principal payments, sales, and maturities |
|
| (70,350 | ) |
|
| (38,571 | ) |
|
| (3,332 | ) |
|
| (1,449 | ) |
|
| (2,944 | ) |
|
| (116,646 | ) |
Charge-offs, net |
|
| 335 |
|
|
| 239 |
|
|
| — |
|
|
| 265 |
|
|
| — |
|
|
| 839 |
|
Transfer to loan collateral in process |
|
| (2,085 | ) |
|
| — |
|
|
| — |
|
|
| (397 | ) |
|
| — |
|
|
| (2,482 | ) |
Amortization of origination costs |
|
| (2,532 | ) |
|
| 386 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,146 | ) |
Amortization of loan premium |
|
| (60 | ) |
|
| (90 | ) |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| (150 | ) |
FASB origination costs |
|
| 3,869 |
|
|
| (139 | ) |
|
| 12 |
|
|
| 1 |
|
|
| — |
|
|
| 3,743 |
|
Paid-in-kind interest |
|
| — |
|
|
| — |
|
|
| 188 |
|
|
| — |
|
|
| — |
|
|
| 188 |
|
Loans – September 30, 2021 |
| $ | 933,790 |
|
| $ | 398,774 |
|
| $ | 72,088 |
|
| $ | 14,934 |
|
| $ | 95 |
|
| $ | 1,419,681 |
|
Nine Months Ended September 30, 2021 |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| Strategic Partnership |
|
| Total |
| ||||||
Loans – December 31, 2020 |
| $ | 792,686 |
|
| $ | 334,033 |
|
| $ | 65,327 |
|
| $ | 37,768 |
|
| $ | 24 |
|
| $ | 1,229,838 |
|
Loan originations |
|
| 346,724 |
|
|
| 179,743 |
|
|
| 20,916 |
|
|
| — |
|
|
| 7,339 |
|
|
| 554,722 |
|
Principal payments, sales and maturities |
|
| (199,449 | ) |
|
| (115,369 | ) |
|
| (14,861 | ) |
|
| (5,663 | ) |
|
| (7,268 | ) |
|
| (342,610 | ) |
Charge-offs, net |
|
| (1,334 | ) |
|
| (237 | ) |
|
| — |
|
|
| (10,529 | ) |
|
| — |
|
|
| (12,100 | ) |
Transfer to loan collateral in process of foreclosure, net |
|
| (8,118 | ) |
|
| — |
|
|
| — |
|
|
| (5,027 | ) |
|
| — |
|
|
| (13,145 | ) |
Amortization of origination costs |
|
| (7,171 | ) |
|
| 1,293 |
|
|
| 12 |
|
|
| (2 | ) |
|
| — |
|
|
| (5,868 | ) |
Amortization of loan premium |
|
| (161 | ) |
|
| (256 | ) |
|
| — |
|
|
| (1,615 | ) |
|
| — |
|
|
| (2,032 | ) |
FASB origination costs |
|
| 10,613 |
|
|
| (433 | ) |
|
| 12 |
|
|
| 2 |
|
|
| — |
|
|
| 10,194 |
|
Paid-in-kind interest |
|
| — |
|
|
| — |
|
|
| 682 |
|
|
| — |
|
|
| — |
|
|
| 682 |
|
Loans – September 30, 2021 |
| $ | 933,790 |
|
| $ | 398,774 |
|
| $ | 72,088 |
|
| $ | 14,934 |
|
| $ | 95 |
|
| $ | 1,419,681 |
|
Three Months Ended September 30, 2020 |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| Strategic Partnership |
|
| Total |
| ||||||
Loans – June 30, 2020 |
| $ | 786,785 |
|
| $ | 282,072 |
|
| $ | 71,476 |
|
| $ | 120,253 |
|
| $ | 8 |
|
| $ | 1,260,594 |
|
Loan originations |
|
| 73,534 |
|
|
| 62,515 |
|
|
| 900 |
|
|
| — |
|
|
| 142 |
|
|
| 137,091 |
|
Principal payments, sales and maturities |
|
| (54,161 | ) |
|
| (29,312 | ) |
|
| (1,318 | ) |
|
| (401 | ) |
|
| (143 | ) |
|
| (85,335 | ) |
Charge-offs, net |
|
| (850 | ) |
|
| (65 | ) |
|
| 3 |
|
|
| (15,304 | ) |
|
|
|
|
| (16,216 | ) | |
Transfer to loan collateral in process |
|
| (2,833 | ) |
|
| — |
|
|
| — |
|
|
| (10,590 | ) |
|
|
|
|
| (13,423 | ) | |
Amortization of origination costs |
|
| (2,093 | ) |
|
| 509 |
|
|
| 2 |
|
|
| (99 | ) |
|
|
|
|
| (1,681 | ) | |
Amortization of loan premium |
|
| (49 | ) |
|
| (81 | ) |
|
| — |
|
|
| (763 | ) |
|
|
|
|
| (893 | ) | |
FASB origination costs |
|
| 2,605 |
|
|
| (196 | ) |
|
| — |
|
|
| 2 |
|
|
|
|
|
| 2,411 |
| |
Paid-in-kind interest |
|
| — |
|
|
| — |
|
|
| 306 |
|
|
| — |
|
|
|
|
|
| 306 |
| |
Transfer to other foreclosed property |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,800 | ) |
|
|
|
|
| (1,800 | ) | |
Loans – September 30, 2020 |
| $ | 802,938 |
|
| $ | 315,442 |
|
| $ | 71,369 |
|
| $ | 91,298 |
|
| $ | 7 |
|
| $ | 1,281,054 |
|
Page 18 of 59
Nine Months Ended September 30, 2020 |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| Strategic Partnership |
|
| Total |
| ||||||
Loans – December 31, 2019 |
| $ | 713,332 |
|
| $ | 247,324 |
|
| $ | 69,767 |
|
| $ | 130,432 |
|
| $ | — |
|
| $ | 1,160,855 |
|
Loan originations |
|
| 249,383 |
|
|
| 140,693 |
|
|
| 6,075 |
|
|
| — |
|
|
| 295 |
|
|
| 396,446 |
|
Principal payments, sales and maturities |
|
| (140,688 | ) |
|
| (72,034 | ) |
|
| (5,422 | ) |
|
| (4,180 | ) |
|
| (288 | ) |
|
| (222,612 | ) |
Charge-offs, net |
|
| (10,796 | ) |
|
| (897 | ) |
|
| 3 |
|
|
| (17,124 | ) |
|
| — |
|
|
| (28,814 | ) |
Transfer to loan collateral in process |
|
| (10,615 | ) |
|
| — |
|
|
| — |
|
|
| (14,934 | ) |
|
| — |
|
|
| (25,549 | ) |
Amortization of origination costs |
|
| (5,853 | ) |
|
| 1,406 |
|
|
| 6 |
|
|
| (131 | ) |
|
| — |
|
|
| (4,572 | ) |
Amortization of loan premium |
|
| (152 | ) |
|
| (248 | ) |
|
| — |
|
|
| (1,001 | ) |
|
| — |
|
|
| (1,401 | ) |
FASB origination costs |
|
| 8,327 |
|
|
| (802 | ) |
|
| — |
|
|
| 36 |
|
|
| — |
|
|
| 7,561 |
|
Paid-in-kind interest |
|
| — |
|
|
| — |
|
|
| 940 |
|
|
| — |
|
|
| — |
|
|
| 940 |
|
Transfer to other foreclosed property |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,800 | ) |
|
| — |
|
|
| (1,800 | ) |
Loans – September 30, 2020 |
| $ | 802,938 |
|
| $ | 315,442 |
|
| $ | 71,369 |
|
| $ | 91,298 |
|
| $ | 7 |
|
| $ | 1,281,054 |
|
The following table sets forth the activity in the allowance for loan losses for the three and nine months ended September 30, 2021 and 2020.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Allowance for loan losses – beginning |
| $ | 46,946 |
|
| $ | 66,977 |
|
| $ | 57,548 |
|
| $ | 46,093 |
|
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Recreation |
|
| (2,313 | ) |
|
| (3,595 | ) |
|
| (10,038 | ) |
|
| (17,546 | ) |
Home improvement |
|
| (523 | ) |
|
| (643 | ) |
|
| (1,990 | ) |
|
| (2,202 | ) |
Commercial |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Medallion |
|
| (1,142 | ) |
|
| (15,448 | ) |
|
| (15,047 | ) |
|
| (19,146 | ) |
Total charge-offs |
|
| (3,978 | ) |
|
| (19,686 | ) |
|
| (27,075 | ) |
|
| (38,894 | ) |
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Recreation |
|
| 2,648 |
|
|
| 2,745 |
|
|
| 8,704 |
|
|
| 6,750 |
|
Home improvement |
|
| 763 |
|
|
| 578 |
|
|
| 1,753 |
|
|
| 1,304 |
|
Commercial |
|
| — |
|
|
| 3 |
|
|
| — |
|
|
| 3 |
|
Medallion |
|
| 1,406 |
|
|
| 144 |
|
|
| 4,518 |
|
|
| 2,023 |
|
Total recoveries |
|
| 4,817 |
|
|
| 3,470 |
|
|
| 14,975 |
|
|
| 10,080 |
|
Net charge-offs(1) |
|
| 839 |
|
|
| (16,216 | ) |
|
| (12,100 | ) |
|
| (28,814 | ) |
Provision (benefit) for loan losses |
|
| (337 | ) |
|
| 39,749 |
|
|
| 2,000 |
|
|
| 73,231 |
|
Allowance for loan losses – ending balance(2) |
| $ | 47,448 |
|
| $ | 90,510 |
|
| $ | 47,448 |
|
| $ | 90,510 |
|
The following tables set forth the allowance for loan losses by type as of September 30, 2021 and December 31, 2020.
September 30, 2021 |
| Amount |
|
| Percentage of |
|
| Allowance as |
|
| Allowance as |
| ||||
Recreation |
| $ | 31,556 |
|
|
| 66 | % |
|
| 3.38 | % |
|
| 87.88 | % |
Home improvement |
|
| 6,496 |
|
|
| 14 |
|
|
| 1.63 |
|
|
| 18.09 |
|
Commercial |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Medallion |
|
| 9,396 |
|
|
| 20 |
|
|
| 62.92 |
|
|
| 26.17 |
|
Total |
| $ | 47,448 |
|
|
| 100 | % |
|
| 3.34 | % |
|
| 132.13 | % |
December 31, 2020 |
| Amount |
|
| Percentage of |
|
| Allowance as |
|
| Allowance as |
| ||||
Recreation |
| $ | 27,348 |
|
|
| 48 | % |
|
| 3.45 | % |
|
| 378.20 | % |
Home improvement |
|
| 5,157 |
|
|
| 9 |
|
|
| 1.54 |
|
| NM |
| |
Commercial |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Medallion |
|
| 25,043 |
|
|
| 43 |
|
|
| 66.31 |
|
|
| 68.01 |
|
Total |
| $ | 57,548 |
|
|
| 100 | % |
|
| 4.68 | % |
|
| 93.17 | % |
The following table presents total nonaccrual loans and foregone interest, substantially all capital adequacy requirementsof which is in the medallion portfolio. The fluctuation in nonaccrual interest foregone is due to past due loans and market conditions.
(Dollars in thousands) |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Total nonaccrual loans |
| $ | 35,910 |
|
| $ | 61,767 |
|
Interest foregone quarter to date |
|
| 377 |
|
|
| 2,306 |
|
Amount of foregone interest applied to principal in the quarter |
|
| 115 |
|
|
| 595 |
|
Interest foregone year to date |
|
| 1,187 |
|
|
| 3,311 |
|
Amount of foregone interest applied to principal year to date |
|
| 358 |
|
|
| 602 |
|
Interest foregone life to date |
|
| 3,274 |
|
|
| 5,252 |
|
Amount of foregone interest applied to principal life to date |
|
| 886 |
|
|
| 792 |
|
Percentage of nonaccrual loans to gross loan portfolio |
|
| 3 | % |
|
| 5 | % |
Percentage of allowance for loan losses to nonaccrual loans |
|
| 132 | % |
|
| 93 | % |
Page 19 of 59
The following tables present the performance status of loans as of September 30, 2021 and December 31, 2020.
September 30, 2021 |
| Performing |
|
| Nonperforming |
|
| Total |
|
| Percentage of |
| ||||
Recreation |
| $ | 928,769 |
|
| $ | 5,021 |
|
| $ | 933,790 |
|
|
| 0.54 | % |
Home improvement |
|
| 398,613 |
|
|
| 161 |
|
|
| 398,774 |
|
|
| 0.04 |
|
Commercial |
|
| 55,703 |
|
|
| 16,385 |
|
|
| 72,088 |
|
|
| 22.73 |
|
Medallion |
|
| — |
|
|
| 14,934 |
|
|
| 14,934 |
|
|
| 100.00 |
|
Strategic partnership |
|
| 95 |
|
|
| — |
|
|
| 95 |
|
|
| — |
|
Total |
| $ | 1,383,180 |
|
| $ | 36,501 |
|
| $ | 1,419,681 |
|
|
| 2.57 | % |
December 31, 2020 |
| Performing |
|
| Nonperforming |
|
| Total |
|
| Percentage of |
| ||||
Recreation |
| $ | 785,047 |
|
| $ | 7,639 |
|
| $ | 792,686 |
|
|
| 0.96 | % |
Home improvement |
|
| 333,862 |
|
|
| 171 |
|
|
| 334,033 |
|
|
| 0.05 |
|
Commercial |
|
| 48,731 |
|
|
| 16,596 |
|
|
| 65,327 |
|
|
| 25.40 |
|
Medallion |
|
| — |
|
|
| 37,768 |
| (1) |
| 37,768 |
|
|
| 100.00 |
|
Strategic partnership |
|
| 24 |
|
|
| — |
|
|
| 24 |
|
|
| — |
|
Total |
| $ | 1,167,664 |
|
| $ | 62,174 |
|
| $ | 1,229,838 |
|
|
| 5.06 | % |
For those loans aged under 90 days past due, there is a possibility that their delinquency status will continue to deteriorate and they will subsequently be placed on nonaccrual status and be reserved for, and as such, deemed nonperforming.
The following tables provide additional information on attributes of the nonperforming loan portfolio as of September 30, 2021 and December 31, 2020, all of which it is subject,had an allowance recorded against the principal balance.
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||||||||||||||||||
(Dollars in thousands) |
| Recorded |
|
| Unpaid |
|
| Related |
|
| Recorded |
|
| Unpaid |
|
| Related |
| ||||||
With an allowance recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Recreation |
| $ | 5,021 |
|
| $ | 5,021 |
|
| $ | 170 |
|
| $ | 7,639 |
|
| $ | 7,639 |
|
| $ | 264 |
|
Home improvement |
|
| 161 |
|
|
| 161 |
|
|
| 3 |
|
|
| 171 |
|
|
| 171 |
|
|
| 3 |
|
Commercial |
|
| 16,385 |
|
|
| 16,400 |
|
|
| — |
|
|
| 16,596 |
|
|
| 16,600 |
|
|
| — |
|
Medallion |
|
| 14,934 |
|
|
| 15,805 |
|
|
| 9,396 |
|
|
| 37,768 |
|
|
| 38,368 |
|
|
| 25,043 |
|
Total nonperforming loans |
| $ | 36,501 |
|
| $ | 37,387 |
|
| $ | 9,569 |
|
| $ | 62,174 |
|
| $ | 62,778 |
|
| $ | 25,310 |
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||||||||||||||
(Dollars in thousands) |
| Average |
|
| Interest |
|
| Average |
|
| Interest |
|
| Average |
|
| Interest |
|
| Average |
|
| Interest |
| ||||||||
With an allowance recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Recreation |
| $ | 4,423 |
|
| $ | 148 |
|
| $ | 6,730 |
|
| $ | 167 |
|
| $ | 4,641 |
|
| $ | 425 |
|
| $ | 6,882 |
|
| $ | 428 |
|
Home improvement |
|
| 161 |
|
|
| — |
|
|
| 103 |
|
|
| — |
|
|
| 151 |
|
|
| — |
|
|
| 103 |
|
|
| 2 |
|
Commercial |
|
| 16,531 |
|
|
| — |
|
|
| 16,894 |
|
|
| — |
|
|
| 16,926 |
|
|
| — |
|
|
| 17,002 |
|
|
| 47 |
|
Medallion |
|
| 16,941 |
|
|
| — |
|
|
| 90,032 |
|
|
| 121 |
|
|
| 17,101 |
|
|
| — |
|
|
| 90,396 |
|
|
| 992 |
|
Total nonperforming loans |
| $ | 38,056 |
|
| $ | 148 |
|
| $ | 113,759 |
|
| $ | 288 |
|
| $ | 38,819 |
|
| $ | 425 |
|
| $ | 114,383 |
|
| $ | 1,469 |
|
The following tables show the aging of all loans as of September 30, 2021 and is well-capitalized.December 31, 2020.
|
| Days Past Due |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
September 30, 2021 |
| 30-59 |
|
| 60-89 |
|
| 90 + |
|
| Total |
|
| Current |
|
| Total (1) |
|
| Recorded |
| |||||||
Recreation |
| $ | 16,603 |
|
| $ | 5,525 |
|
| $ | 3,065 |
|
| $ | 25,193 |
|
| $ | 880,004 |
|
| $ | 905,197 |
|
| $ | 0 |
|
Home improvement |
|
| 794 |
|
|
| 355 |
|
|
| 160 |
|
|
| 1,309 |
|
|
| 399,712 |
|
|
| 401,021 |
|
|
| 0 |
|
Commercial |
|
| — |
|
|
| — |
|
|
| 74 |
|
|
| 74 |
|
|
| 72,014 |
|
|
| 72,088 |
|
|
| 0 |
|
Medallion |
|
| 321 |
|
|
| 678 |
|
|
| 810 |
|
|
| 1,809 |
|
|
| 13,126 |
|
|
| 14,935 |
|
|
| 0 |
|
Strategic partnership |
|
| — |
|
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| 95 |
|
|
| 95 |
|
|
| 0 |
|
Total |
| $ | 17,718 |
|
| $ | 6,558 |
|
| $ | 4,109 |
|
| $ | 28,385 |
|
| $ | 1,364,951 |
|
| $ | 1,393,336 |
|
| $ | 0 |
|
Page 20 of 59
|
| Days Past Due |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
December 31, 2020 |
| 30-59 |
|
| 60-89 |
|
| 90 + |
|
| Total |
|
| Current |
|
| Total (1) |
|
| Recorded |
| |||||||
Recreation |
| $ | 22,058 |
|
| $ | 7,582 |
|
| $ | 5,343 |
|
| $ | 34,983 |
|
| $ | 732,391 |
|
| $ | 767,374 |
|
| $ | 0 |
|
Home improvement |
|
| 813 |
|
|
| 218 |
|
|
| 170 |
|
|
| 1,201 |
|
|
| 335,684 |
|
|
| 336,885 |
|
|
| 0 |
|
Commercial |
|
| — |
|
|
| — |
|
|
| 75 |
|
|
| 75 |
|
|
| 65,265 |
|
|
| 65,340 |
|
|
| 0 |
|
Medallion |
|
| 2,019 |
|
|
| 973 |
|
|
| 1,290 |
|
|
| 4,282 |
|
|
| 31,871 |
|
|
| 36,153 |
|
|
| 0 |
|
Strategic partnership |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 24 |
|
|
| 24 |
|
|
| 0 |
|
Total |
| $ | 24,890 |
|
| $ | 8,773 |
|
| $ | 6,878 |
|
| $ | 40,541 |
|
| $ | 1,165,235 |
|
| $ | 1,205,776 |
|
| $ | 0 |
|
The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 287% and 327% as of September 30, 2021 and December 31, 2020.
The following table shows the TDRs which the Company entered into during the three and nine months ended September 30, 2021.
(Dollars in thousands) |
| Number of |
|
| Pre- |
|
| Post- |
| |||
Three months ended September 30, 2021 |
|
|
|
|
|
|
|
|
| |||
Recreation |
|
| 8 |
|
| $ | 94 |
|
| $ | 55 |
|
Medallion |
|
| 1 |
|
|
| 77 |
|
|
| 77 |
|
Nine months ended September 30, 2021 |
|
|
|
|
|
|
|
|
| |||
Recreation |
|
| 47 |
|
| $ | 568 |
|
| $ | 525 |
|
Medallion |
|
| 11 |
|
|
| 3,071 |
|
|
| 3,071 |
|
During the twelve months ended September 30, 2021, 12 medallion loans modified as TDRs were in default and had an investment value of $1,694,000 as of September 30, 2021, net of a $130,000 allowance for loan losses, 37 recreation loans modified as TDRs were in default and had an investment value of $389,000 as of September 30, 2021, net of a $13,0000 allowance for loan losses, and 0 commercial loans modified as TDRs were in default.
The following table shows the TDRs which the Company entered into during the three and nine months ended September 30, 2020.
(Dollars in thousands) |
| Number of |
|
| Pre- |
|
| Post- |
| |||
Three months ended September 30, 2020 |
|
|
|
|
|
|
|
|
| |||
Recreation |
|
| 18 |
|
| $ | 254 |
|
| $ | 229 |
|
Medallion |
|
| 3 |
|
|
| 448 |
|
|
| 448 |
|
Nine months ended September 30, 2020 |
|
|
|
|
|
|
|
|
| |||
Recreation |
|
| 57 |
|
| $ | 722 |
|
| $ | 510 |
|
Medallion |
|
| 33 |
|
|
| 14,089 |
|
|
| 14,089 |
|
During the twelve months ended September 30, 2020, 69 medallion loans modified as TDRs were in default and had an investment value of $29,296,000 as of September 30, 2020, net of a $20,420,000 allowance for loan losses, and 56 recreation loans modified as TDRs were in default and had an investment value of $558,000 as of September 30, 2021, net of a $19,000 allowance for loan losses.
The following tables show the activity of loan collateral in process of foreclosure, which relate only to the recreation and medallion loans, for the three and nine months ended September 30, 2021 and 2020.
Three Months Ended September 30, 2021 |
| Recreation |
|
| Medallion (1) |
|
| Total |
| |||
Loan collateral in process of foreclosure – June 30, 2021 |
| $ | 882 |
|
| $ | 48,157 |
|
| $ | 49,039 |
|
Transfer from loans, net |
|
| 2,085 |
|
|
| 397 |
|
|
| 2,482 |
|
Sales |
|
| (1,554 | ) |
|
| (1,640 | ) |
|
| (3,194 | ) |
Cash payments received |
|
| — |
|
|
| (4,525 | ) |
|
| (4,525 | ) |
Collateral valuation adjustments |
|
| (640 | ) |
|
| (618 | ) |
|
| (1,258 | ) |
Loan collateral in process of foreclosure – September 30, 2021 |
| $ | 773 |
|
| $ | 41,771 |
|
| $ | 42,544 |
|
Page 21 of 59
| Regulatory | ||||||||||||||||
(Dollars in Thousands) | Minimum | Well-capitalized | September 30, 2017 | December 31, 2016 | ||||||||||||
Common equity tier 1 capital | — | — | $ | 142,763 | $ | 130,158 | ||||||||||
Tier 1 capital | — | — | 169,066 | 156,461 | ||||||||||||
Total capital | — | — | 183,484 | 170,385 | ||||||||||||
Average assets | — | — | 1,095,452 | 1,081,522 | ||||||||||||
Risk-weighted assets | — | — | 1,109,776 | 1,067,103 | ||||||||||||
Leverage ratio(1) | 4 | % | 5 | % | 15.4 | % | 14.5 | % | ||||||||
Common equity tier 1 capital ratio (2) | 5 | 7 | 12.9 | 12.2 | ||||||||||||
Tier 1 capital ratio(3) | 6 | 8 | 15.2 | 14.7 | ||||||||||||
Total capital ratio(3) | 8 | 10 | 16.5 | 16.0 | ||||||||||||
Nine Months Ended September 30, 2021 |
| Recreation |
|
| Medallion (1) |
|
| Total |
| |||
Loan collateral in process of foreclosure – December 31, 2020 |
| $ | 1,432 |
|
| $ | 53,128 |
|
| $ | 54,560 |
|
Transfer from loans, net |
|
| 8,118 |
|
|
| 5,027 |
|
|
| 13,145 |
|
Sales |
|
| (5,842 | ) |
|
| (1,871 | ) |
|
| (7,713 | ) |
Cash payments received |
|
| — |
|
|
| (8,948 | ) |
|
| (8,948 | ) |
Collateral valuation adjustments |
|
| (2,935 | ) |
|
| (5,565 | ) |
|
| (8,500 | ) |
Loan collateral in process of foreclosure – September 30, 2021 |
| $ | 773 |
|
| $ | 41,771 |
|
| $ | 42,544 |
|
(4)
Three Months Ended September 30, 2020 |
| Recreation |
|
| Medallion |
|
| Total |
| |||
Loan collateral in process of foreclosure – June 30, 2020 |
| $ | 1,258 |
|
| $ | 46,117 |
|
| $ | 47,375 |
|
Transfer from loans, net |
|
| 2,833 |
|
|
| 10,611 |
|
|
| 13,444 |
|
Sales |
|
| (1,697 | ) |
|
| — |
|
|
| (1,697 | ) |
Cash payments received |
|
| — |
|
|
| (426 | ) |
|
| (426 | ) |
Collateral valuation adjustments |
|
| (1,395 | ) |
|
| (8,559 | ) |
|
| (9,954 | ) |
Loan collateral in process of foreclosure – September 30, 2020 |
| $ | 999 |
|
| $ | 47,743 |
|
| $ | 48,742 |
|
Nine Months Ended September 30, 2020 |
| Recreation |
|
| Medallion |
|
| Total |
| |||
Loan collateral in process of foreclosure – December 31, 2019 |
| $ | 1,476 |
|
| $ | 51,235 |
|
| $ | 52,711 |
|
Transfer from loans, net |
|
| 10,615 |
|
|
| 14,954 |
|
|
| 25,569 |
|
Sales |
|
| (5,684 | ) |
|
| (300 | ) |
|
| (5,984 | ) |
Cash payments received |
|
| — |
|
|
| (2,318 | ) |
|
| (2,318 | ) |
Collateral valuation adjustments |
|
| (5,408 | ) |
|
| (15,828 | ) |
|
| (21,236 | ) |
Loan collateral in process of foreclosure – September 30, 2020 |
| $ | 999 |
|
| $ | 47,743 |
|
| $ | 48,742 |
|
(5) FUNDS BORROWED
The outstanding balances of funds borrowed were as follows.follows:
|
| Payments Due for the Twelve Months Ending September 30, |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(Dollars in thousands) |
| 2022 |
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| Thereafter |
|
| September 30, |
|
| December 31, 2020(1) |
|
| Interest |
| |||||||||
Deposits(3) |
| $ | 443,666 |
|
| $ | 212,403 |
|
| $ | 266,598 |
|
| $ | 117,798 |
|
| $ | 158,340 |
|
| $ | 0 |
|
| $ | 1,198,805 |
|
| $ | 1,067,822 |
|
|
| 1.26 | % |
Retail and privately |
|
| 0 |
|
|
| 0 |
|
|
| 36,000 |
|
|
| — |
|
|
| 31,250 |
|
|
| 53,750 |
|
|
| 121,000 |
|
|
| 103,225 |
|
|
| 7.66 | % |
SBA debentures |
|
| — |
|
|
| 5,000 |
|
|
| 14,909 |
|
|
| 14,000 |
|
|
| 14,000 |
|
|
| 16,000 |
|
|
| 63,909 |
|
|
| 68,008 |
|
|
| 2.92 | % |
Preferred |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 33,000 |
|
|
| 33,000 |
|
|
| 33,000 |
|
|
| 2.24 | % |
Notes payable to |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 31,261 |
|
|
| 0 | % |
Other |
|
| 8,054 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 8,054 |
|
|
| 8,689 |
|
|
| 2.00 | % |
Total |
| $ | 451,720 |
|
| $ | 217,403 |
|
| $ | 317,507 |
|
| $ | 131,798 |
|
| $ | 203,590 |
|
| $ | 102,750 |
|
| $ | 1,424,768 |
|
| $ | 1,312,005 |
|
|
| 1.90 | % |
(A) DEPOSITS
Deposits are raised through the use of investment brokerage firms that package time deposits in denominations of less than $250,000 qualifying for FDIC insurance into larger pools that are sold to the Bank. The rates paid on the deposits are competitive with market rates paid by other financial institutions. Additionally, a brokerage fee is paid, depending on the maturity of the deposits, which averages less than 0.15%. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity. The Bank did 0t have any individual time deposits greater than $100,000 as of September 30, 2021. In October 2020, the Bank began to originate time deposits through an internet listing service. These listing service deposits are from other financial institutions, and as of September 30, 2021, totaled $8,738,000. The following table presents the maturity of the broker pools, which excludes strategic partner reserve deposits, as of September 30, 2021.
| Payments Due for the Fiscal Year Ending September 30, | September 30, | December 31, | Interest | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | 2017 | 2016 | Rate(1) | |||||||||||||||||||||||||||
DZ loan | $ | 101,354 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 101,354 | $ | 106,244 | 2.93 | % | ||||||||||||||||||
Notes payable to banks | 82,426 | — | — | — | — | — | 82,426 | 94,219 | 3.80 | % | ||||||||||||||||||||||||||
SBA debentures and borrowings | 1,917 | 3,047 | 26,269 | 8,500 | — | 40,000 | 79,733 | 81,985 | 3.39 | % | ||||||||||||||||||||||||||
Retail notes | — | — | — | 33,625 | — | — | 33,625 | 33,625 | 9.00 | % | ||||||||||||||||||||||||||
Preferred securities | — | — | — | — | — | 33,000 | 33,000 | 33,000 | 3.44 | % | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total | $ | 185,697 | $ | 3,047 | $ | 26,269 | $ | 42,125 | $ | — | $ | 73,000 | $ | 330,138 | $ | 349,073 | 3.93 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
(Dollars in thousands) |
| September 30, 2021 |
| |
Three months or less |
| $ | 157,023 |
|
Over three months through six months |
|
| 89,027 |
|
Over six months through one year |
|
| 197,616 |
|
Over one year |
|
| 755,139 |
|
Total deposits |
| $ | 1,198,805 |
|
Page 22 of 59
(B) RETAIL AND PRIVATELY PLACED NOTES
Page 20In February 2021, the Company completed a private placement to certain institutional investors of 94$25,000,000 aggregate principal amount of 7.25% unsecured senior notes due February 2026, with interest payable semiannually. In March 2021, an additional $3,250,000 principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $3,000,000 principal amount of such notes was issued to certain institutional investors. The Company has used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.
(A) DZ LOAN
In December 2008, Trust III entered into2020, the Company completed a private placement to certain institutional investors of $33,600,000 aggregate principal amount of 7.50% unsecured senior notes due December 2027, with interest payable semiannually. In February and March 2021, an additional $8,500,000 principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $11,650,000 principal amount of such notes was issued to certain institutional investors. The Company has used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.
In March 2019, the Company completed a private placement to certain institutional investors of $30,000,000 aggregate principal amount of 8.25% unsecured senior notes due 2024, with interest payable semiannually. The Company used the net proceeds from the offering for general corporate purposes, including repaying certain borrowings under its notes payable to banks at a discount which led to a gain of $4,145,000 in the 2019 first quarter. In August 2019, an additional $6,000,000 principal amount of such notes was issued to certain institutional investors.
In April 2016, the Company issued a total of $33,625,000 aggregate principal amount of 9.00% unsecured notes due 2021, with interest payable quarterly in arrears. The Company used the net proceeds from the offering of approximately $31,786,000 to make loans and other investments in portfolio companies and for general corporate purposes, including repaying borrowings under its DZ loan agreement with DZ Bank to provide up to $200,000,000in the ordinary course 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. The line was reduced to $150,000,000, and was further reduced in stages lowering to $125,000,000business. These notes were repaid at maturity on July 1, 2016, and remains as an amortizing facility; and of which $101,354,000 was outstanding at September 30, 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.April 15, 2021.
Borrowings under Trust III’s DZ loan are collateralized by Trust III’s assets. MFC is the servicer of the loans owned by Trust III. The DZ loan includes a borrowing base covenant and rapid amortization in certain circumstances. In addition, if certain financial tests are not met, MFC can be replaced as the servicer. The interest rate with the 2013 extension is a pooled short-term commercial paper rate which approximates LIBOR (30 day LIBOR was 1.23% at September 30, 2017) plus 1.65%.
(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%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$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”).$34,024,756, or the SBA Loan. In connection with the SBA loan,Loan, FSVC executed a Note, (the “SBA Note”),or the SBA Note, with an effective date of March 1, 2017, in favor of SBA, in the principal amount of $34,024,756.$34,024,756. The SBA Loan bears interest at a rate of 3.25% per annum and requires a minimum of $5,500,000 of principal and interest to be paid on or before February 1, 2018, a minimum of $9,500,000 of principal and interest to be paid on or before February 1, 2019,3.25% and all remaining unpaid principal and interest are due on or before February 1, 2020,April 30, 2024, the final maturity date of the SBA Loan. The SBA Loan agreement contains covenants and events of defaults, including, without limitation, payment defaults, breaches of representations, and warranties and covenants defaults.date. As of September 30, 2017, $169,985,0002021, $183,985,000 of commitments had been fully utilized, there were $5,500,000 of$16,500,000 commitments available, ($2,000,000 of which requires a $1,000,000 capital contribution from the Company), and $79,733,000$63,909,000 was outstanding, including $31,233,000$9,909,000 under the SBA Note.
(C)On July 31, 2020, MCI accepted a commitment from the SBA for $25,000,000 in debenture financing. As part of the acceptance, MCI paid the SBA a $250,000 commitment fee. The commitment expires September 24, 2024. $8,500,000 of the commitments has been drawn as of September 30, 2021 to replace debentures which matured in 2021. The remaining balance of $16,500,000 is drawable, $9,500,000 of which upon the infusion of $4,750,000 of capital from either the capitalization of retained earnings or capital infusion from 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 (0.13% at September 30, 2021) 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 September 30, 2021, $33,000,000 was outstanding on the preferred securities.
(E) 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 summarizesIn the key attributes2021 second quarter, the Company used some of the Company’s various borrowing arrangementsproceeds of the privately placed notes to pay off twenty five of its notes payable to banks aggregating $17,762,000 principal amount, resulting in a gain on debt extinguishment of $2,859,000.
In March 2021, the Company used some of the proceeds of the privately placed notes to pay off two of its notes payable to banks aggregating $5,207,000 principal amount, one with these lendersa maturity of April 15, 2021 and one with a maturity of September 1, 2021, resulting in a gain on debt extinguishment of $1,767,000.
In November 2018, MFC entered into a note to the benefit of DZ Bank for $1,400,000 at a 4.00% interest rate due December 2023, as part of the restructuring of the DZ loan. The note required a regular quarterly payment of $70,000 of principal and accrued interest and had a maturity date of December 2023. The entire outstanding balance was settled during the quarter ended September 30, 2017.2021. See Note 15 for more information.
Page 23 of 59
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Borrower | # of Lenders / Notes | Note Dates | Maturity Dates | Type | Note Amounts | Balance Outstanding at September 30, 2017 | Monthly Payment | Average Interest Rate at September 30, 2017 | Interest Rate Index(1) | |||||||||||||||||||||||
The Company | 6/6 | 4/11 - 8/14 | 10/17 - 7/18 | Term loans and demand note secured by pledged loans (2) | $ | 60,021 | $ | 60,021 | Interest(3) | 3.98 | % | Various (2) | ||||||||||||||||||||
Medallion Chicago | 3/28 | 11/11 - 12/11 | 10/16 -12/17 | Term loans secured by owned Chicago medallions (4) | 25,708 | 22,405 | $135 principal & interest | 3.34 | % | N/A | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
| $ | 85,729 | $ | 82,426 | |||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
(F) OTHER BORROWINGS
Page 21 of 94
(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 (1.33% at September 30, 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 thevarious promissory notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor.with affiliate Richard Petty. At September 30, 2017, $33,000,000 was2021, the total outstanding on these notes was $7,554,000 at a 2.00% annual interest rate compounded monthly and due March 31, 2022. Additionally, RPAC has a short term promissory note to an unrelated party for $500,000 due on December 31, 2021.
On June 17, 2020, RPAC was approved for and received a Paycheck Protection Program, or PPP, loan under the preferred securities.CARES Act, in the amount of $747,000 at a 1.00% annual interest rate due in five years. In accordance with its terms, the note was forgiven during the second quarter 2021, as the loan proceeds were used in accordance with the requirements set forth in the PPP.
(E) MARGIN LOAN(G) COVENANT COMPLIANCE
In June 2015,From time to time the Company enteredmay enter into a margin loan agreement with Morgan Stanley. The margin loan is secured by the pledge of short-term, high-quality investment securities held by the Company, and is initially available at 90% of the current fair
market value of the securities. The margin loan bears interest at30-day LIBOR (1.23% at September 30, 2017) plus 1.00%. As of September 30, 2017, there were no outstandings under the margin loan.
(F) 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.
(G) COVENANT COMPLIANCE
Certain of the Company’s debt agreements which may contain restrictions that require the Company and its subsidiaries to maintain certain financial ratios, including debt to equity and minimum net worth. As of September 30, 2021 the Company did not have any borrowing agreements that contained any such restrictions.
(6) LEASES
The Company ishas leased premises that expire at various dates through November 30, 2027 subject to various operating leases. The Company has implemented ASC Topic 842 under a modified retrospective approach in compliance with such restrictionswhich no adjustments have been made to the prior year balances.
The following table presents the operating lease costs and additional information for the three and nine months ended September 30, 2021 and 2020.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Operating lease costs |
| $ | 571 |
|
| $ | 596 |
|
| $ | 1,715 |
|
| $ | 1,788 |
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating cash flows from operating leases |
|
| 481 |
|
|
| 632 |
|
|
| 1,780 |
|
|
| 1,994 |
|
Right-of-use asset obtained in exchange for lease liability |
|
| (41 | ) |
|
| (14 | ) |
|
| (76 | ) |
|
| (42 | ) |
The following table presents the breakout of the operating leases as of September 30, 2017.2021 and December 31, 2020.
(Dollars in thousands) |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Operating lease right-of-use assets |
| $ | 10,277 |
|
| $ | 11,737 |
|
Other current liabilities |
|
| 2,140 |
|
|
| 2,004 |
|
Operating lease liabilities |
|
| 9,346 |
|
|
| 11,018 |
|
Total operating lease liabilities |
|
| 11,486 |
|
|
| 13,022 |
|
Weighted average remaining lease term |
| 5.7 years |
|
| 6.4 years |
| ||
Weighted average discount rate |
|
| 5.55 | % |
|
| 5.54 | % |
(5)At September 30, 2021, maturities of the lease liabilities were as follows:
(Dollars in thousands) |
|
|
| |
Remainder of 2021 |
| $ | 612 |
|
2022 |
|
| 2,411 |
|
2023 |
|
| 2,356 |
|
2024 |
|
| 2,373 |
|
2025 |
|
| 2,390 |
|
Thereafter |
|
| 3,521 |
|
Total lease payments |
| $ | 13,663 |
|
Less imputed interest |
|
| 2,177 |
|
Total operating lease liabilities |
| $ | 11,486 |
|
(7) 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 of the Internal Revenue Code, 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 percent80% or more of the outstanding equity interest measured by both vote and fair value.
Page 2224 of 9459
The following table sets forth the significant components of our deferred and other tax assets and liabilities as of September 30, 20172021 and December 31, 2016.2020.
(Dollars in thousands) |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Goodwill and other intangibles |
| $ | (44,022 | ) |
| $ | (44,799 | ) |
Provision for loan losses |
|
| 12,550 |
|
|
| 19,556 |
|
Net operating loss carryforwards(1) |
|
| 18,745 |
|
|
| 30,493 |
|
Accrued expenses, compensation, and other assets |
|
| 2,309 |
|
|
| 1,174 |
|
Unrealized gains on other investments |
|
| 10 |
|
|
| (6,769 | ) |
Total deferred tax liability |
|
| (10,408 | ) |
|
| (345 | ) |
Valuation allowance(2) |
|
| (2,295 | ) |
|
| (462 | ) |
Deferred tax liability, net |
| $ | (12,703 | ) |
| $ | (807 | ) |
(Dollars in thousands) | 2017 | 2016 | ||||||
Unrealized gain on investment in Medallion Bank | $ | (53,345 | ) | $ | (58,512 | ) | ||
Unrealized losses on loans and nonaccrual interest | 27,007 | 16,382 | ||||||
Unrealized gain on investments in other controlled subsidiaries | (5,901 | ) | (5,610 | ) | ||||
Unrealized gains on investments other than securities | (2,919 | ) | (3,206 | ) | ||||
Accrued expenses, compensation | 1,050 | 1,263 | ||||||
Net operating loss carryforwards(1) | 630 | 732 | ||||||
Unrealized gains on other investments | (835 | ) | (299 | ) | ||||
|
|
|
| |||||
Total deferred tax liability | (34,313 | ) | (49,250 | ) | ||||
Valuation allowance | (16 | ) | (30 | ) | ||||
|
|
|
| |||||
Deferred tax liability, net | (34,329 | ) | (49,280 | ) | ||||
Taxes receivable (payable) | 697 | 3,380 | ||||||
|
|
|
| |||||
Net deferred and other tax liabilities | $ | (33,632 | ) | $ | (45,900 | ) | ||
|
|
|
| |||||
The components of our tax (provision) benefit for the three and nine months ended September 30, 20172021 and 2016 were2020 was as follows.follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Current |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal |
| $ | (1,359 | ) |
| $ | — |
|
| $ | (2,154 | ) |
| $ | — |
|
State |
|
| (721 | ) |
|
| (83 | ) |
|
| (991 | ) |
|
| (306 | ) |
Deferred |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal |
|
| (3,198 | ) |
|
| 5,940 |
|
|
| (9,252 | ) |
|
| 9,239 |
|
State |
|
| (889 | ) |
|
| 2,524 |
|
|
| (4,176 | ) |
|
| 3,550 |
|
Net (provision) benefit for income taxes |
| $ | (6,167 | ) |
| $ | 8,381 |
|
| $ | (16,573 | ) |
| $ | 12,483 |
|
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Current | ||||||||||||||||
Federal | $ | (910 | ) | $ | — | $ | 639 | $ | — | |||||||
State | (807 | ) | — | (445 | ) | — | ||||||||||
Deferred | ||||||||||||||||
Federal | 1,609 | — | 7,275 | — | ||||||||||||
State | 6,263 | — | 7,675 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net benefit for income taxes | $ | 6,155 | $ | — | $ | 15,144 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
The following table presents a reconciliation of statutory federal income tax (provision) benefit to consolidated actual income tax (provision) benefit reported in net increase in net assets for the three and nine months ended September 30, 20172021 and 2016.2020.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Statutory Federal income tax (provision) benefit at 21% |
| $ | (4,807 | ) |
| $ | 5,967 |
|
| $ | (11,331 | ) |
| $ | 10,034 |
|
State and local income taxes, net of federal income tax benefit |
|
| (942 | ) |
|
| 1,201 |
|
|
| (2,217 | ) |
|
| 1,961 |
|
Valuation allowance against net operating losses |
|
| 0 |
|
|
| — |
|
|
| (1,833 | ) |
|
| — |
|
Change in effective state income tax rates and accrual |
|
| (110 | ) |
|
| (939 | ) |
|
| (1,479 | ) |
|
| (790 | ) |
Income attributable to non-controlling interest |
|
| 183 |
|
|
| 522 |
|
|
| 449 |
|
|
| 356 |
|
Non deductible expenses |
|
| (132 | ) |
|
| (211 | ) |
|
| 81 |
|
|
| (1,000 | ) |
Other |
|
| (359 | ) |
|
| 1,841 |
|
|
| (243 | ) |
|
| 1,922 |
|
Total income tax (provision) benefit |
| $ | (6,167 | ) |
| $ | 8,381 |
|
| $ | (16,573 | ) |
| $ | 12,483 |
|
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Statutory Federal Income tax benefit at 35% | $ | 1,937 | $ | — | $ | 6,374 | $ | — | ||||||||
State and local income taxes, net of federal income tax benefit | 99 | — | 327 | — | ||||||||||||
Change in effective state income tax rate | 3,232 | — | 3,232 | — | ||||||||||||
Appreciation of Medallion Bank | 1,681 | — | 3,731 | — | ||||||||||||
Depreciation of other unconsolidated subsidiaries | (462 | ) | — | (462 | ) | — | ||||||||||
Utilization of carry forwards | 459 | — | 2,715 | $ | — | |||||||||||
Other | (791 | ) | — | (773 | ) | $ | — | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total income tax benefit | $ | 6,155 | $ | — | $ | 15,144 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
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 necessary valuation allowance deemed necessary as of September 30, 2017.2021.
The Company has filed tax returns in many states. Federal, New York State, and New York City, and Utah state tax filings of the Company for the tax years 20142018 through the present are the more significant filings that are open for examination.
Page 23 of 94
(6)(8) 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 OptionCompany’s Board of Directors approved the 2018 Equity Incentive Plan, or the 2018 Plan, which was approved by the Company’s stockholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to the Company’s employees and non-employee directors, including options, restricted stock, restricted stock units, and stock appreciation rights, etc. On April 22, 2020, the Company’s Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provided forapproved an amendment to the issuance2018 Plan to increase the number 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 authorized for issuance thereunder, which was approved by the Company’s stockholders on the date the option is granted. The term and vesting periodsJune 19, 2020. A total of 2,210,968 shares of the optionsCompany’s common stock are determinedissuable under the 2018 Plan, and 438,132 remained issuable as of September 30, 2021. 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 Compensation Committee, provided thatBoard of Directors pursuant to the maximum term2018 Plan, whichever occurs first.
Page 25 of an option may not exceed a period of ten years.59
The Company’s Board of Directors approved the 2015 Employee Restricted Stock Plan, (2015or the 2015 Restricted Stock Plan)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 provideprovided 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 400,331241,919 remained issuable as of September 30, 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.occurs first.
The Company’sCompany had a stock option plan, the 2006 Stock Option Plan, available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors 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 SECFebruary 15, 2006 and approval of the Employee Restricted Stock Option Plan by the Company’s shareholders on June 11, 2010. No16, 2006, provided for the issuance of a maximum of 800,000 shares of common stock of the Company. NaN additional shares are available for issuance under the Employee Restricted2006 Stock Option Plan. The terms2006 Stock Option Plan was administered by the Compensation Committee of the Employee Restricted Stock Plan provided for grantsBoard of restricted stock awards toDirectors. The option price per share could not be less than the Company’s employees. A grant of restricted stock is a grant of sharescurrent market value of the Company’s common stock which, aton the time of issuance, is subject to certain forfeiture provisions,date the option was granted. The term and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 800,000 sharesvesting periods of the Company’s common stockoptions were issuable underdetermined by the Employee Restricted Stock Plan, and asCompensation Committee, provided that the maximum term of September 30, 2017, nonean option could not exceed a period 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.ten years.
The Company’s Board of Directors approved the 2015Non-Employee Director Stock Option Plan, (2015or the 2015 Director Plan)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 264,667258,334 remained issuable as of September 30, 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 grantgranted 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 arewere elected to serve less than a full term. The option price per share maycould not be less than the current market value of the Company’s common stock on the date the option iswas granted. Options granted under the 2015 Director Plan are exercisable annually, as defined in the 2015 Director Plan. The term of the options maycould not exceed ten years.years.
The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan, (theor the Amended Director Plan)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. NoNaN additional shares are available for issuance under the Amended Director Plan. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company willwould 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 arewere elected to serve less than a full term. The option price per share maycould not be less than the current market value of the Company’s common stock on the date the option iswas granted. Options granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options maycould not exceed ten years.years.
No additionalAdditional shares are only available for future issuance under the Employee Restricted Stock Plan and the Amended Director2018 Plan. At September 30, 2017, 314,2932021, 1,186,586 options on the Company’s common stock were outstanding under the 2006, and 2015Company’s plans, of which 273,960326,116 options were exercisable, andexercisable. Additionally, there were 345,470860,470 unvested shares ofunder the Company’s restricted common stock outstandingplan, and 16,803 unvested restricted stock units, and 47,472 vested restricted stock units under the Employee Restricted Stock Plan.
Page 24 of 94
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 the options granted was $0.29$3.24 per share and $0.53$3.30 per share for the nine months ended September 30, 2017 and 2016. 2021. The following assumption categories are used to determine the value of any option grants.
|
| Nine Months Ended September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Risk free interest rate |
|
| 0.97 | % |
|
| 1.46 | % |
Expected dividend yield |
|
| 0 |
|
|
| — |
|
Expected life of option in years(1) |
|
| 6.25 |
|
|
| 6.25 |
|
Expected volatility(2) |
|
| 53.98 |
|
|
| 50.18 |
|
��Page 26 of 59
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
Risk free interest rate | 1.84 | % | 1.22 | % | ||||
Expected dividend yield | 7.39 | 10.13 | ||||||
Expected life of option in years(1) | 6.00 | 6.00 | ||||||
Expected volatility(2) | 30.00 | 30.00 | ||||||
The following table presents the activity for the stock option programs for the 20172021 first, second, and third quarters and the 20162020 full year.
| Number of Options | Exercise Price Per Share | Weighted Average Exercise Price | ||||||||||
Outstanding at December 31, 2015 | 446,254 | $ | 7.49-13.84 | $ | 10.38 | |||||||
Granted | 12,000 | 7.10 | 7.10 | |||||||||
Cancelled | (110,636 | ) | 9.22-13.84 | 12.25 | ||||||||
Exercised(1) | (2,100 | ) | 9.22 | 9.22 | ||||||||
|
|
|
|
|
| |||||||
Outstanding at December 31, 2016 | 345,518 | 7.10-13.84 | 9.67 | |||||||||
Granted | — | — | — | |||||||||
Cancelled | (21,558 | ) | 11.21 | 11.21 | ||||||||
Exercised(1) | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Outstanding at March 31, 2017 | 323,960 | 7.10-13.84 | 9.57 | |||||||||
Granted | 12,000 | 2.22 | 2.22 | |||||||||
Cancelled | — | — | — | |||||||||
Exercised(1) | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Outstanding at June 30, 2017 | 335,960 | 2.22-13.84 | 9.31 | |||||||||
Granted | 11,333 | 2.61 | 2.61 | |||||||||
Cancelled | 33,000 | 10.76 | 10.76 | |||||||||
Exercised(1) | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Outstanding at September 30, 2017(2) | 314,293 | $ | 2.22-13.84 | $ | 8.91 | |||||||
Options exercisable at September 30, 2017 (2) | 273,960 | $ | 7.10-13.84 | $ | 9.50 | |||||||
|
|
|
|
|
| |||||||
(1) The aggregate intrinsic value, which represents the difference between the price | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Page 25 of 94
The following table presents the activity for the restricted stock programs for the 20172021 first, second, and third quarters and the 20162020 full year.
|
| Number of |
|
|
| Grant |
|
| Weighted |
| |||
Outstanding at December 31, 2019 |
|
| 284,879 |
|
| $ | 3.95-7.25 |
|
| $ | 6.01 |
| |
Granted |
|
| 229,408 |
|
|
| 4.89-6.68 |
|
|
| 6.21 |
| |
Cancelled |
|
| (8,755 | ) |
|
| 3.95-7.25 |
|
|
| 6.93 |
| |
Vested(1) |
|
| (89,392 | ) |
|
| 3.95-6.55 |
|
|
| 5.37 |
| |
Outstanding at December 31, 2020 |
|
| 416,140 |
|
|
| 4.39-7.25 |
|
|
| 6.24 |
| |
Granted |
|
| 163,561 |
|
|
|
| 6.79 |
|
|
| 6.79 |
|
Cancelled |
|
| (7,602 | ) |
|
| 4.89-7.25 |
|
|
| 5.96 |
| |
Vested(1) |
|
| (119,577 | ) |
|
| 4.39-7.25 |
|
|
| 6.09 |
| |
Outstanding at March 31, 2021 |
|
| 452,522 |
|
|
| 4.80-7.25 |
|
|
| 6.48 |
| |
Granted |
|
| — |
|
|
|
| — |
|
|
| — |
|
Cancelled |
|
| (10,332 | ) |
|
| 4.89-7.25 |
|
|
| 6.13 |
| |
Vested(1) |
|
| — |
|
|
|
| — |
|
|
| — |
|
Outstanding at June 30, 2021 |
|
| 442,190 |
|
|
| 4.80-7.25 |
|
|
| 6.49 |
| |
Granted |
|
| — |
|
|
|
| — |
|
|
| — |
|
Cancelled |
|
| (687 | ) |
|
| 4.89 - 7.25 |
|
|
| 5.40 |
| |
Vested(1) |
|
| (5,208 | ) |
|
|
| 4.80 |
|
|
| 4.80 |
|
Outstanding at September 30, 2021(2) |
|
| 436,295 |
|
| $ | 4.89 - 7.25 |
|
| $ | 6.51 |
| |
Page 27 of 59
During the nine months ended September 30, 2021, the Company granted 16,803 restricted stock units, or RSUs, that vest on June 17, 2022 with a grant price of $8.87, and during the year ended December 31, 2020, granted 47,156 RSUs that vested on June 19, 2021 with a grant price of $3.16. For the RSUs granted in 2021 and 2020, unitholders had the option of deferring settlement until a future date if the recipient makes a formal election under the guidelines of IRC Section 409A, which was done for 47,272 units.
| Number of Shares | Grant Price Per Share | Weighted Average Grant Price | ||||||||||
Outstanding at December 31, 2015 | 209,040 | $ | 9.08-15.61 | $ | 10.96 | |||||||
Granted | 48,527 | 3.95-7.98 | 4.47 | |||||||||
Cancelled | (11,325 | ) | 9.92-15.61 | 11.17 | ||||||||
Vested(1) | (78,539 | ) | 9.08-15.61 | 11.38 | ||||||||
|
|
|
|
|
| |||||||
Outstanding at December 31, 2016 | 167,703 | 3.95-13.46 | 8.88 | |||||||||
Granted | 105,138 | 2.14 | 2.14 | |||||||||
Cancelled | (5,186 | ) | 2.14-10.08 | 2.94 | ||||||||
Vested(1) | (67,176 | ) | 9.92-13.46 | 11.33 | ||||||||
|
|
|
|
|
| |||||||
Outstanding at March 31, 2017 | 200,479 | 2.14-10.38 | 4.67 | |||||||||
Granted | 157,767 | 2.06 | 2.06 | |||||||||
Cancelled | (6,492 | ) | 2.14-10.08 | 2.80 | ||||||||
Vested(1) | (5,792 | ) | 9.08 | 9.08 | ||||||||
|
|
|
|
|
| |||||||
Outstanding at June 30, 2017 | 345,962 | 2.06-10.38 | 3.44 | |||||||||
Granted | — | — | — | |||||||||
Cancelled | (492 | ) | 3.95-10.08 | 4.60 | ||||||||
Vested(1) | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Outstanding at September 30, 2017 (2) | 345,470 | $ | 2.06-10.38 | $ | 3.44 | |||||||
|
|
|
|
|
| |||||||
The following table presents the activity for the unvested options outstanding under the plans for the 20172021 first, second, and third quarters.
|
| Number of |
|
|
| Exercise |
|
| Weighted |
| |||
Outstanding at December 31, 2020 |
|
| 773,362 |
|
| $ | 4.89-7.25 |
|
| $ | 6.42 |
| |
Granted |
|
| 317,398 |
|
|
|
| 6.79 |
|
|
| 6.79 |
|
Cancelled |
|
| (2,530 | ) |
|
| 6.55-7.25 |
|
|
| 6.96 |
| |
Vested |
|
| (185,278 | ) |
|
| 6.55-7.25 |
|
|
| 6.67 |
| |
Outstanding at March 31, 2021 |
|
| 902,952 |
|
|
| 4.89-7.25 |
|
|
| 6.50 |
| |
Granted |
|
| — |
|
|
|
| — |
|
|
| — |
|
Cancelled |
|
| (33,134 | ) |
|
| 4.89-7.25 |
|
|
| 5.99 |
| |
Vested |
|
| (8,000 | ) |
|
|
| 5.58 |
|
|
| 5.58 |
|
Outstanding at June 30, 2021 |
|
| 861,818 |
|
| $ | 4.89-7.25 |
|
|
| 6.53 |
| |
Granted |
|
| — |
|
|
|
| — |
|
|
| — |
|
Cancelled |
|
| (1,348 | ) |
|
| 4.89 - 7.25 |
|
|
| 5.40 |
| |
Vested |
|
| — |
|
|
|
| — |
|
|
| — |
|
Outstanding at September 30, 2021 |
|
| 860,470 |
|
| $ | 4.89 - 7.25 |
|
| $ | 6.53 |
| |
| Number of Options | Exercise Price Per Share | Weighted Average Exercise Price | ||||||||||
Outstanding at December 31, 2016 and March 31, 2017 | 33,000 | $ | 7.10-13.53 | $ | 8.93 | |||||||
Granted | 12,000 | 2.22 | 2.22 | |||||||||
Cancelled | — | — | — | |||||||||
Vested | (16,000 | ) | 7.10-13.53 | 9.59 | ||||||||
|
|
|
|
|
| |||||||
Outstanding at June 30, 2017 | 29,000 | 2.22-9.38 | 5.79 | |||||||||
Granted | 11,333 | 2.61 | 2.61 | |||||||||
Cancelled | — | — | — | |||||||||
Vested | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Outstanding at September 30, 2017 | 40,333 | $ | 2.22-9.38 | $ | 4.90 | |||||||
|
|
|
|
|
| |||||||
The intrinsic value of the options vested was $0$0 and $77,000 for the 2017 third quarterthree and nine months.months ended September 30, 2021.
(7)(9) SEGMENT REPORTING
The Company has one6 business segment, itssegments, which include 4 lending and investing2 non-operating segments, which are reflective of how Company management makes decisions about its business and operations. This segment originates and services medallion, secured
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 operated by the Bank and include loans in all fifty states, with the highest concentrations in Texas, Florida, and California at 15%, 10%, and 8% of loans outstanding and with no other states over 5% as of September 30, 2021. The recreation lending segment is a consumer finance business that works with third-party dealers and financial service providers for the purpose of financing RVs, boats, and other consumer recreational equipment, of which RVs, boats, and trailers make up 60%, 20%, and 9% of the segment portfolio as of September 30, 2021. The home improvement lending segment works with contractors and financial service providers to finance residential home improvements concentrated in roofs, swimming pools, and windows at 28%, 26%, and 13% of total home improvement loans outstanding, and investswith no other product lines over 10% as of September 30, 2021. The commercial lending segment focuses on enterprise wide industries, including manufacturing services, and various other industries, in both marketablewhich 62% of these loans are made in the Midwest. The medallion lending segment arose in connection with the financing of taxi medallions, taxis, and nonmarketable securities.
In addition, our non-operating segments include RPAC, which is a race car team, and our corporate and other investments segment which includes items not allocated to our operating segments such as investment securities, equity investments, intercompany eliminations, and other corporate elements. As a result of COVID-19, the prior year race season had been suspended from March 15, 2020 through May 17, 2020. As states reopened, NASCAR resumed races and completed all races scheduled in 2020. Commencing in the 2020 second quarter, the Bank began issuing loans related to its strategic partnership business, which is currently included within the corporate and other investment segment due to its small size.
As part of segment reporting, capital ratios for all operating segments have been normalized at 20%, which approximates the percentage of consolidated total equity divided by total assets, with the net adjustment applied to corporate and other investments. In addition, the commercial segment exclusively represents the mezzanine lending business, and the legacy commercial loan business (immaterial to total) has been allocated to corporate and other investments.
Page 2628 of 9459
(8) OTHER OPERATING EXPENSES
The major components of other operating expenses were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Travel, meals, and entertainment | $ | 126 | $ | 175 | $ | 541 | $ | 646 | ||||||||
Directors’ fees | 101 | 108 | 230 | 256 | ||||||||||||
Miscellaneous taxes | 84 | 58 | 170 | 247 | ||||||||||||
Bad debt expense | 64 | 14 | 168 | 55 | ||||||||||||
Computer expenses | 51 | 65 | 176 | 176 | ||||||||||||
Insurance | 46 | 47 | 136 | 150 | ||||||||||||
Office expense | 38 | 59 | 147 | 147 | ||||||||||||
Printing and stationery | 32 | 80 | 80 | 114 | ||||||||||||
Dues and subscriptions | 32 | 25 | 73 | 75 | ||||||||||||
Depreciation and amortization | 23 | 28 | 71 | 85 | ||||||||||||
Other expenses | 13 | 39 | 28 | 142 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other operating expenses | $ | 610 | $ | 698 | $ | 1,820 | $ | 2,093 | ||||||||
|
|
|
|
|
|
|
| |||||||||
(9) SELECTED FINANCIAL RATIOS AND OTHER DATA
The following table provides selected financial ratiostables present segment data as of and other data:for the three and nine months ended September 30, 2021 and 2020.
|
| Consumer Lending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Three Months Ended |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| RPAC |
|
| Corp. and |
|
| Consolidated |
| |||||||
Total interest income |
| $ | 30,529 |
|
| $ | 8,586 |
|
| $ | 2,055 |
|
| $ | 1 |
|
| $ | 0 |
|
| $ | 326 |
|
| $ | 41,497 |
|
Total interest expense |
|
| 2,305 |
|
|
| 958 |
|
|
| 662 |
|
|
| 2,009 |
|
|
| 38 |
|
|
| 1,454 |
|
|
| 7,426 |
|
Net interest income (loss) |
|
| 28,224 |
|
|
| 7,628 |
|
|
| 1,393 |
|
|
| (2,008 | ) |
|
| (38 | ) |
|
| (1,128 | ) |
|
| 34,071 |
|
Provision for loan losses |
|
| 916 |
|
|
| 369 |
|
|
| 0 |
|
|
| (1,944 | ) |
|
| 0 |
|
|
| 322 |
|
|
| (337 | ) |
Net interest income (loss) |
|
| 27,308 |
|
|
| 7,259 |
|
|
| 1,393 |
|
|
| (64 | ) |
|
| (38 | ) |
|
| (1,450 | ) |
|
| 34,408 |
|
Sponsorship and race winnings |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 3,335 |
|
|
| 0 |
|
|
| 3,335 |
|
Race team related expenses |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (2,424 | ) |
|
| 0 |
|
|
| (2,424 | ) |
Other income (expense), net |
|
| (8,856 | ) |
|
| (3,437 | ) |
|
| 636 |
|
|
| 2,073 |
|
|
| (2,066 | ) |
|
| (778 | ) |
|
| (12,428 | ) |
Net income (loss) before taxes |
|
| 18,452 |
|
|
| 3,822 |
|
|
| 2,029 |
|
|
| 2,009 |
|
|
| (1,193 | ) |
|
| (2,228 | ) |
|
| 22,891 |
|
Income tax (provision) benefit |
|
| (4,752 | ) |
|
| (951 | ) |
|
| (510 | ) |
|
| (504 | ) |
|
| 299 |
|
|
| 251 |
|
|
| (6,167 | ) |
Net income (loss) |
| $ | 13,700 |
|
| $ | 2,871 |
|
| $ | 1,519 |
|
| $ | 1,505 |
|
| $ | (894 | ) |
| $ | (1,977 | ) |
| $ | 16,724 |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total loans, net |
| $ | 902,234 |
|
| $ | 392,278 |
|
| $ | 70,232 |
|
| $ | 5,538 |
|
| $ | 0 |
|
| $ | 1,951 |
|
| $ | 1,372,233 |
|
Total assets |
|
| 916,109 |
|
|
| 405,439 |
|
|
| 92,257 |
|
|
| 93,683 |
|
|
| 30,969 |
|
|
| 266,777 |
|
|
| 1,805,234 |
|
Total funds borrowed |
|
| 712,474 |
|
|
| 296,509 |
|
|
| 73,806 |
|
|
| 74,941 |
|
|
| 8,054 |
|
|
| 258,358 |
|
|
| 1,424,142 |
|
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Return on average assets |
|
| 6.09 | % |
|
| 2.89 | % |
|
| 6.60 | % |
|
| 6.12 | % |
|
| (11.28 | %) |
|
| (2.65 | %) |
|
| 3.73 | % |
Return on average equity |
|
| 30.46 |
|
|
| 14.43 |
|
|
| 32.99 |
|
|
| 30.62 |
|
|
| (11.08 | ) |
|
| (19.79 | ) |
|
| 19.81 |
|
Interest yield |
|
| 13.78 |
|
|
| 9.04 |
|
|
| 12.04 |
|
|
| 0.09 |
|
| N/A |
|
| N/A |
|
|
| 11.55 |
| ||
Net interest margin |
|
| 12.74 |
|
|
| 8.03 |
|
|
| 8.16 |
|
|
| (139.64 | ) |
| N/A |
|
| N/A |
|
|
| 9.48 |
| ||
Reserve coverage |
|
| 3.38 |
|
|
| 1.63 |
|
|
| (0.00 | ) | (1) |
| 49.98 |
|
| N/A |
|
| N/A |
|
|
| 3.34 |
| ||
Delinquency status(2) |
|
| 0.34 |
|
|
| 0.04 |
|
|
| 0.10 |
| (1) |
| 5.42 |
|
| N/A |
|
| N/A |
|
|
| 0.29 |
| ||
Charge-off ratio(4) |
|
| (0.15 | ) |
|
| (0.25 | ) |
|
| — |
| (3) |
| (43.01 | ) |
| N/A |
|
| N/A |
|
|
| (0.38 | ) | ||
|
| Consumer Lending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Nine Months Ended |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| RPAC |
|
| Corp. and |
|
| Consolidated |
| |||||||
Total interest income |
| $ | 86,857 |
|
| $ | 24,732 |
|
| $ | 4,920 |
|
| $ | (1,543 | ) |
| $ | 0 |
|
| $ | 987 |
|
| $ | 115,953 |
|
Total interest expense |
|
| 7,962 |
|
|
| 3,309 |
|
|
| 1,950 |
|
|
| 5,903 |
|
|
| 113 |
|
|
| 4,481 |
|
|
| 23,718 |
|
Net interest income (loss) |
|
| 78,895 |
|
|
| 21,423 |
|
|
| 2,970 |
|
|
| (7,446 | ) |
|
| (113 | ) |
|
| (3,494 | ) |
|
| 92,235 |
|
Provision for loan losses |
|
| 5,546 |
|
|
| 1,575 |
|
|
| 0 |
|
|
| (5,931 | ) |
|
| 0 |
|
|
| 810 |
|
|
| 2,000 |
|
Net interest income (loss) |
|
| 73,349 |
|
|
| 19,848 |
|
|
| 2,970 |
|
|
| (1,515 | ) |
|
| (113 | ) |
|
| (4,304 | ) |
|
| 90,235 |
|
Sponsorship and race winnings |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 10,153 |
|
|
| 0 |
|
|
| 10,153 |
|
Race team related expenses |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (7,219 | ) |
|
| — |
|
|
| (7,219 | ) |
Other income (expense), net |
|
| (21,774 | ) |
|
| (7,989 | ) |
|
| 107 |
|
|
| (1,228 | ) |
|
| (5,689 | ) |
|
| (2,637 | ) |
|
| (39,210 | ) |
Net income (loss) before taxes |
|
| 51,575 |
|
|
| 11,859 |
|
|
| 3,077 |
|
|
| (2,743 | ) |
|
| (2,868 | ) |
|
| (6,941 | ) |
|
| 53,959 |
|
Income tax (provision) benefit |
|
| (13,281 | ) |
|
| (3,054 | ) |
|
| (773 | ) |
|
| 689 |
|
|
| 720 |
|
|
| (874 | ) |
|
| (16,573 | ) |
Net income (loss) |
| $ | 38,294 |
|
| $ | 8,805 |
|
| $ | 2,304 |
|
| $ | (2,054 | ) |
| $ | (2,148 | ) |
| $ | (7,815 | ) |
| $ | 37,386 |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total loans, net |
| $ | 902,234 |
|
| $ | 392,278 |
|
| $ | 70,232 |
|
| $ | 5,538 |
|
| $ | 0 |
|
| $ | 1,951 |
|
| $ | 1,372,233 |
|
Total assets |
|
| 916,109 |
|
|
| 405,439 |
|
|
| 92,257 |
|
|
| 93,683 |
|
|
| 30,969 |
|
|
| 266,777 |
|
|
| 1,805,234 |
|
Total funds borrowed |
|
| 712,474 |
|
|
| 296,509 |
|
|
| 73,806 |
|
|
| 74,941 |
|
|
| 8,054 |
|
|
| 258,358 |
|
|
| 1,424,142 |
|
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Return on average assets |
|
| 6.08 | % |
|
| 3.20 | % |
|
| 3.68 | % |
|
| (2.52 | %) |
|
| (8.89 | %) |
|
| (3.68 | %) |
|
| 2.73 | % |
Return on average equity |
|
| 30.39 |
|
|
| 16.02 |
|
|
| 18.38 |
|
|
| (12.60 | ) |
|
| (386.73 | ) |
|
| (27.18 | ) |
|
| 14.47 |
|
Interest yield |
|
| 14.05 |
|
|
| 9.37 |
|
|
| 10.56 |
|
|
| (23.55 | ) |
| N/A |
|
| N/A |
|
|
| 11.56 |
| ||
Net interest margin |
|
| 12.76 |
|
|
| 8.11 |
|
|
| 6.37 |
|
|
| (113.66 | ) |
| N/A |
|
| N/A |
|
|
| 9.19 |
| ||
Reserve coverage |
|
| 3.38 |
|
|
| 1.63 |
|
|
| (0.00 | ) | (1) |
| 49.98 |
|
| N/A |
|
| N/A |
|
|
| 3.34 |
| ||
Delinquency status(2) |
|
| 0.34 |
|
|
| 0.04 |
|
|
| 0.10 |
| (1) |
| 5.42 |
|
| N/A |
|
| N/A |
|
|
| 0.29 |
| ||
Charge-off ratio(4) |
|
| 0.22 |
|
|
| 0.09 |
|
|
| — |
| (3) |
| 143.94 |
|
| N/A |
|
| N/A |
|
|
| 1.17 |
| ||
Page 29 of 59
|
| Consumer Lending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Three Months Ended |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| RPAC |
|
| Corp. and |
|
| Consolidated |
| |||||||
Total interest income |
| $ | 28,962 |
|
| $ | 7,218 |
|
| $ | 1,791 |
|
| $ | (909 | ) |
| $ | — |
|
| $ | 378 |
|
| $ | 37,440 |
|
Total interest expense |
|
| 3,476 |
|
|
| 1,655 |
|
|
| 663 |
|
|
| (56 | ) |
|
| 42 |
|
|
| 2,604 |
|
|
| 8,384 |
|
Net interest income (loss) |
|
| 25,486 |
|
|
| 5,563 |
|
|
| 1,128 |
|
|
| (853 | ) |
|
| (42 | ) |
|
| (2,226 | ) |
|
| 29,056 |
|
Provision for loan losses |
|
| 1,812 |
|
|
| 745 |
|
|
| — |
|
|
| 37,196 |
|
|
| — |
|
|
| (4 | ) |
|
| 39,749 |
|
Net interest income (loss) after loss |
|
| 23,674 |
|
|
| 4,818 |
|
|
| 1,128 |
|
|
| (38,049 | ) |
|
| (42 | ) |
|
| (2,222 | ) |
|
| (10,693 | ) |
Sponsorship and race winning |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,962 |
|
|
| — |
|
|
| 8,962 |
|
Race team related expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,636 | ) |
|
| — |
|
|
| (2,636 | ) |
Other income (expense), net |
|
| (7,246 | ) |
|
| (2,700 | ) |
|
| (712 | ) |
|
| (9,738 | ) |
|
| (2,503 | ) |
|
| (1,148 | ) |
|
| (24,047 | ) |
Net income (loss) before taxes |
|
| 16,428 |
|
|
| 2,118 |
|
|
| 416 |
|
|
| (47,787 | ) |
|
| 3,781 |
|
|
| (3,370 | ) |
|
| (28,414 | ) |
Income tax (provision) benefit |
|
| (4,201 | ) |
|
| (541 | ) |
|
| (104 | ) |
|
| 11,908 |
|
|
| (942 | ) |
|
| 2,261 |
|
|
| 8,381 |
|
Net income (loss) |
| $ | 12,227 |
|
| $ | 1,577 |
|
| $ | 312 |
|
| $ | (35,879 | ) |
| $ | 2,839 |
|
| $ | (1,109 | ) |
| $ | (20,033 | ) |
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total loans, net |
| $ | 774,956 |
|
| $ | 310,691 |
|
| $ | 68,042 |
|
| $ | 33,521 |
|
| $ | — |
|
| $ | 3,334 |
|
| $ | 1,190,544 |
|
Total assets |
|
| 788,459 |
|
|
| 321,084 |
|
|
| 80,247 |
|
|
| 142,450 |
|
|
| 40,112 |
|
|
| 231,923 |
|
|
| 1,604,275 |
|
Total funds borrowed |
|
| 628,528 |
|
|
| 255,778 |
|
|
| 65,906 |
|
|
| 113,009 |
|
|
| 8,652 |
|
|
| 199,312 |
|
|
| 1,271,185 |
|
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Return on average assets |
|
| 6.22 | % |
|
| 2.06 | % |
|
| 1.49 | % |
|
| (85.70 | %) |
|
| 31.97 | % |
|
| (8.78 | %) |
|
| (5.69 | %) |
Return on average equity |
|
| 31.11 |
|
|
| 10.29 |
|
|
| 6.82 |
|
| NM |
|
| NM |
|
|
| (54.58 | ) |
|
| (29.77 | ) | ||
Interest yield |
|
| 14.97 |
|
|
| 9.73 |
|
|
| 10.51 |
|
|
| (5.34 | ) |
| N/A |
|
| N/A |
|
|
| 11.23 |
| ||
Net interest margin |
|
| 13.18 |
|
|
| 7.50 |
|
|
| 6.62 |
|
|
| (3.89 | ) |
| N/A |
|
| N/A |
|
|
| 8.72 |
| ||
Reserve coverage |
|
| 3.48 |
|
|
| 1.51 |
|
|
| — |
| (1) |
| 63.28 |
|
| N/A |
|
| N/A |
|
|
| 7.07 |
| ||
Delinquency status(2) |
|
| 0.52 |
|
|
| 0.03 |
|
|
| 2.67 |
| (1) |
| 8.31 |
|
| N/A |
|
| N/A |
|
|
| 1.07 |
| ||
Charge-off ratio |
|
| 0.44 |
|
|
| 0.09 |
|
|
| (0.02 | ) | (3) |
| 89.89 |
|
| N/A |
|
| N/A |
|
|
| 5.36 |
| ||
|
| Consumer Lending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Nine Months Ended |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| RPAC |
|
| Corp. and |
|
| Consolidated |
| |||||||
Total interest income |
| $ | 82,525 |
|
| $ | 19,431 |
|
| $ | 5,275 |
|
| $ | 86 |
|
| $ | — |
|
| $ | 1,253 |
|
| $ | 108,570 |
|
Total interest expense |
|
| 10,268 |
|
|
| 4,178 |
|
|
| 1,937 |
|
|
| 2,781 |
|
|
| 122 |
|
|
| 6,933 |
|
|
| 26,219 |
|
Net interest income (loss) |
|
| 72,257 |
|
|
| 15,253 |
|
|
| 3,338 |
|
|
| (2,695 | ) |
|
| (122 | ) |
|
| (5,680 | ) |
|
| 82,351 |
|
Provision for loan losses |
|
| 20,705 |
|
|
| 3,041 |
|
|
| — |
|
|
| 49,489 |
|
|
| — |
|
|
| (4 | ) |
|
| 73,231 |
|
Net interest income (loss) after loss |
|
| 51,552 |
|
|
| 12,212 |
|
|
| 3,338 |
|
|
| (52,184 | ) |
|
| (122 | ) |
|
| (5,676 | ) |
|
| 9,120 |
|
Sponsorship and race winning |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15,161 |
|
|
| — |
|
|
| 15,161 |
|
Race team related expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,584 | ) |
|
| — |
|
|
| (6,584 | ) |
Other income (expense), net |
|
| (21,115 | ) |
|
| (7,002 | ) |
|
| (2,191 | ) |
|
| (20,603 | ) |
|
| (5,726 | ) |
|
| (8,842 | ) |
|
| (65,479 | ) |
Net income (loss) before taxes |
|
| 30,437 |
|
|
| 5,210 |
|
|
| 1,147 |
|
|
| (72,787 | ) |
|
| 2,729 |
|
|
| (14,518 | ) |
|
| (47,782 | ) |
Income tax (provision) benefit |
|
| (7,783 | ) |
|
| (1,332 | ) |
|
| (286 | ) |
|
| 18,138 |
|
|
| (680 | ) |
|
| 4,426 |
|
|
| 12,483 |
|
Net income (loss) |
| $ | 22,654 |
|
| $ | 3,878 |
|
| $ | 861 |
|
| $ | (54,649 | ) |
| $ | 2,049 |
|
| $ | (10,092 | ) |
| $ | (35,299 | ) |
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total loans, net |
| $ | 774,956 |
|
| $ | 310,691 |
|
| $ | 68,042 |
|
| $ | 33,521 |
|
| $ | — |
|
| $ | 3,334 |
|
| $ | 1,190,544 |
|
Total assets |
|
| 788,459 |
|
|
| 321,084 |
|
|
| 80,247 |
|
|
| 142,450 |
|
|
| 40,112 |
|
|
| 231,923 |
|
|
| 1,604,275 |
|
Total funds borrowed |
|
| 628,528 |
|
|
| 255,778 |
|
|
| 65,906 |
|
|
| 113,009 |
|
|
| 8,652 |
|
|
| 199,312 |
|
|
| 1,271,185 |
|
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Return on average assets |
|
| 4.04 | % |
|
| 1.84 | % |
|
| 1.37 | % |
|
| (38.80 | %) |
|
| 8.27 | % |
|
| (5.45 | %) |
|
| (3.43 | %) |
Return on average equity |
|
| 20.20 |
|
|
| 9.19 |
|
|
| 6.56 |
|
|
| (192.88 | ) |
| NM |
|
|
| (22.64 | ) |
|
| (17.02 | ) | |
Interest yield |
|
| 14.99 |
|
|
| 9.62 |
|
|
| 10.58 |
|
|
| 0.13 |
|
| N/A |
|
| N/A |
|
|
| 11.31 |
| ||
Net interest margin |
|
| 13.13 |
|
|
| 7.53 |
|
|
| 6.69 |
|
|
| (4.12 | ) |
| N/A |
|
| N/A |
|
|
| 8.58 |
| ||
Reserve coverage |
|
| 3.48 |
|
|
| 1.51 |
|
|
| — |
| (1) |
| 63.28 |
|
| N/A |
|
| N/A |
|
|
| 7.07 |
| ||
Delinquency status(2) |
|
| 0.52 |
|
|
| 0.03 |
|
|
| 2.67 |
| (1) |
| 8.31 |
|
| N/A |
|
| N/A |
|
|
| 1.07 |
| ||
Charge-off ratio |
|
| 1.96 |
|
|
| 0.44 |
|
|
| (0.01 | ) | (3) |
| 26.21 |
|
| N/A |
|
| N/A |
|
|
| 3.30 |
| ||
Page 30 of 59
(10) COMMITMENTS AND CONTINGENCIES
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net share data | ||||||||||||||||
Net asset value at the beginning of the period | $ | 11.65 | $ | 11.41 | $ | 11.91 | $ | 11.42 | ||||||||
Net investment income (loss) | (0.07 | ) | (0.10 | ) | (0.26 | ) | (0.08 | ) | ||||||||
Income tax benefit | 0.26 | — | 0.63 | — | ||||||||||||
Net realized gains on investments | 0.04 | 0.10 | 0.16 | — | ||||||||||||
Net change in unrealized appreciation (depreciation) on investments | (0.20 | ) | 0.21 | (0.66 | ) | 0.76 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in net assets resulting from operations | 0.03 | 0.21 | (0.13 | ) | 0.68 | |||||||||||
Issuance of common stock | (0.00 | ) | — | (0.10 | ) | 0.02 | ||||||||||
Repurchase of common stock | — | 0.04 | — | 0.04 | ||||||||||||
Net investment income | — | — | — | — | ||||||||||||
Return of capital | — | (0.05 | ) | — | — | |||||||||||
Net realized gains on investments | — | — | — | (0.55 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total distributions | — | (0.05 | ) | — | (0.55 | ) | ||||||||||
Other | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total increase (decrease) in net asset value | 0.03 | 0.20 | (0.23 | ) | 0.19 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net asset value at the end of the period(1) | $ | 11.68 | $ | 11.61 | $ | 11.68 | $ | 11.61 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Per share market value at beginning of period | $ | 2.39 | $ | 7.38 | $ | 3.02 | $ | 7.04 | ||||||||
Per share market value at end of period | 2.17 | 4.22 | 2.17 | 4.22 | ||||||||||||
Total return(2) | (37 | %) | (168 | %) | (38 | %) | (48 | %) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Ratios/supplemental data | ||||||||||||||||
Total shareholders’ equity (net assets) | $ | 283,580 | $ | 280,783 | $ | 283,580 | $ | 280,783 | ||||||||
Average net assets | $ | 284,151 | $ | 277,579 | $ | 285,673 | $ | 278,149 | ||||||||
Total expense ratio(3) (4) | 1.49 | % | 11.44 | % | 2.21 | % | 10.67 | % | ||||||||
Operating expenses to average net assets(4) | 5.13 | 6.60 | 4.49 | 6.22 | ||||||||||||
Net investment income after income taxes to average net assets(4) | (3.48 | ) | (3.73 | ) | (1.97 | ) | (0.95 | ) | ||||||||
Page 27 of 94
(10) RECENTLY ISSUED ACCOUNTING STANDARDS
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 Company has employment agreements with certain key officers for either a one-, two- or five-year term. Annually, the contracts with a five-year term will generally renew for new five-year terms unless prior to the end of the first year of each five-year term, either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current five-year term. Typically, the contracts with a one- or two-year term will renew for new one- or two-year terms unless prior to the term either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current one or two-year terms; however, there is assessingcurrently one agreement that renews after two years for additional one- year terms. In the impactevent of a change in control, as defined, during the update willemployment period, the agreements provide for severance compensation to the executive in an amount equal to the balance of the salary, bonus, and value of fringe benefits which the executive would be entitled to receive for the remainder of the employment period.
Employment agreements expire at various dates through 2025, with future minimum payments under these agreements of approximately $10,896,000.
(B) OTHER COMMITMENTS
The Company had no commitments to extend credit or make investments outstanding at September 30, 2021. Generally, any commitments would be on the same terms as loans to or investments in existing borrowers or investees, and generally have fixed expiration dates. Since some commitments would be expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
(C) SEC MATTERS
The staff of the SEC has conducted an investigation of the Company relating to certain issues that occurred during the period 2015 to 2017, including (i) the Company’s retention of third parties in 2015 and 2016 concerning posting information about the Company on itscertain financial conditionwebsites and results(ii) the Company’s financial reporting and disclosures concerning certain assets, including Medallion Bank, in 2016 and 2017, a period when the Company had previously reported as a business development company (“BDC”) under the Investment Company Act of operations.
In January 2017,1940. Since April 2018, 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 havereport as 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 ReceiptsBDC, and Cash Payments. The update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flowshas not worked 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. such third parties since 2016.The Company does not expect the adoption of ASU2016-15to have a material impact on its consolidatedchange previously reported financial statements.results.
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 and is effective for fiscal years beginning after December 15, 2019 for all other entities, with early adoption permitted. The Company is assessingcurrently engaged in discussions and is cooperating with the SEC staff regarding a potential settlement of some or all aspects of the investigation, which, if reached, is expected to include a civil fine in an amount that is not currently estimable, but which may be material. There can be no assurance that a settlement will be reached, or the terms and timing of any such settlement. If a full settlement is not reached, litigation may ensue. In either event, the Company could incur a loss that could be material to the Company, its results of operations or financial condition.
(D) LITIGATION
The Company and its subsidiaries become defendants to various legal proceedings arising from the normal course of business. In the opinion of management, based on the advice of legal counsel, there is no proceeding pending, or except as described above, the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse impact the update will have on itsthe financial condition andor results of operations.operations of the Company.
(E) 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 2016,2017 as a result of FSVC’s transfer to liquidation status and the FASB issued ASU2016-01, Financial Instruments - Overall(Topic 825-10): Recognition and Measurementrestructure 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.ASU 2016-01 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 does not believe this update will have a material impact on its financial condition.FSVC loan described in Note 5.
(11) RELATED PARTY TRANSACTIONS
Certain directors, officers and shareholdersstockholders of the Company are also directors and officers of its wholly-ownedmain consolidated subsidiaries, MFC, MCI, FSVC, and Medallionthe 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, iswas an officer of LAX Group, LLC (LAX), one of the Company’s portfolio companies.equity investments that sold its assets on December 16, 2020. In January 2020, Mr. Rudnick receivesreceived a salary from LAX of $166,000$178,000 per year, which was reduced to $133,000 in the 2020 second quarter, and certain equity from LAX consisting of 10%10% ownership in LAX Class B stock, vesting at 3.34%3.34% per year; 5%5% of any new equity raised from outside investors at a valuation of $1,500,000$1,500,000 or higher; and 10%10% of LAX’s profits as a year endyear-end bonus. In addition, Mr. Rudnick providesprovided consulting services to the Company directly for a monthly retainer of $4,200.
Page 31 of 59
Page 28The Company’s subsidiary RPAC, has an agreement with minority shareholder Richard Petty, in which it makes an annual payment of 94
At$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 $7,554,000 that earns interest at an annual rate of 2% through September 30, 2017, December 31, 2016, and September 30, 2016, the Company and MSC serviced $314,974,000, $325,751,000, and $329,304,000 of loans for Medallion Bank. Included in net investment income were amounts as described in the table below that were received from Medallion Bank for services rendered in originating and servicing loans, and also for reimbursement of certain expenses incurred on their behalf.
The Company has assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. 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, $1,330,000 and $3,938,000 of servicing fee income was earned by MSC in the 2017 third quarter and nine months, and $1,416,000 and $4,231,000 was earned in the comparable 2016 periods.
The following table summarizes the net revenues received from Medallion Bank.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Reimbursement of operating expenses | $ | 182 | $ | 257 | $ | 636 | $ | 754 | ||||||||
Loan origination and servicing fees | 2 | 137 | 5 | 226 | ||||||||||||
|
|
|
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|
|
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| |||||||||
Total other income | $ | 184 | $ | 394 | $ | 641 | $ | 980 | ||||||||
|
|
|
|
|
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|
| |||||||||
The Company had a loan to Medallion Fine Art, Inc. in the amount of $1,167,000 and $3,159,000 as of September 30, 2017 and December 31, 2016. The loan bears interest at a rate of 12%, all2021, NaN of which ishas been paid in kind. During 2017 and 2016, the Company advanced $0 and $300,000, and was repaid $2,165,000 and $6,111,000 with respect to this loan. Additionally, the Company recognized $38,000 and $163,000 of interest income in the three and nine months ended September 30, 2017, and $99,000 and $504,000 in the comparable 2016 periods with respect to this loan.date.
The Company and MCI had loans to RPAC Racing LLC, an affiliate of Medallion Motorsports LLC which totaled $8,645,000 and $8,589,000 as of September 30, 2017 and December 31, 2016, and which were placed on nonaccrual effective July 1, 2017. The loans bear interest at rates of 9.9% and 2%, all of which is paid in kind. The Company and MCI recognized $0 and $56,000 of interest income for the three and nine months ended September 30, 2017, and $174,000 and $429,000 for the comparable 2016 periods with respect to these loans.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB ASC Topic 825, Financial“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—Cash—Book value equals fair value.
(b)Equity investments and securities—The Company’s equity securities are recorded at cost less any impairment plus or minus observable price changes.
(c)Investment securities—The Company’s investments are recorded at the estimated fair value of such investments.
(b)(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 approximatesapproximated fair value.
(c)(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 September 30, 20172021 and December 31, 2016,2020, the estimated fair value of theseoff-balance-sheet instruments was not material.
(d)(g)Fixedrateborrowings - —The fair value of the debentures payable to the SBA is estimated based on current market interest rates for similar debt.
| September 30, 2017 | December 31, 2016 | |||||||||||||||
(Dollars in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial assets | ||||||||||||||||
Investments | $ | 621,185 | $ | 621,185 | $ | 652,278 | $ | 652,278 | ||||||||
Cash(1) | 19,281 | 19,281 | 20,962 | 20,962 | ||||||||||||
Page 29
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||||||||||
(Dollars in thousands) |
| Carrying Amount |
|
| Fair Value |
|
| Carrying Amount |
|
| Fair Value |
| ||||
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash, cash equivalents and federal funds sold(1) |
| $ | 85,374 |
|
| $ | 85,374 |
|
| $ | 112,040 |
|
| $ | 112,040 |
|
Equity investments |
|
| 10,214 |
|
|
| 10,214 |
|
|
| 9,746 |
|
|
| 9,746 |
|
Investment securities |
|
| 47,511 |
|
|
| 47,511 |
|
|
| 46,792 |
|
|
| 46,792 |
|
Loans receivable |
|
| 1,372,233 |
|
|
| 1,372,233 |
|
|
| 1,172,290 |
|
|
| 1,172,290 |
|
Accrued interest receivable(2) |
|
| 9,646 |
|
|
| 9,646 |
|
|
| 10,338 |
|
|
| 10,338 |
|
Equity securities(3) |
|
| 1,969 |
|
|
| 1,969 |
|
|
| — |
|
|
| — |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Funds borrowed(4) |
|
| 1,425,518 |
|
|
| 1,425,518 |
|
|
| 1,312,255 |
|
|
| 1,312,591 |
|
Accrued interest payable(2) |
|
| 3,047 |
|
|
| 3,047 |
|
|
| 4,673 |
|
|
| 4,673 |
|
| September 30, 2017 | December 31, 2016 | |||||||||||||||
(Dollars in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Accrued interest receivable(2) | 560 | 560 | 769 | 769 | ||||||||||||
Financial liabilities | ||||||||||||||||
Funds borrowed(3) | 330,138 | 327,919 | 349,073 | 340,290 | ||||||||||||
Accrued interest payable(2) | 3,138 | 3,138 | 2,883 | 2,883 | ||||||||||||
(13) 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(levels 1 and 2) and unobservable (level 3). Therefore gains and losses for such assets and liabilities categorized within the level 3 table below may include changes in fair value that are attributable to both observable inputs (level(levels 1 and 2) and unobservable inputs (level 3).
Page 32 of 59
Assets and liabilities measured at fair value, recorded on the consolidated balance sheets, are categorized based on the inputs to the valuation techniques as follows:
Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most US Government and agency securities, and certain other sovereign government obligations).
Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
A) Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
B) Quoted price for identical or similar assets or liabilities in non-active markets (for example, corporate and municipal bonds, which trade infrequently);
C) Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
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).
Page 30 of 94
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
Equity investments were recorded at cost less impairment plus or minus observable price changes. Commencing in 2020, the sensitivity of the various level 3 valuationsCompany elected to the factors that are relevant in their valuation analysis.
Medallion loans are primarily collateral-based lending, whereby the collateral value exceeds the amount of the loan, providing sufficient excess collateral to protect against losses to the Company. As a result, the initial valuation assessment is that as long as the loan is current and performing, itsmeasure equity investments at fair value approximates the par value of the loan. To the extenton a loan becomes nonperforming, the collateral value hasnon-recurring basis, which have been adequate to result in a complete recovery. In a case where the collateral value was inadequate, an unrealized loss would be recorded to reflect any shortfall. Collateral valuesadjusted 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 been placed on the operating cash flows of the borrowers and the values of their personal guarantees in determining whether or not a valuation adjustment is necessary. Those portfolios had historically been at very low loan to collateral value ratios, and as a result, historically have not been highly sensitive to changes in collateral values. Over the last few years, as medallion collateral values have declined, the impact on the Company’s valuation analysis has become more significant, which could result in a significantly lower fair value measurement.all periods presented.
The mezzanine and other secured commercial portions of the commercial loan portfolio are a combination of cash flow and collateral based lending. The initial valuation assessment is that as long as the loan is current and performing, its fair value approximates the par value of the loan. If a loan becomes nonperforming, an evaluation is performed which considers and analyzes a variety of factors which may include the financial condition and operating performance of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience, the relationships between current and projected market rates and portfolio rates of interest and maturities, as well as general market trends for businesses in the same industry. Since each individual nonperforming loan has its own unique attributes, the factors analyzed, and their relative importance to each valuation analysis, differ between each asset, and may differ from period to period for a particular asset. The valuation is highly sensitive to changes in the assumptions used. To the extent that any assumption in the analysis changes significantly from one period to another, that change could result in a significantly lower or higher fair market value measurement. For example, if a borrower’s valuation was determined primarily on the cash flow generated from their business, then if that cash flow deteriorated significantly from a prior period valuation, that could have a material impact on the valuation in the current period.
The investment in Medallion Bank is subject to a thorough valuation analysis as described previously, and on an annual basis, the Company also receives 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 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 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 second quarter of 2015, the Company first became aware of external interest in Medallion Bank and its portfolio’s 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 in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the 2016 third quarter there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, $128,918,000 was recorded in 2016, and additional appreciation of $563,000 was recorded in 2017. See Note 3 for additional information about Medallion Bank.
Investments in controlled subsidiaries, other than Medallion Bank, equity investments, and investments other than securities are valued similarly, while also considering available current market data, including relevant and applicable market trading and transaction comparables, the nature and realizable value of any collateral, applicable interest rates and market yields, the portfolio company’s ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, and borrower financial analysis, among other factors. As a result of this valuation process, the Company uses the actual results of operations of the controlled subsidiaries as the best estimate of changes in fair value, in most cases, and records the results as a component of unrealized appreciation (depreciation) on investments. For the balance of controlled subsidiary investments, equity investments, and investments other than securities positions, the result of the analysis results in changes to the value of the position if
Page 31 of 94
there is clear evidence that it’s value has either decreased or increased in light of the specific facts considered for each investment. The valuation is highly sensitive to changes in the assumptions used. To the extent that any assumption in the analysis changes significantly from one period to another, that change could result in a significantly lower or higher fair market value measurement. For example, if an investee’s valuation was determined primarily on the cash flow generated from their business, then if that cash flow deteriorated significantly from a prior period valuation, that could have a material impact on the valuation in the current period.
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 20172021 and December 31, 2016.2020.
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
2017 Assets | ||||||||||||||||
Medallion loans | $ | — | $ | — | $ | 224,580 | $ | 224,580 | ||||||||
Commercial loans | — | — | 82,760 | 82,760 | ||||||||||||
Investment in Medallion Bank and other controlled subsidiaries | — | — | 303,861 | 303,861 | ||||||||||||
Equity investments | — | — | 9,984 | 9,984 | ||||||||||||
Investment other than securities | — | — | 9,510 | 9,510 | ||||||||||||
Other assets | — | — | 339 | 339 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
2016 Assets | ||||||||||||||||
Medallion loans | $ | — | $ | — | $ | 266,816 | $ | 266,816 | ||||||||
Commercial loans | — | — | 83,634 | 83,634 | ||||||||||||
Investment 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 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
September 30, 2021 Level 1 Level 2 Level 3 Total Assets Interest-bearing deposits $ — $ 1,250 $ — $ 1,250 Available for sale investment securities — 47,511 — 47,511 Equity securities 1,969 — — 1,969 Total(1) $ 1,969 $ 48,761 $ — $ 50,730 Included
(Dollars in thousands)
The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilitiescomprehensive loss for the quartersthree and nine months ended September 30, 20172021 related to these assets.
December 31, 2020 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing deposits |
| $ | — |
|
| $ | 1,500 |
|
| $ | — |
|
| $ | 1,500 |
|
Available for sale investment securities(1) |
|
| — |
|
|
| 46,792 |
|
|
| — |
|
|
| 46,792 |
|
Total |
| $ | — |
|
| $ | 48,292 |
|
| $ | — |
|
| $ | 48,292 |
|
The following tables present the Company’s fair value hierarchy for those assets and 2016.liabilities measured at fair value on a non-recurring basis as of September 30, 2021 and December 31, 2020.
September 30, 2021 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Equity investments |
| $ | — |
|
| $ | — |
|
| $ | 10,214 |
|
| $ | 10,214 |
|
Impaired loans |
|
| — |
|
|
| — |
|
|
| 36,501 |
|
|
| 36,501 |
|
Loan collateral in process of foreclosure |
|
| — |
|
|
| — |
|
|
| 42,544 |
|
|
| 42,544 |
|
Total |
| $ | — |
|
| $ | — |
|
| $ | 89,259 |
|
| $ | 89,259 |
|
Page 33 of 59
(Dollars in thousands) | Medallion Loans | Commercial Loans | Investments in Medallion Bank & Other Controlled Subs | Equity Investments | Investments Other Than Securities | Other Assets | ||||||||||||||||||
June 30, 2017 | $ | 233,415 | $ | 78,092 | $ | 301,819 | $ | 10,316 | $ | 9,510 | $ | 354 | ||||||||||||
Gains (losses) included in earnings | (6,690 | ) | (73 | ) | 3,291 | (325 | ) | — | (15 | ) | ||||||||||||||
Purchases, investments, and issuances | 1,475 | 6,007 | 250 | 300 | — | — | ||||||||||||||||||
Sales, maturities, settlements, and distributions | (3,620 | ) | (1,266 | ) | (1,499 | ) | (307 | ) | — | — | ||||||||||||||
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|
| |||||||||||||
September 30, 2017 | $ | 224,580 | $ | 82,760 | $ | 303,861 | $ | 9,984 | $ | 9,510 | $ | 339 | ||||||||||||
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|
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|
|
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| |||||||||||||
Amounts related to held assets(1) | ($ | 6,669 | ) | $ | 75 | $ | 3,291 | $ | (325 | ) | $ | — | ($ | 15 | ) | |||||||||
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|
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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, 2016 | $ | 266,816 | $ | 83,634 | $ | 293,360 | $ | 8,407 | $ | 9,510 | $ | 354 | ||||||||||||
Gains (losses) included in earnings | (27,837 | ) | (476 | ) | 12,345 | 3,830 | — | (15 | ) | |||||||||||||||
Purchases, investments, and issuances | 1,795 | 13,823 | 652 | 1,156 | — | — | ||||||||||||||||||
December 31, 2020 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Equity investments |
| $ | — |
|
| $ | — |
|
| $ | 9,746 |
|
| $ | 9,746 |
|
Impaired loans |
|
| — |
|
|
| — |
|
|
| 62,174 |
|
|
| 62,174 |
|
Loan collateral in process of foreclosure |
|
| — |
|
|
| — |
|
|
| 54,560 |
|
|
| 54,560 |
|
Total |
| $ | — |
|
| $ | — |
|
| $ | 126,480 |
|
| $ | 126,480 |
|
Page 32 of 94
(Dollars in thousands) | Medallion Loans | Commercial Loans | Investments in Medallion Bank & Other Controlled Subs | Equity Investments | Investments Other Than Securities | Other Assets | ||||||||||||||||||
Sales, maturities, settlements, and distributions | (16,194 | ) | (14,221 | ) | (2,496 | ) | (3,409 | ) | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
September 30, 2017 | $ | 224,580 | $ | 82,760 | $ | 303,861 | $ | 9,984 | $ | 9,510 | $ | 339 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Amounts related to held assets(1) | ($ | 27,764 | ) | ($ | 375 | ) | $ | 12,345 | $ | 1,056 | $ | — | ($ | 15 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
(Dollars in thousands) | Medallion Loans | Commercial Loans | Investments in Medallion Bank & Other Controlled Subs | Equity Investments | Investments Other Than Securities | Other Assets | ||||||||||||||||||
June 30, 2016 | $ | 297,367 | $ | 88,045 | $ | 180,954 | $ | 8,561 | $ | 33,127 | $ | 354 | ||||||||||||
Gains (losses) included in earnings | (6,087 | ) | 1,864 | 25,913 | 84 | (14,107 | ) | — | ||||||||||||||||
Purchases, investments, and issuances | 5,628 | 355 | 1,315 | 250 | — | — | ||||||||||||||||||
Sales, maturities, settlements, and distributions | (8,651 | ) | (9,154 | ) | (84 | ) | (793 | ) | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
September 30, 2016 | $ | 288,257 | $ | 81,110 | $ | 208,098 | $ | 8,102 | $ | 19,020 | $ | 354 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Amounts related to held assets(1) | ($ | 6,050 | ) | ($ | 114 | ) | $ | 25,913 | ($ | 110 | ) | ($ | 14,107 | ) | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
(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 | (11,317 | ) | 2,403 | 47,221 | 2,021 | (18,862 | ) | — | ||||||||||||||||
Purchases, investments, and issuances | 18,071 | 16,371 | 5,061 | 1,400 | — | — | ||||||||||||||||||
Sales, maturities, settlements, and distributions | (26,905 | ) | (19,783 | ) | (4,097 | ) | (1,892 | ) | — | — | ||||||||||||||
Transfers in (out) (1) | — | 224 | — | (224 | ) | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
September 30, 2016 | $ | 288,257 | $ | 81,110 | $ | 208,098 | $ | 8,102 | $ | 19,020 | $ | 354 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Amounts related to held assets(2) | ($ | 11,168 | ) | ($ | 297 | ) | $ | 47,221 | $ | 1,022 | ($ | 18,862 | ) | $ | — | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
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.
Page 33 of 94
The valuation techniques and significant unobservable inputs used in recurring Levelnon-recurring level 3 fair value measurements of assets and liabilities as of September 30, 20172021 and December 31, 20162020.
(Dollars in thousands) |
| Fair Value at 9/30/21 |
|
| Valuation Techniques |
| Unobservable Inputs |
| Range | |
Equity investments |
| $ | 9,668 |
|
| Investee financial |
| Financial condition and |
| N/A |
|
|
|
|
|
|
| Collateral support |
| N/A | |
|
|
| 546 |
|
| Precedent market |
| Offering price |
| $8.73 / share |
Impaired loans |
|
| 36,501 |
|
| Market approach |
| Historical and actual loss |
| 1.50% - 6.00% |
|
|
|
|
|
|
|
|
| 60% of balance | |
|
|
|
|
|
|
| Transfer prices (2) |
| $0.0 - 79.5 | |
|
|
|
|
|
|
| Collateral value |
| N/A | |
Loan collateral in process of |
|
| 42,544 |
|
| Market approach |
| Transfer prices (2) |
| $0.0 - 79.5 |
|
|
|
|
|
|
| Collateral value (3) |
| $6.8 - 79.5 | |
(Dollars in thousands) |
| Fair Value at 12/31/20 |
|
| Valuation Techniques |
| Unobservable Inputs |
| Range | |
Equity investments |
| $ | 8,291 |
|
| Investee financial |
| Financial condition and |
| N/A |
|
|
|
|
|
|
| Collateral support |
| N/A | |
|
|
| 1,455 |
|
| Precedent market |
| Offering price |
| $8.73 / share |
Impaired loans |
|
| 62,174 |
|
| Market approach |
| Historical and actual loss |
| 1.50% - 6.00% |
|
|
|
|
|
|
|
|
| 60% of balance | |
|
|
|
|
|
|
| Transfer prices (2) |
| $0.6 - 108.7 | |
|
|
|
|
|
|
| Collateral value |
| N/A | |
Loan collateral in process of |
|
| 53,128 |
|
| Market approach |
| Transfer prices (2) |
| $0.6 - 108.7 |
|
|
| 1,432 |
|
|
|
| Collateral value (3) |
| $0.7 - 32.3 |
(14) MEDALLION BANK PREFERRED STOCK (Non-controlling interest)
On December 17, 2019, the Bank closed an initial public offering of 1,840,000 shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, with a $46,000,000 aggregate liquidation amount, yielding net proceeds of $42,485,000, which were as follows.recorded in the Bank’s shareholders’ equity. Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.
On July 21, 2011, the Bank issued, and the US Treasury purchased 26,303 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series E, or Series E, for an aggregate purchase price of $26,303,000 under the Small Business Lending Fund Program, or SBLF, with a liquidation amount of $1,000 per share. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks. The Bank pays a dividend rate of 9% on the Series E.
(Dollars in thousands) | Fair Value at 9/30/17 | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Medallion Loans | $ | 224,580 | Precedent market transactions | Adequacy of collateral (loan to value) | 1% - 359% (150 | %) | ||||||
Commercial Loans – Mezzanine and Other | 82,760 | Borrower financial analysis | Financial condition and operating performance of | N/A | ||||||||
the borrower Portfolio yields | 2% - 19.00% (12.91 | %) | ||||||||||
Investment in Medallion Bank | 290,657 | Precedent M&A transactions | Price / Book Value multiples | 2.0 to 2.2 | ||||||||
| Price / Earnings multiples | 11.5 to 12.7 | |||||||||||
| Discounted cash flow | Discount rate | 17.50 | % | |||||||||
| Terminal value | $ | 419,712 to $499,354 | ||||||||||
Investment in Other Controlled Subsidiaries | 5,486 | Investee financial analysis | Financial condition and operating performance | N/A | ||||||||
| Implied value of individual franchises | $ | 31,700 | ||||||||||
| Equity value | $ | 1,000 - $5,000 | ||||||||||
| 4,361 | 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 | |||||||||||
| 3,227 | 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 | |||||||||||
| 130 | Investee book value and equity pickup | Financial condition and operating performance of the investee | N/A | |||||||||
Equity Investments | 6,087 | Investee financial analysis | Financial condition and operating performance of the borrower | N/A | ||||||||
| Collateral support | N/A | |||||||||||
| 1,431 | Investee financial analysis | Equity value | $ | 1,000 - $5,000 | ||||||||
| Preferred equity yield | 12 | % | ||||||||||
| 1,455 | Precedent Market transaction | Offering price | $ | 8.73 / share | ||||||||
| 995 | Investee book value | Valuation indicated by investee filings | N/A | |||||||||
| 16 | Market comparables | Discount for lack of marketability | 10% (10 | %) | ||||||||
Investments Other Than Securities | 9,510 | 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 | % | |||||||
Page 34 of 9459
(15) VARIABLE INTEREST ENTITIES
(Dollars in thousands) | Fair Value at 12/31/16 | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Medallion Loans | $ | 266,816 | Precedent market transactions | Adequacy of collateral (loan to value) | 0% - 379% (135 | %) | ||||||
Commercial Loans – Mezzanine and Other | 83,634 | Borrower financial analysis | Financial condition and operating performance of the borrower | N/A | ||||||||
| Portfolio yields | 3% - 19.00% (13.05 | %) | ||||||||||
Investment in Medallion Bank | 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 | % | ||||||||||
Investment in Other Controlled Subsidiaries | 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 operating performance of the investee | N/A | |||||||||
Equity Investments | 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 | %) | ||||||||
Investments Other Than Securities | 9,510 | Precedent market transaction | Transfer prices of Chicago medallions | N/A | ||||||||
| Cash flow analysis | Discount rate in cash flow analysis | 6 | % | |||||||||
Other Assets | 354 | Borrower collateral analysis | Adequacy of collateral (loan to value) | 0 | % | |||||||
Page 35During the 2018 third quarter, the Company determined that Trust III was a VIE. Trust III had historically been consolidated as a subsidiary of 94
(14) INVESTMENTS OTHER THAN SECURITIES
The following table presentsMFC, 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 was supported by a qualitative assessment that Trust III did not have sufficient equity at risk. Since the inception of Trust III, MFC had also been party to a limited guaranty which was considered a variable interest because, pursuant to the guaranty, MFC absorbed variability as a result of the on-going performance of the loans in Trust III. As of October 31, 2018, the Company determined that MFC was no longer the primary beneficiary of Trust III and accordingly deconsolidated the VIE, leading to a net gain of $25,325,000 recorded as well as a new promissory note payable by MFC of $1,400,000 issued in settlement of the limited guaranty. See Note 5 for more details. Subsequent to deconsolidation, the Company’s investments other than securitiesinterest in Trust III was accounted for as an equity investment and had a value of September 30, 2017 and December 31, 2016.$0 through its disposition in the 2021 third quarter. In addition, the Company remained the servicer of the assets of Trust III for a fee, until its disposition.
Investment Type(Dollars in thousands) | Number of Investments | Investment Cost | Value as of 9/30/17 | Value as of 12/31/16 | ||||||||||||
City of Chicago Taxicab Medallions | 154 | (1) | $ | 8,411 | $ | 9,240 | (2) | $ | 9,240 | (2) | ||||||
City of Chicago Taxicab Medallions (handicap accessible) | 5 | (1) | 278 | 270 | (3) | 270 | (3) | |||||||||
|
|
|
|
|
| |||||||||||
Total Investments Other Than Securities | $ | 8,689 | $ | 9,510 | $ | 9,510 | ||||||||||
|
|
|
|
|
| |||||||||||
(15)(16) SUBSEQUENT EVENTS
We haveThe Company has evaluated subsequentthe effects of events that have occurred subsequent to September 30, 2021, through the date of financial statement issuance.
In October 2017, a term loan with a maturity date of October 31, 2017 was extended until November 1, 2018.
Page 36 of 94
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
September 30, 2017
(Dollars in thousands) | Obligor | 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 | 359 | 57 | % | 4.25 | % | $ | 7,041 | $ | 191,693 | $ | 190,324 | $ | 162,677 | |||||||||||||||||||||||||||||
| Sean Cab Corp ## | Term Loan | 12/09/11 | 11/23/18 | 1 | 1 | % | 4.63 | % | $ | 3,187 | $ | 3,187 | $ | 3,187 | ||||||||||||||||||||||||||||
| Real Cab Corp ## & | Term Loan | 07/20/07 | 07/20/17 | 1 | 1 | % | 2.81 | % | $ | 2,533 | $ | 2,533 | $ | 2,533 | ||||||||||||||||||||||||||||
| Real Cab Corp ## & | Term Loan | 07/20/07 | 07/20/17 | 1 | * | 2.81 | % | $ | 349 | $ | 349 | $ | 349 | |||||||||||||||||||||||||||||
| Slo Cab Corp ## & | Term Loan | 07/20/07 | 07/20/17 | 1 | 1 | % | 2.81 | % | $ | 1,520 | $ | 1,520 | $ | 1,520 | ||||||||||||||||||||||||||||
| Slo Cab Corp ## & | Term Loan | 07/20/07 | 07/20/17 | 1 | * | 2.81 | % | $ | 209 | $ | 209 | $ | 209 | |||||||||||||||||||||||||||||
| Junaid Trans Corp ## & {Annually-Prime plus 1.00%} | Term Loan | 04/30/13 | 04/29/19 | 1 | * | 5.00 | % | $ | 1,395 | $ | 1,395 | $ | 1,395 | |||||||||||||||||||||||||||||
| Apple Cab Corp ## & | �� | Term Loan | 04/11/14 | 07/31/17 | 1 | * | 3.25 | % | $ | 1,339 | $ | 1,339 | $ | 1,339 | ||||||||||||||||||||||||||||
| Anniversary Taxi Corp ## & | Term Loan | 04/11/14 | 07/31/17 | 1 | * | 3.25 | % | $ | 1,339 | $ | 1,339 | $ | 1,339 | |||||||||||||||||||||||||||||
| Kby Taxi Inc ## & | Term Loan | 04/11/14 | 07/31/17 | 1 | * | 3.25 | % | $ | 1,339 | $ | 1,339 | $ | 1,339 | |||||||||||||||||||||||||||||
| Hj Taxi Corp ## & | Term Loan | 04/11/14 | 07/31/17 | 1 | * | 3.25 | % | $ | 1,339 | $ | 1,339 | $ | 1,339 | |||||||||||||||||||||||||||||
| Avi Taxi Corporation ## & | Term Loan | 04/11/14 | 07/31/17 | 1 | * | 3.25 | % | $ | 1,339 | $ | 1,339 | $ | 1,339 | |||||||||||||||||||||||||||||
| Penegali Taxi LLC ## | Term Loan | 12/11/14 | 12/10/17 | 1 | * | 3.75 | % | $ | 1,303 | $ | 1,303 | $ | 1,303 | |||||||||||||||||||||||||||||
| Uddin Taxi Corp ## | Term Loan | 11/05/15 | 11/05/18 | 1 | * | 4.75 | % | $ | 1,287 | $ | 1,287 | $ | 1,287 | |||||||||||||||||||||||||||||
| Sonu-Seema Corp ## (interest rate includes deferred interest of 2.5%) | Term Loan | 12/07/12 | 12/20/18 | 1 | * | 5.00 | % | $ | 1,285 | $ | 1,285 | $ | 1,285 | |||||||||||||||||||||||||||||
| (deferred interest of $26 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
| Waylon Transit LLC ## | Term Loan | 09/27/17 | 09/27/22 | 1 | * | 0.00 | % | $ | 1,275 | $ | 1,275 | $ | 1,275 | $ | 1,277 | |||||||||||||||||||||||||||
| Bunty & Jyoti Inc ## (interest rate includes deferred interest of 2.5%) | Term Loan | 03/13/13 | 12/13/18 | 1 | * | 5.00 | % | $ | 1,269 | $ | 1,269 | $ | 1,269 | |||||||||||||||||||||||||||||
| (deferred interest of $27 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
| Perem Hacking Corp ## & {Annually-Prime plus .25%} | Term Loan | 05/01/16 | 05/01/21 | 1 | * | 4.25 | % | $ | 1,232 | $ | 1,232 | $ | 1,234 | |||||||||||||||||||||||||||||
| S600 Service Co Inc ## & {Annually-Prime plus .25%} | Term Loan | 05/01/16 | 05/01/21 | 1 | * | 4.25 | % | $ | 1,232 | $ | 1,232 | $ | 1,234 | |||||||||||||||||||||||||||||
| Ela Papou LLC ## & | Term Loan | 06/27/14 | 09/15/17 | 1 | * | 4.00 | % | $ | 1,217 | $ | 1,217 | $ | 1,217 | |||||||||||||||||||||||||||||
| Earie Hacking LLC ## | Term Loan | 12/28/15 | 12/28/20 | 1 | * | 3.60 | % | $ | 1,173 | $ | 1,173 | $ | 1,175 | |||||||||||||||||||||||||||||
| Amme Taxi Inc ## | Term Loan | 10/21/13 | 10/21/18 | 1 | * | 3.70 | % | $ | 1,173 | $ | 1,173 | $ | 1,173 | |||||||||||||||||||||||||||||
Various New York && ## | 0.00% to 18.38% (interest rate includes deferred interest 1.00% to 9.19%) | Term Loan | | 03/23/01 to 09/15/17 | | | 05/28/16 to 12/21/26 | | 338 | 47 | % | 4.35 | % | $ | 5,766 | $ | 163,359 | $ | 161,990 | $ | 134,335 | |||||||||||||||||||||
| (deferred interest of $997 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Chicago | 109 | 7 | % | 4.81 | % | $ | 36,382 | $ | 35,675 | $ | 19,369 | |||||||||||||||||||||||||||||||
| Sweetgrass Peach &Chadwick Cap ## (interest rate includes deferred interest of 1%) | Term Loan | 08/28/12 | 02/24/18 | 1 | * | 6.00 | % | $ | 1,403 | $ | 1,403 | $ | 1,403 | |||||||||||||||||||||||||||||
| (deferred interest of $32 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Various Chicago && ## | 0.00% to 8.00% (interest rate includes deferred interest .75% to 5.25%) | Term Loan | | 01/22/10 to 08/08/16 | | | 03/12/16 to 12/22/20 | | 108 | 6 | % | 4.76 | % | $ | 34,979 | $ | 34,272 | $ | 17,966 | |||||||||||||||||||||||
| (deferred interest of $157 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Newark && ## | 110 | 8 | % | 5.31 | % | $ | 729 | $ | 22,523 | $ | 22,484 | $ | 21,963 | |||||||||||||||||||||||||||||
| Viergella Inc ## | Term Loan | 02/20/14 | 02/20/18 | 1 | * | 4.75 | % | $ | 1,287 | $ | 1,287 | $ | 1,287 | |||||||||||||||||||||||||||||
Various Newark && ## | 4.50% to 7.00% (interest rate includes deferred interest 1.50%) | Term Loan | | 04/09/10 to 09/21/17 | | | 07/11/17 to 05/14/25 | | 109 | 7 | % | 5.35 | % | $ | 729 | $ | 21,236 | $ | 21,197 | $ | 20,676 | |||||||||||||||||||||
| (deferred interest of $1 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Boston && ## | 0.00% to 6.15% | Term Loan | | 06/12/07 to 06/02/17 | | | 12/07/15 to 11/06/25 | | 61 | 7 | % | 4.48 | % | $ | 316 | $ | 25,676 | $ | 25,373 | $ | 18,754 | |||||||||||||||||||||
Cambridge && ## | 3.75% to 5.50% | Term Loan | | 05/06/11 to 12/15/15 | | | 03/29/16 to 01/26/20 | | 13 | 0 | % | 4.47 | % | $ | 4,436 | $ | 4,389 | $ | 1,265 | |||||||||||||||||||||||
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 | % | 7.24 | % | $ | 963 | $ | 944 | $ | 552 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Total medallion loans ($219,977 pledged as collateral under borrowing arrangements) |
| 661 | 79 | % | 4.44 | % | $ | 8,086 | $ | 281,673 | $ | 279,189 | $ | 224,580 | ||||||||||||||||||||||||||||
|
|
|
|
|
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Commercial Loans | ||||||||||||||||||||||||||||||||||||||||||
Secured mezzanine (18% Minnesota, 14% North Carolina, 9% Oklahoma, 8% Ohio, 7% Texas, 7% Delaware 6% California, 5% Oregon, 5% Kansas, 5% North Dakota, 4% Pennsylvania, 4% Colorado, and 8% 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%) | Term Loan | 04/06/17 | 04/06/24 | 1 | 2 | % | 14.00 | % | $ | 5,000 | $ | 5,000 | $ | 5,000 | $ | 4,979 | |||||||||||||||||||||||||
| Stride Tool Holdings, LLC (interest rate includes PIK interest of 3%) | Term Loan | 04/05/16 | 04/05/21 | 1 | 1 | % | 15.00 | % | $ | 4,185 | $ | 4,185 | $ | 4,144 | ||||||||||||||||||||||||||||
| (capitalized interest of $185 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
| AA Plush Holdings, LLC (interest rate includes PIK interest of 6%) | Term Loan | 08/15/14 | 08/15/19 | 1 | 1 | % | 14.00 | % | $ | 3,345 | $ | 3,345 | $ | 3,340 | ||||||||||||||||||||||||||||
| (capitalized interest of $345 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||
Page 37 of 94
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
September 30, 2017
(Dollars in thousands) | Obligor | 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 | |||||||||||||||||||||||||||||||||
| Pinnacle Products International, Inc. (interest rate includes PIK interest of 17%) | Term Loan | 10/09/15 | 10/09/20 | 1 | 1 | % | 15.00 | % | $ | 3,224 | $ | 3,224 | $ | 3,224 | ||||||||||||||||||||||||||||||
| (capitalized interest of $424 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| Liberty Paper Products Acquisition LLC (interest rate includes PIK interest of 2%) | Term Loan | 06/09/16 | 06/09/21 | 1 | 1 | % | 14.00 | % | $ | 3,086 | $ | 3,086 | $ | 3,086 | ||||||||||||||||||||||||||||||
| (capitalized interest of $85 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| BB Opco, LLC d/b/a BreathableBaby, LLC (interest rate includes PIK interest of 3%) | Term Loan | 08/01/14 | 08/01/19 | 1 | 1 | % | 14.00 | % | $ | 2,698 | $ | 2,698 | $ | 2,700 | ||||||||||||||||||||||||||||||
| (capitalized interest of $197 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| EGC Operating Company, LLC (interest rate includes PIK interest of 2%) | Term Loan | 09/30/14 | 09/30/19 | 1 | 1 | % | 15.00 | % | $ | 2,463 | $ | 2,463 | $ | 2,468 | ||||||||||||||||||||||||||||||
| (capitalized interest of $53 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| American Cylinder, Inc. d/b/a All Safe (interest rate includes PIK interest of 7%) | Term Loan | 07/03/13 | 09/30/18 | 1 | 1 | % | 19.00 | % | $ | 1,750 | $ | 1,750 | $ | 1,750 | ||||||||||||||||||||||||||||||
| (capitalized interest of $250 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| Tri-Tech Forensics, Inc. (interest rate includes PIK interest of 2%) | 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%) | Term Loan | 05/05/17 | 05/05/22 | 1 | * | 14.00 | % | $ | 1,250 | $ | 1,250 | $ | 1,250 | $ | 1,250 | |||||||||||||||||||||||||||||
| + | Various Other && 10.00% to 14.00% | Term Loan | | 03/31/06 to 03/28/17 | | | 03/31/18 to 03/28/22 | | 3 | * | 11.00 | % | $ | 200 | $ | 271 | $ | 271 | $ | 207 | ||||||||||||||||||||||||
Professional, Scientific, and Technical Services (20% 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 | % | $ | 4,125 | $ | 4,125 | $ | 4,117 | |||||||||||||||||||||||||||||
| (capitalized interest of $625 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| Northern Technologies, LLC (interest rate includes PIK interest of 1%) | Term Loan | 01/29/16 | 01/29/23 | 1 | 1 | % | 13.00 | % | $ | 3,660 | $ | 3,660 | $ | 3,660 | ||||||||||||||||||||||||||||||
| (capitalized interest of $60 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| ADSCO Opco, LLC (interest rate includes PIK interest of 2%) | Term Loan | 10/25/16 | 10/25/21 | 1 | 1 | % | 13.00 | % | $ | 3,669 | $ | 3,669 | $ | 3,659 | ||||||||||||||||||||||||||||||
| (capitalized interest of $69 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%) | Term Loan | 05/21/15 | 05/21/22 | 1 | * | 14.00 | % | $ | 1,319 | $ | 1,319 | $ | 1,319 | |||||||||||||||||||||||||||||||
| (capitalized interest of $5 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| Portu-Sunberg Marketing LLC | Term Loan | 10/21/16 | 03/21/22 | 1 | * | 12.00 | % | $ | 1,250 | $ | 1,250 | $ | 1,245 | |||||||||||||||||||||||||||||||
Arts, Entertainment, and Recreation (11% of the total) | RPAC Racing, LLC & (interest rate includes PIK interest of 10.00%) | 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) | ||||||||||||||||||||||||||||||||||||||||||||
| RPAC Racing LLC & (interest rate includes PIK interest of 9.90%) | Term Loan | 06/22/16 | 03/31/20 | 1 | 1 | % | 9.90 | % | $ | 2,034 | $ | 2,034 | $ | 2,034 | ||||||||||||||||||||||||||||||
| (capitalized interest of $34 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| RPAC Racing LLC & (interest rate includes PIK interest of 9.90%) | Term Loan | 09/14/16 | 03/31/20 | 1 | * | 9.90 | % | $ | 1,000 | $ | 1,000 | $ | 1,000 | |||||||||||||||||||||||||||||||
Information (10% of the total) | US Internet Corp. | Term Loan | 03/14/17 | 03/14/22 | 1 | 1 | % | 14.50 | % | $ | 5,650 | $ | 4,075 | $ | 4,075 | $ | 4,069 | |||||||||||||||||||||||||||
| US Internet Corp. (interest rate includes PIK interest of 17%) | Term Loan | 03/14/17 | 03/14/22 | 1 | * | 19.00 | % | $ | 1,500 | $ | 1,099 | $ | 1,099 | $ | 1,099 | |||||||||||||||||||||||||||||
| (capitalized interest of $99 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| Centare Holdings, Inc. (interest rate includes PIK interest of 2%) | Term Loan | 08/30/13 | 08/30/18 | 1 | 1 | % | 14.00 | % | $ | 2,500 | $ | 2,500 | $ | 2,496 | ||||||||||||||||||||||||||||||
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%) | Term Loan | 07/03/17 | 09/03/22 | 1 | 1 | % | 15.00 | % | $ | 2,000 | $ | 2,018 | $ | 2,018 | $ | 2,018 | ||||||||||||||||||||||||||||
| (capitalized interest of $18 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 4.6%) | Term Loan | 09/08/17 | 09/08/24 | 1 | 1 | % | 16.50 | % | $ | 4,000 | $ | 4,011 | $ | 4,011 | $ | 4,011 | |||||||||||||||||||||||||||
| (capitalized interest of $11 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Transportation and Warehousing (5% of the total) | LLL Transport, Inc. (interest rate includes PIK interest of 3%) | Term Loan | 10/23/15 | 04/23/21 | 1 | 1 | % | 15.00 | % | $ | 3,880 | $ | 3,880 | $ | 3,878 | |||||||||||||||||||||||||||||
| (capitalized interest of $380 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Administrative and Support Services (4% of the total) | Staff One, Inc. | Term Loan | 06/30/08 | 03/31/18 | 1 | 1 | % | 3.00 | % | $ | 2,590 | $ | 2,590 | $ | 2,590 | |||||||||||||||||||||||||||||
| Staff One, Inc. (interest rate includes PIK interest of 7%) | Term Loan | 12/28/16 | 03/31/18 | 1 | * | 19.00 | % | $ | 588 | $ | 588 | $ | 588 | |||||||||||||||||||||||||||||||
| (capitalized interest of $31 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
Page 38 of 94
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
September 30, 2017
(Dollars in | Obligor | 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 | |||||||||||||||||||||||||||||||||
| Staff One, Inc. | Term Loan | 09/15/11 | 03/31/18 | 1 | * | 3.00 | % | $ | 279 | $ | 279 | $ | 279 | |||||||||||||||||||||||||||||||
Construction (2% of the total) | Highland Crossing-M, LLC | Term Loan | 01/07/15 | 02/01/25 | 1 | 1 | % | 11.50 | % | $ | 1,446 | $ | 1,446 | $ | 1,445 | |||||||||||||||||||||||||||||
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 | * | 9.79 | % | $ | 951 | $ | 951 | $ | 379 | ||||||||||||||||||||||||||
Retail Trade (0% of the total) | Various Other && 10.00% | Term Loan | 06/30/00 | 09/30/17 | 1 | * | �� | 10.00 | % | $ | 43 | $ | 43 | $ | 36 | |||||||||||||||||||||||||||||
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Total secured mezzanine(2) | 38 | 28 | % | 13.02 | % | $ | 21,100 | $ | 81,190 | $ | 81,190 | $ | 80,449 | |||||||||||||||||||||||||||||||
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Other secured commercial (53% New York, 42% New Jersey and 5% 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 | 12/17/17 | 1 | * | 12.00 | % | $ | 1,167 | $ | 1,167 | $ | 1,167 | ||||||||||||||||||||||||||||||
| (capitalized interest of $2,868 per footnote 2) | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | % | $ | 902 | $ | 868 | $ | 701 | |||||||||||||||||||||||||||
Accommodation and Food Services (14% 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 | * | 8.27 | % | $ | 653 | $ | 553 | $ | 312 | ||||||||||||||||||||||||||
Transportation and Warehousing (3% 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 (2% 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 | % | 9.51 | % | $ | 2,866 | $ | 2,727 | $ | 2,311 | |||||||||||||||||||||||||||||||||
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Total commercial loans (2) |
| 49 | 29 | % | 12.91 | % | $ | 21,100 | $ | 84,056 | $ | 83,917 | $ | 82,760 | ||||||||||||||||||||||||||||||
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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 | 102 | % | 0.00 | % | $ | 145,676 | $ | 290,657 | |||||||||||||||||||||||||||||||
NASCAR Race Team | Medallion MotorSports, LLC | 75% of LLC units | 11/24/10 | None | 1 | 2 | % | 42.40 | % | $ | 2,820 | $ | 5,486 | |||||||||||||||||||||||||||||||
Art Dealer | Medallion Fine Art, Inc. | 100% of common stock | 12/03/12 | None | 1 | 2 | % | 0.00 | % | $ | 1,798 | $ | 4,360 | |||||||||||||||||||||||||||||||
Loan Servicing | Medallion Servicing Corp. | 100% of common stock | 11/05/10 | None | 1 | * | 0.00 | % | $ | 131 | $ | 131 | ||||||||||||||||||||||||||||||||
Professional Sports Team | LAX Group LLC | | 45% of membership interests | | 05/23/12 | None | 1 | 1 | % | 0.00 | % | $ | 477 | $ | 3,227 | |||||||||||||||||||||||||||||
Media | Medallion Taxi Media, Inc. | 100% of common stock | 01/01/17 | None | 1 | * | 0.00 | % | $ | 0 | ||||||||||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries, net | 6 | 107 | % | 0.83 | % | $ | 0 | $ | 0 | $ | 150,902 | $ | 303,861 | |||||||||||||||||||||||||||||||
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Equity investments | ||||||||||||||||||||||||||||||||||||||||||||
Commercial Finance | Convergent Capital, Ltd ** | | 7% of limited partnership interest | | 07/20/07 | None | 1 | * | 0.00 | % | $ | 1,272 | $ | 995 | ||||||||||||||||||||||||||||||
NASCAR Race Team | Rpac Racing LLC | | 1,000 shares of Series D | | 08/25/15 | None | 1 | * | 0.00 | % | $ | 0 | $ | 1,431 | ||||||||||||||||||||||||||||||
Loan Servicing | Upgrade, Inc. | | 166,667 shares of Series A-1 preferred stock | | 09/30/16 | None | 1 | * | 0.00 | % | $ | 250 | $ | 1,455 | ||||||||||||||||||||||||||||||
Employee Leasing Services | Staff One, Inc. | 46.4% preferred stock | 06/30/08 | None | 2 | * | 0.00 | % | $ | 472 | $ | 1,172 | ||||||||||||||||||||||||||||||||
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 Series A-2 LLC units | 04/05/16 | None | 1 | * | 0.00 | % | $ | 500 | $ | 500 | ||||||||||||||||||||||||||||||||
Services related to advertising | ADSCO Opco, LLC | | 7.9% of LLC units of Class ASeries A-2 | | 10/25/16 | None | 1 | * | 0.00 | % | $ | 400 | $ | 400 | ||||||||||||||||||||||||||||||
Page 39 of 94
Medallion Financial Corp.
Consolidated Summary Schedule of Investments
September 30, 2017
(Dollars in | Obligor Name/ | 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 | |||||||||||||||||||||||||||||||
Envirnomental Consulting Services | Northern Technologies, LLC | 8.27% of LLC units | | 01/29/2016, 12/5/16 & 6/12/17 | | None | 1 | * | 0.00 | % | $ | 408 | $ | 408 | $ | 408 | ||||||||||||||||||||||||||
Paper Tapes Manufacturer | Liberty Paper Products Acquisition, LLC | 100% of Series A preferred LLCunits - 12% total | 06/09/16 | None | 1 | * | 0.00 | % | $ | 350 | $ | 350 | ||||||||||||||||||||||||||||||
Stuffed Toy Manufacturer | AA Plush Holdings, LLC | 1.6% LLC common units | 08/15/14 | 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 | ||||||||||||||||||||||||||||||
Engineering Design Service | 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 | ||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||
Sheet metal manufacturer | SWDP Acquisition Co., LLC | 9.9875% of Common LLC units | 04/06/17 | None | 1 | * | 0.00 | % | $ | 400 | $ | 400 | $ | 400 | ||||||||||||||||||||||||||||
Manufacturer of industrial filters | Filter Holdings, Inc. | 7.14% of Common Stock, 7.14% of Preferred Stock | 05/05/17 | None | 2 | * | 0.00 | % | $ | 207 | $ | 207 | $ | 207 | ||||||||||||||||||||||||||||
Distributor & service provider of car wash equipment and chemical solutions | Harrell’s Car Wash Systems, Inc. | 0.89% of Common Stock | 07/03/17 | None | 1 | * | 0.00 | % | $ | 100 | $ | 100 | $ | 100 | ||||||||||||||||||||||||||||
Distributor of specialty sand products | Green Diamond Performance Materials, Inc. | 4.26% of Preferred Series A Stock | 09/08/17 | None | 1 | * | 0.00 | % | $ | 200 | $ | 200 | $ | 200 | ||||||||||||||||||||||||||||
Design, assemble, distribute forensic supplies | TTFI Holdings, Inc. | 4.91% of Common Stock; 4.61% of Preferred Stock | 06/15/17 | None | 3 | * | 0.00 | % | $ | 192 | $ | 192 | $ | 192 | ||||||||||||||||||||||||||||
Various Other # | + | ** | * Various | | 09/10/98 to 10/19/16 | | None to 2/5/23 | | 12 | * | 0.00 | % | $ | 868 | $ | 884 | ||||||||||||||||||||||||||
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Equity investments, net | 36 | 4 | % | 0.00 | % | $ | 1,508 | $ | 0 | $ | 6,909 | $ | 9,984 | |||||||||||||||||||||||||||||
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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 ($219,977 pledged as collateral under borrowing arrangements) (3) |
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| 752 | 219 | % | 4.70 | % | $ | 30,694 | $ | 365,729 | $ | 520,917 | $ | 621,185 | ||||||||||||||||||||||||||||||
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Page 40 of 94
Page 41 of 94
Medallion Financial Corp
CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
As of and for the nine months ended September 30, 2017such date, there were no subsequent events that required disclosure.
Page 35 of 59
Name of issuer and title of issue (Dollars in thousands) | Number of shares (all restricted unless otherwise noted) | Equity in net profit and (loss) for the quarter ended 9/30/17 | Amount of dividends or interest(1) for the quarter ended 9/30/17 | Equity in net profit and (loss) for the nine months ended 9/30/17 | Amount of dividends or interest(1) for the nine months ended 9/30/17 | Value as of 9/30/17 | ||||||||||||||||
Medallion Bank – common stock | 1,000,000 shares - 100% of common stock | $ | 4,568 | $ | 0 | $ | 10,193 | $ | 0 | $ | 290,657 | |||||||||||
Medallion Motorsports, LLC – membership interest(2) | 75% of membership interest | (2,530 | ) | 1,196 | (1,493 | ) | 1,196 | 5,486 | ||||||||||||||
Medallion Fine Art, Inc. – common stock (3) | 1,000 shares - 100% of common stock | (95 | ) | 0 | 713 | 0 | 4,360 | |||||||||||||||
LAX Group LLC – membership interest | 45% of membership interest | (47 | ) | 0 | 1,262 | 0 | 3,227 | |||||||||||||||
Medallion Servicing Corp. – common stock | 1,000 shares - 100% of common stock | 176 | 0 | 414 | 0 | 130 | ||||||||||||||||
Medallion Taxi Media, Inc. – common stock | 1,000 shares - 100% of common stock | (37 | ) | 60 | 0 | 60 | 0 | |||||||||||||||
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Total investments in Medallion Bank and other controlled subsidiaries | 2,035 | 1,256 | 11,089 | $ | 1,256 | 303,861 | ||||||||||||||||
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RPAC Racing LLC (2) | 100% of Series D units | 0 | 0 | 0 | 0 | 1,431 | ||||||||||||||||
Stride Tool Holdings LLC (4) – membership interest | 7.14% of Series A membership interest | 0 | 0 | 0 | 0 | 500 | ||||||||||||||||
Northern Technologies LLC – membership interest(5) | 7.7% of membership interest | 0 | 0 | 0 | 0 | 408 | ||||||||||||||||
ADSCO Holdco LLC – membership interest (6) | 5.65% of membership interest | 0 | 0 | 0 | 0 | 400 | ||||||||||||||||
SWDP Acquisition Co LLC.(7) | 9.99% of membership interest | 0 | 0 | 0 | 0 | 400 | ||||||||||||||||
Appliance Recycling Centers of America Inc. – common stock | 8.86% of common stock | 0 | 0 | 0 | 0 | 16 | ||||||||||||||||
Filter Holdings INC.(8) | 7.14% of common & preferred stock | 0 | 0 | 0 | 0 | 207 | ||||||||||||||||
Third Century JRT, Inc.(9) | 13% of common stock | 0 | 0 | 0 | 0 | 200 | ||||||||||||||||
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Total equity investments in affiliates | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 3,562 | ||||||||||||
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Page 42 of 94
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Page 43 of 94
The table below provides a recap of the changes in the investment in the respective issuers for the 2017 quarters.
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 | 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) | ||||||||||||||||||||||||||||||||||||||||||
Title of Issue | Common Stock | Common Stock(1) | 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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Value as of 12/31/16 | $ | 280,589 | $ | 3,647 | $ | 6,980 | $ | 475 | $ | 454 | $ | 1,690 | $ | — | $ | 200 | $ | 351 | $ | 500 | $ | 400 | $ | 1,351 | — | — | ||||||||||||||||||||||||||||||
Gross additions / investments | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Gross reductions / distributions | (502 | ) | — | — | (28 | ) | (96 | ) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Net equity in profit and loss, and unrealized appreciation and (depreciation) | 4,300 | 850 | 1,437 | (13 | ) | 61 | 1,456 | 20 | — | — | — | — | 235 | — | — | |||||||||||||||||||||||||||||||||||||||||
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Value as of 3/31/17 | 284,387 | 4,497 | 8,417 | 434 | 419 | 3,146 | 20 | 200 | 351 | 500 | 400 | 1,586 | — | — | ||||||||||||||||||||||||||||||||||||||||||
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Gross additions / investments | 302 | — | — | — | — | 100 | — | — | 57 | — | — | — | 207 | 400 | ||||||||||||||||||||||||||||||||||||||||||
Gross reductions / distributions | — | — | — | — | (399 | ) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Net equity in profit and loss, and unrealized appreciation and (depreciation) | 1,325 | (42 | ) | (400 | ) | (116 | ) | 177 | (147 | ) | 17 | — | — | — | — | 236 | — | — | ||||||||||||||||||||||||||||||||||||||
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Value as of 6/30/17 | 286,014 | 4,455 | 8,017 | 318 | 197 | 3,099 | 37 | 200 | 408 | 500 | 400 | 1,822 | 207 | 400 | ||||||||||||||||||||||||||||||||||||||||||
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Gross additions / investments | 75 | — | — | — | — | 175 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Gross reductions / distributions | — | — | (1,197 | ) | (308 | ) | (243 | ) | — | (60 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Net equity in profit and loss, and unrealized appreciation and (depreciation) | 4,568 | (95 | ) | (1,334 | ) | 6 | 176 | (47 | ) | 23 | — | — | — | — | (391 | ) | — | — | ||||||||||||||||||||||||||||||||||||||
Other adjustments | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
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Value as of 9/30/17 | $ | 290,657 | $ | 4,360 | $ | 5,486 | $ | 16 | $ | 130 | $ | 3,227 | $ | 0 | $ | 200 | $ | 408 | $ | 500 | $ | 400 | $ | 1,431 | $ | 207 | 400 | |||||||||||||||||||||||||||||
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Page 44 of 94
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Page 45 of 94
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) | ||||||||||||||||||||||||||||||||||||||||||
Page 46 of 94
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 | |||||||||||||||||||||||||||||||
Page 47 of 94
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 | ||||||||||||||||||||||||||||||
Page 48 of 94
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 | |||||||||||||||||||||||||||||||
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, 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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Page 49 of 94
Page 50 of 94
Medallion Financial Corp
CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFIILIATES
As of and for the year ended December 31, 2016
Name of issuer and title of issue (Dollars in thousands) | 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 | ||||||||||
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 afiliates | $ | 0 | $ | 0 | $ | 3,577 | ||||||||
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Page 51 of 94
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 | (4,227 | ) | — | (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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Page 52 of 94
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERALOBJECTIVE
The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes thereto for the three and nine months ended September 30, 2021 and the year ended December 31, 2020. This section is intended to provide management’s perspective of our financial condition and results of operations. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors in our Annual Report on Form 10-K, as updated by this Quarterly Report on Form 10-Q.
GENERAL
We are a specialty finance company that has historically had a leading positionwhose strategic focus and growth in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. Recently, our strategic growthrecent years has been through aMedallion Bank (a wholly-owned portfolio company of ours, Medallion Bank,subsidiary), which originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers,home improvements, and provides loan origination and other services to fintech partners. Historically we have had a leading position in originating, acquiring, and servicing loans that finance small-scale home improvements.taxi medallions and various types of commercial businesses.
Since Medallion Bank, or the Bank, acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 18%17%. Since 1996, the year in which we became a public company, weWe 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 3% (6% and 3% on a managed basis when combined with Medallion Bank). In January 2017, we announced our plans to transform our overall strategy. We are transitioningtransitioned away from medallion lending and placinghave placed our strategic focus on our growing consumer financeloan portfolio. Total assets under our management and the managementAs a result of our unconsolidated wholly-owned subsidiaries, which includes our managed net investment portfolio, as well as assets serviced for third party investors, were $1,646,000,000change in strategy, as of September 30, 2017,2021, our consumer loans represented 94% of our gross loan portfolio, with commercial loans representing 5% and $1,632,000,000 and $1,634,000,000medallion loans representing 1%. Total assets under management, which includes assets serviced for third-party investors, were $1.8 billion as of September 30, 2021 and December 31, 20162020 and $1.7 billion as of September 30, 2016,2020, and have grown at a compound annual growth rate of 10%9% from $215,000,000 at the end of 1996.
Our loan-related earnings depend primarily on our level of net interestinterest 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, privately placed notes, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities.
We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Medallion Capital’sOur 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 areIn 2019, the Bank started building aclosed-end,non-diversified management strategic partnership program to provide lending and other services to financial technology, or fintech, companies. The Bank entered into an initial partnership in 2020 and began issuing its first loans, then entered into another strategic partnership in 2021, and continues to explore opportunities with additional fintech companies.
In recent years, we have focused on growing our consumer lending segments and maintaining the profitability of our commercial lending segment. Since the beginning of 2020, we have taken various steps to pursue this strategy, including:
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 aan industrial bank regulated by the FDIC and the Utah Department of Financial Institutions whichthat originates consumer loans, raises deposits, and conducts other banking activities. MedallionThe 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 Medallionthe Bank, whowhich originated these loans, and have since been serviced by Medallion Servicing Corp., or MSC. However, at this time Medallionthe 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 $507,198,000portfolio, as of September 30, 2017.it winds down. MSC earns referral and servicing fees for these activities. As anon-investment company, Medallion
Page 36 of 59
We are considering various alternatives for the Bank, is not consolidated withwhich may include an initial public offering of its common stock, the Company.
Realized gainssale of all or losses on investments are recognized when the investments are sold or written off. The realized gains or 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 valuespart of the portfolio assets at the end of the period as compared with their estimated fair values at the beginning of the period. Generally, realized gains (losses) on investments and changes in unrealized appreciation (depreciation) on investments are inversely related. When an appreciated asset is sold to realizeBank, a gain, a decrease in the previously recorded unrealized appreciation occurs. Conversely, when a loss previously recorded as unrealized depreciation is realized by the salespin-off or other dispositionpotential transaction. We do not have a deadline for its consideration of a depreciated portfolio asset,these alternatives, and there can be no assurance that this evaluation process will result in any transaction being announced or consummated.
Page 37 of 59
COVID-19
The ongoing coronavirus, or COVID-19, pandemic, its broad impact and preventive measures taken to contain or mitigate the reclassification ofoutbreak have had, and may to continue to have, significant negative effects on the loss from unrealizedUS and global economy, employment levels, employee productivity, and financial market conditions. This has had, and may continue to realized causes a decrease in net unrealized depreciation and an increase in realized loss.
Page 53 of 94
Our investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described 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, by the FDIC and State of Utah, and also by additional marketplace restrictions, such ashave negative effects on the ability of our borrowers to transfer industrial bank charters. Becauserepay outstanding loans, the value of these restrictionscollateral securing loans, the demand for loans and other factors, our Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value.financial services products and consumer discretionary spending. As a result of this valuation process, we had previously used Medallion Bank’s actualthese or other consequences, the outbreak has adversely and materially affected our business, results of operations and financial condition. Although we continue to see signs of recovery, it remains uncertain, and the effects of the outbreak on us could be exacerbated given that our business model is largely consumer and small business directed, which are more severely affected by COVID-19 and the preventative measures taken to contain or mitigate the outbreak, including its significant negative effects on consumer discretionary spending. The full extent to which the outbreak will continue to impact our operations will depend on future developments, including the impact of the Delta variant, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the continued outbreak, the actions taken to contain or mitigate the outbreak and how long, and to what extent the economic recovery from its effects will take.
We have taken steps to operate through this crisis, including having had our workforce work remotely on a part-time basis in New York, though our employees outside of New York largely continue to work remotely. In addition, we implemented a number of cost-cutting measures, such as reducing employee headcount by 21% at our parent company, Medallion Financial Corp., and closing satellite offices in Long Island City, Chicago and Boston.
In March 2020, we adjusted the payment policies and procedures with our consumer and medallion businesses, and allowed borrowers to defer payments up to 180 days. As of September 30, 2021, minimal consumer loans remained on deferral and no medallion loans remained on deferral. For our consumer loan portfolios, although we believe that our deferral programs have been effective to date in mitigating the effect of COVID-19, the ultimate effects of COVID-19 on these portfolios remains to be seen. For our medallion portfolio, we determined that anticipated payment activity on our medallion portfolio was impossible to quantify upon exit of the deferral moratorium, and therefore all medallion loans were deemed impaired, placed on nonaccrual status, and written down to each market’s net collateral value at December 31, 2020, with additional write-offs taken during 2021. We will continue to monitor our medallion portfolio and related assets, which may result in additional write-downs, charge-offs or impairments, the impact of which could be material to our results of operations and financial condition.
Substantially all our medallion loans and related assets are concentrated in New York City. As a result of the COVID-19 pandemic, economic activity and taxi ridership decreased dramatically in New York City and despite the reopening of New York City, there has not been a substantial increase in ridership and gross meter fares. The extent to which the COVID-19 pandemic will continue to adversely affect taxi medallion owners and, by extension, our medallion loans and related assets, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, actions taken by governmental authorities, and the direct and indirect impact of the pandemic on taxi medallion owners and the behaviors of people who have historically taken taxis.
In regards to our commercial business, many of our mezzanine portfolio companies were able to access the Paycheck Protection Program, providing needed liquidity during a period of depressed market demands. MCI drew on its remaining unfunded commitments has a commitment from the SBA for $16,500,000 in debenture financing with a ten-year term, upon a capital infusion from Medallion Financial Corp. For the commercial portfolio, performance is slowly recovering although lingering impacts of COVID-19 continue to weigh on performance.
RPAC received $747,000 under the Paycheck Protection Program in the 2020 second quarter, all of which has been forgiven and accordingly recorded as Other income in the 2021 second quarter.
Page 38 of 59
Average Balances and Rates
The following table shows our consolidated average balance sheet, interest income and expense, and the average interest earning/bearing assets and liabilities, and which reflects the average yield on assets and average costs on liabilities for the three and nine months ended September 30, 2021 and 2020.
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2021 |
|
| 2020 |
| ||||||||||||||||||
(Dollars in thousands) |
| Average |
|
| Interest |
|
| Average |
|
| Average |
|
| Interest |
|
| Average |
| ||||||
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-earning cash and cash equivalents |
| $ | 3,470 |
|
| $ | 11 |
|
|
| 1.26 | % |
| $ | 75,877 |
|
| $ | 32 |
|
|
| 0.17 | % |
Federal funds sold |
|
| 44,648 |
|
|
| 6 |
|
|
| 0.05 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Investment securities |
|
| 48,161 |
|
|
| 223 |
|
|
| 1.84 |
|
|
| 46,712 |
|
|
| 206 |
|
|
| 1.75 |
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Recreation |
|
| 879,027 |
|
|
| 30,538 |
|
|
| 13.78 |
|
|
| 769,463 |
|
|
| 28,962 |
|
|
| 14.97 |
|
Home improvement |
|
| 376,989 |
|
|
| 8,586 |
|
|
| 9.04 |
|
|
| 295,040 |
|
|
| 7,218 |
|
|
| 9.73 |
|
Commercial |
|
| 71,008 |
|
|
| 2,102 |
|
|
| 11.74 |
|
|
| 71,143 |
|
|
| 1,931 |
|
|
| 10.80 |
|
Medallion |
|
| 5,705 |
|
|
| 26 |
|
|
| 1.81 |
|
|
| 67,730 |
|
|
| (909 | ) |
|
| (5.34 | ) |
Strategic partnership |
|
| 93 |
|
|
| 5 |
|
|
| 21.33 |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
Total loans |
|
| 1,332,822 |
|
|
| 41,257 |
|
|
| 12.28 |
|
|
| 1,203,381 |
|
|
| 37,202 |
|
|
| 12.30 |
|
Total interest-earning assets |
|
| 1,429,101 |
|
|
| 41,497 |
|
|
| 11.55 |
|
|
| 1,325,970 |
|
|
| 37,440 |
|
|
| 11.23 |
|
Non-interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash |
|
| 30,576 |
|
|
|
|
|
|
|
|
| 15,843 |
|
|
|
|
|
|
| ||||
Equity investments |
|
| 10,189 |
|
|
|
|
|
|
|
|
| 10,363 |
|
|
|
|
|
|
| ||||
Income tax receivable |
|
| (822 | ) |
|
|
|
|
|
|
|
| 226 |
|
|
|
|
|
|
| ||||
Loan collateral in process of foreclosure(1) |
|
| 45,962 |
|
|
|
|
|
|
|
|
| 49,586 |
|
|
|
|
|
|
| ||||
Goodwill and intangible assets |
|
| 200,992 |
|
|
|
|
|
|
|
|
| 202,437 |
|
|
|
|
|
|
| ||||
Other assets |
|
| 44,360 |
|
|
|
|
|
|
|
|
| 52,536 |
|
|
|
|
|
|
| ||||
Total non-interest-earning assets |
|
| 331,257 |
|
|
|
|
|
|
|
|
| 330,991 |
|
|
|
|
|
|
| ||||
Total assets |
| $ | 1,760,358 |
|
|
|
|
|
|
|
| $ | 1,656,961 |
|
|
|
|
|
|
| ||||
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deposits |
| $ | 1,164,457 |
|
| $ | 4,190 |
|
|
| 1.43 | % |
| $ | 1,092,647 |
|
| $ | 5,454 |
|
|
| 1.99 | % |
Retail and privately placed notes |
|
| 121,000 |
|
|
| (4,433 | ) |
|
| (14.54 | ) |
|
| 69,625 |
|
|
| 1,683 |
|
|
| 9.62 |
|
SBA debentures and borrowings |
|
| 64,333 |
|
|
| 6,648 |
|
|
| 41.00 |
|
|
| 73,947 |
|
|
| 674 |
|
|
| 3.63 |
|
Preferred securities |
|
| 33,000 |
|
|
| (247 | ) |
|
| (2.97 | ) |
|
| 33,000 |
|
|
| 205 |
|
|
| 2.47 |
|
Notes payable to banks |
|
| 511 |
|
|
| 1,230 |
|
|
| 954.97 |
|
|
| 31,935 |
|
|
| 327 |
|
|
| 4.07 |
|
Other borrowings |
|
| 8,049 |
|
|
| 38 |
|
|
| 1.87 |
|
|
| 8,633 |
|
|
| 41 |
|
|
| 1.89 |
|
Total interest-bearing liabilities |
|
| 1,391,350 |
|
|
| 7,426 |
|
|
| 2.12 |
|
|
| 1,309,787 |
|
|
| 8,384 |
|
|
| 2.55 |
|
Non-interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deferred tax liability |
|
| 9,621 |
|
|
|
|
|
|
|
|
| 3,803 |
|
|
|
|
|
|
| ||||
Other liabilities(2) |
|
| 27,971 |
|
|
|
|
|
|
|
|
| 27,599 |
|
|
|
|
|
|
| ||||
Total non-interest-bearing liabilities |
|
| 37,592 |
|
|
|
|
|
|
|
|
| 31,402 |
|
|
|
|
|
|
| ||||
Total liabilities |
|
| 1,428,942 |
|
|
|
|
|
|
|
|
| 1,341,189 |
|
|
|
|
|
|
| ||||
Non-controlling interest |
|
| 72,058 |
|
|
|
|
|
|
|
|
| 71,887 |
|
|
|
|
|
|
| ||||
Total stockholders’ equity |
|
| 259,358 |
|
|
|
|
|
|
|
|
| 243,885 |
|
|
|
|
|
|
| ||||
Total liabilities and stockholders' equity |
| $ | 1,760,358 |
|
|
|
|
|
|
|
| $ | 1,656,961 |
|
|
|
|
|
|
| ||||
Net interest income |
|
|
|
| $ | 34,071 |
|
|
|
|
|
|
|
| $ | 29,056 |
|
|
|
| ||||
Net interest margin |
|
|
|
|
|
|
|
| 9.48 | % |
|
|
|
|
|
|
|
| 8.72 | % | ||||
Page 39 of 59
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2021 |
|
| 2020 |
| ||||||||||||||||||
(Dollars in thousands) |
| Average |
|
| Interest |
|
| Average |
|
| Average |
|
| Interest |
|
| Average |
| ||||||
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-earning cash and cash equivalents |
| $ | 3,130 |
|
| $ | 28 |
|
|
| 1.20 | % |
| $ | 73,620 |
|
| $ | 151 |
|
|
| 0.27 | % |
Federal funds sold |
|
| 42,135 |
|
|
| 15 |
|
|
| 0.05 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Investment securities |
|
| 45,091 |
|
|
| 666 |
|
|
| 1.97 |
|
|
| 46,963 |
|
|
| 788 |
|
|
| 2.24 |
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Recreation |
|
| 826,772 |
|
|
| 86,857 |
|
|
| 14.05 |
|
|
| 735,228 |
|
|
| 82,525 |
|
|
| 14.99 |
|
Home improvement |
|
| 353,017 |
|
|
| 24,732 |
|
|
| 9.37 |
|
|
| 269,671 |
|
|
| 19,431 |
|
|
| 9.62 |
|
Commercial |
|
| 65,606 |
|
|
| 5,178 |
|
|
| 10.55 |
|
|
| 69,948 |
|
|
| 5,589 |
|
|
| 10.67 |
|
Medallion |
|
| 8,759 |
|
|
| (1,538 | ) |
|
| (23.48 | ) |
|
| 87,271 |
|
|
| 86 |
|
|
| 0.13 |
|
Strategic partnership |
|
| 59 |
|
|
| 15 |
|
|
| 33.99 |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
Total loans |
|
| 1,254,213 |
|
|
| 115,244 |
|
|
| 12.29 |
|
|
| 1,162,125 |
|
|
| 107,631 |
|
|
| 12.37 |
|
Total interest-earning assets |
|
| 1,344,569 |
|
|
| 115,953 |
|
|
| 11.56 |
|
|
| 1,282,708 |
|
|
| 108,570 |
|
|
| 11.31 |
|
Non-interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash |
|
| 45,244 |
|
|
|
|
|
|
|
|
| 16,268 |
|
|
|
|
|
|
| ||||
Equity investments |
|
| 9,833 |
|
|
|
|
|
|
|
|
| 10,498 |
|
|
|
|
|
|
| ||||
Loan collateral in process of foreclosure(1) |
|
| 50,096 |
|
|
|
|
|
|
|
|
| 49,774 |
|
|
|
|
|
|
| ||||
Goodwill and intangible assets |
|
| 201,354 |
|
|
|
|
|
|
|
|
| 202,799 |
|
|
|
|
|
|
| ||||
Deferred tax asset |
|
| (206 | ) |
|
|
|
|
|
|
|
| 132 |
|
|
|
|
|
|
| ||||
Other assets |
|
| 45,171 |
|
|
|
|
|
|
|
|
| 49,511 |
|
|
|
|
|
|
| ||||
Total non-interest-earning assets |
|
| 351,492 |
|
|
|
|
|
|
|
|
| 328,982 |
|
|
|
|
|
|
| ||||
Total assets |
| $ | 1,696,061 |
|
|
|
|
|
|
|
| $ | 1,611,690 |
|
|
|
|
|
|
| ||||
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deposits |
| $ | 1,104,378 |
|
| $ | 13,366 |
|
|
| 1.62 | % |
| $ | 1,039,153 |
|
| $ | 17,315 |
|
|
| 2.23 | % |
Retail and privately placed notes |
|
| 120,615 |
|
|
| 7,729 |
|
|
| 8.57 |
|
|
| 69,625 |
|
|
| 5,049 |
|
|
| 9.69 |
|
SBA debentures and borrowings |
|
| 63,138 |
|
|
| 1,586 |
|
|
| 3.36 |
|
|
| 72,659 |
|
|
| 2,016 |
|
|
| 3.71 |
|
Preferred securities |
|
| 33,000 |
|
|
| 791 |
|
|
| 3.20 |
|
|
| 33,000 |
|
|
| 766 |
|
|
| 3.10 |
|
Notes payable to banks |
|
| 13,441 |
|
|
| 133 |
|
|
| 1.32 |
|
|
| 32,468 |
|
|
| 951 |
|
|
| 3.91 |
|
Other borrowings |
|
| 8,009 |
|
|
| 113 |
|
|
| 1.89 |
|
|
| 8,148 |
|
|
| 122 |
|
|
| 2.00 |
|
Total interest-bearing liabilities |
|
| 1,342,581 |
|
|
| 23,718 |
|
|
| 2.36 |
|
|
| 1,255,053 |
|
|
| 26,219 |
|
|
| 2.79 |
|
Non-interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deferred tax liability |
|
| 5,492 |
|
|
|
|
|
|
|
|
| 5,978 |
|
|
|
|
|
|
| ||||
Other liabilities(2) |
|
| 27,831 |
|
|
|
|
|
|
|
|
| 26,955 |
|
|
|
|
|
|
| ||||
Total non-interest-bearing liabilities |
|
| 33,323 |
|
|
|
|
|
|
|
|
| 32,933 |
|
|
|
|
|
|
| ||||
Total liabilities |
|
| 1,375,904 |
|
|
|
|
|
|
|
|
| 1,287,986 |
|
|
|
|
|
|
| ||||
Non-controlling interest |
|
| 72,597 |
|
|
|
|
|
|
|
|
| 71,321 |
|
|
|
|
|
|
| ||||
Total stockholders’ equity |
|
| 247,560 |
|
|
|
|
|
|
|
|
| 252,383 |
|
|
|
|
|
|
| ||||
Total liabilities and stockholders' equity |
| $ | 1,696,061 |
|
|
|
|
|
|
|
| $ | 1,611,690 |
|
|
|
|
|
|
| ||||
Net interest income |
|
|
|
| $ | 92,235 |
|
|
|
|
|
|
|
| $ | 82,351 |
|
|
|
| ||||
Net interest margin |
|
|
|
|
|
|
|
| 9.19 | % |
|
|
|
|
|
|
|
| 8.58 | % | ||||
Page 40 of 59
During the quarter, our net loans receivable had a yield of 12.28% (compared to 12.30% in the prior year’s third quarter), mainly driven by the growth in the home improvement portfolio which has a lower yield than our recreation portfolio, offset by contraction in the medallion portfolio, all of which is on non-accrual. During the year to date period, our net loans receivable had a yield of 12.29% (compared to 12.37% in the prior year period), similarly driven by the growth in the home improvement portfolio which has a lower yield than our recreation portfolio, offset by contraction in the medallion portfolio, all of which is on non-accrual. The debt, mainly certificates of deposit, helps fund our growing consumer loan business and as market rates have decreased, so has the average cost of borrowings. In addition, we issued new privately placed notes since December 31, 2020, which were at lower rates compared to the prior issuances.
Rate/Volume Analysis
The following tables present the change in interest income and expense due to changes in the average balances (volume) and average rates, calculated for the periods indicated.
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2021 |
|
| 2020 |
| ||||||||||||||||||
(Dollars in thousands) |
| Increase |
|
| Increase |
|
| Net |
|
| Increase |
|
| Increase |
|
| Net |
| ||||||
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-earning cash and cash equivalents |
| $ | (1 | ) |
| $ | (29 | ) |
| $ | (30 | ) |
| $ | 160 |
|
| $ | (273 | ) |
| $ | (113 | ) |
Investment securities |
|
| 8 |
|
|
| 24 |
|
|
| 32 |
|
|
| 12 |
|
|
| (109 | ) |
|
| (97 | ) |
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Recreation |
|
| 3,886 |
|
|
| (2,310 | ) |
|
| 1,576 |
|
|
| 3,616 |
|
|
| (801 | ) |
|
| 2,815 |
|
Home improvement |
|
| 1,886 |
|
|
| (518 | ) |
|
| 1,368 |
|
|
| 1,848 |
|
|
| 186 |
|
|
| 2,034 |
|
Commercial |
|
| 1 |
|
|
| 170 |
|
|
| 171 |
|
|
| 150 |
|
|
| (106 | ) |
|
| 44 |
|
Medallion |
|
| (285 | ) |
|
| 1,220 |
|
|
| 935 |
|
|
| (182 | ) |
|
| (1,701 | ) |
|
| (1,883 | ) |
Strategic partnerships |
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total loans |
|
| 5,493 |
|
|
| (1,438 | ) |
|
| 4,055 |
|
|
| 5,432 |
|
|
| (2,422 | ) |
|
| 3,010 |
|
Total interest-earning assets |
|
| 5,500 |
|
|
| (1,443 | ) |
|
| 4,057 |
|
|
| 5,604 |
|
|
| (2,804 | ) |
|
| 2,800 |
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deposits |
| $ | 273 |
|
| $ | (1,537 | ) |
| $ | (1,264 | ) |
| $ | 919 |
|
| $ | (1,468 | ) |
| $ | (549 | ) |
SBA debentures and borrowings |
|
| (992 | ) |
|
| 6,966 |
|
|
| 5,974 |
|
|
| (12 | ) |
|
| (55 | ) |
|
| (67 | ) |
Notes payable to banks |
|
| (75,638 | ) |
|
| 76,541 |
|
|
| 903 |
|
|
| 74 |
|
|
| (9 | ) |
|
| 65 |
|
Retail and privately placed notes |
|
| (1,878 | ) |
|
| (4,238 | ) |
|
| (6,116 | ) |
|
| (66 | ) |
|
| (43 | ) |
|
| (109 | ) |
Preferred securities |
|
| 1 |
|
|
| (453 | ) |
|
| (452 | ) |
|
| — |
|
|
| (175 | ) |
|
| (175 | ) |
Other borrowings |
|
| (3 | ) |
|
| — |
|
|
| (3 | ) |
|
| (1 | ) |
|
| (5 | ) |
|
| (6 | ) |
Total interest-bearing liabilities |
|
| (78,237 | ) |
|
| 77,279 |
|
|
| (958 | ) |
|
| 914 |
|
|
| (1,755 | ) |
|
| (841 | ) |
Net |
| $ | 83,737 |
|
| $ | (78,722 | ) |
| $ | 5,015 |
|
| $ | 4,690 |
|
| $ | (1,049 | ) |
| $ | 3,641 |
|
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2021 |
|
| 2020 |
| ||||||||||||||||||
(Dollars in thousands) |
| Increase |
|
| Increase |
|
| Net |
|
| Increase |
|
| Increase |
|
| Net |
| ||||||
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-earning cash and cash equivalents |
| $ | (27 | ) |
| $ | (81 | ) |
| $ | (108 | ) |
| $ | 485 |
|
| $ | (778 | ) |
| $ | (293 | ) |
Investment securities |
|
| (28 | ) |
|
| (94 | ) |
|
| (122 | ) |
|
| 56 |
|
|
| (260 | ) |
|
| (204 | ) |
Loans |
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
| |||
Recreation |
|
| 9,617 |
|
|
| (5,285 | ) |
|
| 4,332 |
|
|
| 12,149 |
|
|
| (2,620 | ) |
|
| 9,529 |
|
Home improvement |
|
| 5,839 |
|
|
| (538 | ) |
|
| 5,301 |
|
|
| 4,892 |
|
|
| 351 |
|
|
| 5,243 |
|
Commercial |
|
| (343 | ) |
|
| (68 | ) |
|
| (411 | ) |
|
| 779 |
|
|
| (787 | ) |
|
| (8 | ) |
Medallion |
|
| 13,786 |
|
|
| (15,410 | ) |
|
| (1,624 | ) |
|
| (807 | ) |
|
| (1,588 | ) |
|
| (2,395 | ) |
Strategic partnerships |
|
| 13 |
|
|
| 2 |
|
|
| 15 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total loans |
|
| 28,912 |
|
|
| (21,299 | ) |
|
| 7,613 |
|
|
| 17,013 |
|
|
| (4,644 | ) |
|
| 12,369 |
|
Total interest-earning assets |
|
| 28,857 |
|
|
| (21,474 | ) |
|
| 7,383 |
|
|
| 17,554 |
|
|
| (5,682 | ) |
|
| 11,872 |
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deposits |
| $ | 789 |
|
| $ | 7,123 |
|
| $ | 7,912 |
|
| $ | 2,677 |
|
| $ | (1,771 | ) |
| $ | 906 |
|
SBA debentures and borrowings |
|
| (239 | ) |
|
| 1,151 |
|
|
| 912 |
|
|
| (138 | ) |
|
| (107 | ) |
|
| (245 | ) |
Notes payable to banks |
|
| (188 | ) |
|
| (6 | ) |
|
| (194 | ) |
|
| 1,024 |
|
|
| (80 | ) |
|
| 944 |
|
Retail and privately placed notes |
|
| 3,267 |
|
|
| 2,779 |
|
|
| 6,046 |
|
|
| (480 | ) |
|
| (271 | ) |
|
| (751 | ) |
Preferred securities |
|
| — |
|
|
| 586 |
|
|
| 586 |
|
|
| — |
|
|
| (404 | ) |
|
| (404 | ) |
Other borrowings |
|
| (2 | ) |
|
| 74 |
|
|
| 72 |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
Total interest-bearing liabilities |
|
| 3,627 |
|
|
| 11,707 |
|
|
| 15,334 |
|
|
| 3,085 |
|
|
| (2,633 | ) |
|
| 452 |
|
Net |
| $ | 25,230 |
|
| $ | (33,181 | ) |
| $ | (7,951 | ) |
| $ | 14,469 |
|
| $ | (3,049 | ) |
| $ | 11,420 |
|
During the three and nine months ended September 30, 2021, the increase in the interest earning assets was mainly driven by the increase in volume of consumer loans, even as the best estimaterates declined. The debt change similarly was driven by the increase in the
Page 41 of changes in fair value, and recorded59
borrowings, mainly driven by the results as a componentdeposits, which are used to fund the consumer loans, along with new privately placed notes, offset by the repayment of unrealized appreciation (depreciation) on investments. In the second quarter of 2015, we first became aware of externalretail notes.
Our interest in Medallion Bank and its portfolio’s 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 was recorded in 2016, and $563,000 was recorded in 2017. See Note 3 for additional information about Medallion Bank.
Trends in Investment Portfolio
Our investment incomeexpense is driven by the interest rates payable on our bank certificates of deposit, short-term credit facilities with banks, fixed-rate, long-term debentures issued to the SBA, and other short-term notes payable. The Bank issues brokered time certificates of deposit, which are our lowest borrowing costs. The Bank is able to bid on these deposits at a variety of maturity options, which allows for improved interest rate management strategies.
Our cost of funds is primarily driven by the rates paid on our various debt instruments and their relative mix, and changes in the levels of average borrowings outstanding. See Note 5 to the consolidated financial statements for details on the terms of our outstanding debt. Our debentures issued to the SBA typically have terms of ten years.
We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities outstanding during the period. The tables above show the average borrowings and related borrowing costs for the three and nine months ended September 30, 2021 and 2020.
We continue to seek SBA funding through Medallion Capital, Inc., to the extent it offers attractive rates. SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the Small Business Investment Act of 1985, as amended, or the SBIA, and SBA regulations. In July 2020, we obtained a $25,000,000 commitment from the SBA. We believe that financing operations primarily with short-term floating rate secured bank debt has generally decreased our interest expense, but has also increased our exposure to the risk of increases in market interest rates, which we mitigate with certain interest rate strategies. At September 30, 2021 and 2020, short-term adjustable rate debt constituted 2% and 4% of total debt.
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 yields on our investment portfolio. To identify trendswhich are amortized to interest income over the life of the loan. During the three and nine months ended September 30, 2021, there was continued growth in the balancesconsumer lending segments along with recoveries on the medallion segment, which was partly offset by consumer and yields,medallion charge-offs during the period, the continuing of loans aged over 120 days transferred to loan collateral in process of foreclosure and payments received from borrowers.
Three Months Ended September 30, 2021 |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| Strategic Partnership |
|
| Total |
| ||||||
Loans – June 30, 2021 |
| $ | 886,206 |
|
| $ | 368,257 |
|
| $ | 69,520 |
|
| $ | 16,514 |
|
| $ | 70 |
|
| $ | 1,340,567 |
|
Loan originations |
|
| 118,407 |
|
|
| 68,692 |
|
|
| 5,700 |
|
|
| — |
|
|
| 2,969 |
|
|
| 195,768 |
|
Principal payments, sales, and maturities |
|
| (70,350 | ) |
|
| (38,571 | ) |
|
| (3,332 | ) |
|
| (1,449 | ) |
|
| (2,944 | ) |
|
| (116,646 | ) |
Charge-offs, net |
|
| 335 |
|
|
| 239 |
|
|
| — |
|
|
| 265 |
|
|
| — |
|
|
| 839 |
|
Transfer to loan collateral in process of foreclosure, net |
|
| (2,085 | ) |
|
| — |
|
|
| — |
|
|
| (397 | ) |
|
| — |
|
|
| (2,482 | ) |
Amortization of origination costs |
|
| (2,532 | ) |
|
| 386 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,146 | ) |
Amortization of loan premium |
|
| (60 | ) |
|
| (90 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (150 | ) |
FASB origination costs |
|
| 3,869 |
|
|
| (139 | ) |
|
| 12 |
|
|
| 1 |
|
|
| — |
|
|
| 3,743 |
|
Paid-in-kind interest |
|
| — |
|
|
| — |
|
|
| 188 |
|
|
| — |
|
|
| — |
|
|
| 188 |
|
Loans – September 30, 2021 |
| $ | 933,790 |
|
| $ | 398,774 |
|
| $ | 72,088 |
|
| $ | 14,934 |
|
| $ | 95 |
|
| $ | 1,419,681 |
|
Nine Months Ended September 30, 2021 |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| Strategic Partnership |
|
| Total |
| ||||||
Loans – December 31, 2020 |
| $ | 792,686 |
|
| $ | 334,033 |
|
| $ | 65,327 |
|
| $ | 37,768 |
|
| $ | 24 |
|
| $ | 1,229,838 |
|
Loan originations |
|
| 346,724 |
|
|
| 179,743 |
|
|
| 20,916 |
|
|
| — |
|
|
| 7,339 |
|
|
| 554,722 |
|
Principal payments, sales, and maturities |
|
| (199,449 | ) |
|
| (115,369 | ) |
|
| (14,861 | ) |
|
| (5,663 | ) |
|
| (7,268 | ) |
|
| (342,610 | ) |
Charge-offs, net |
|
| (1,334 | ) |
|
| (237 | ) |
|
| — |
|
|
| (10,529 | ) |
|
| — |
|
|
| (12,100 | ) |
Transfer to loan collateral in process of foreclosure, net |
|
| (8,118 | ) |
|
| — |
|
|
| — |
|
|
| (5,027 | ) |
|
| — |
|
|
| (13,145 | ) |
Amortization of origination costs |
|
| (7,171 | ) |
|
| 1,293 |
|
|
| 12 |
|
|
| (2 | ) |
|
| — |
|
|
| (5,868 | ) |
Amortization of loan premium |
|
| (161 | ) |
|
| (256 | ) |
|
| — |
|
|
| (1,615 | ) |
|
| — |
|
|
| (2,032 | ) |
FASB origination costs |
|
| 10,613 |
|
|
| (433 | ) |
|
| 12 |
|
|
| 2 |
|
|
| — |
|
|
| 10,194 |
|
Paid-in-kind interest |
|
| — |
|
|
| — |
|
|
| 682 |
|
|
| — |
|
|
| — |
|
|
| 682 |
|
Loans – September 30, 2021 |
| $ | 933,790 |
|
| $ | 398,774 |
|
| $ | 72,088 |
|
| $ | 14,934 |
|
| $ | 95 |
|
| $ | 1,419,681 |
|
Page 42 of 59
Three Months Ended September 30, 2020 |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| Strategic Partnership |
|
| Total |
| ||||||
Loans – June 30, 2020 |
| $ | 786,785 |
|
| $ | 282,072 |
|
| $ | 71,476 |
|
| $ | 120,253 |
|
| $ | 8 |
|
| $ | 1,260,594 |
|
Loan originations |
|
| 73,534 |
|
|
| 62,515 |
|
|
| 900 |
|
|
| — |
|
|
| 142 |
|
|
| 137,091 |
|
Principal payments, sales, and maturities |
|
| (54,161 | ) |
|
| (29,312 | ) |
|
| (1,318 | ) |
|
| (401 | ) |
|
| (143 | ) |
|
| (85,335 | ) |
Charge-offs, net |
|
| (850 | ) |
|
| (65 | ) |
|
| 3 |
|
|
| (15,304 | ) |
|
| — |
|
|
| (16,216 | ) |
Transfer to loan collateral in process of foreclosure, net |
|
| (2,833 | ) |
|
| — |
|
|
| — |
|
|
| (10,590 | ) |
|
| — |
|
|
| (13,423 | ) |
Amortization of origination costs |
|
| (2,093 | ) |
|
| 509 |
|
|
| 2 |
|
|
| (99 | ) |
|
| — |
|
|
| (1,681 | ) |
Amortization of loan premium |
|
| (49 | ) |
|
| (81 | ) |
|
| — |
|
|
| (763 | ) |
|
| — |
|
|
| (893 | ) |
FASB origination costs |
|
| 2,605 |
|
|
| (196 | ) |
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 2,411 |
|
Paid-in-kind interest |
|
| — |
|
|
| — |
|
|
| 306 |
|
|
| — |
|
|
| — |
|
|
| 306 |
|
Transfer to other foreclosed property |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,800 | ) |
|
| — |
|
|
| (1,800 | ) |
Loans – September 30, 2020 |
| $ | 802,938 |
|
| $ | 315,442 |
|
| $ | 71,369 |
|
| $ | 91,298 |
|
| $ | 7 |
|
| $ | 1,281,054 |
|
Nine Months Ended September 30, 2020 |
| Recreation |
|
| Home |
|
| Commercial |
|
| Medallion |
|
| Strategic Partnership |
|
| Total |
| ||||||
Loans – December 31, 2019 |
| $ | 713,332 |
|
| $ | 247,324 |
|
| $ | 69,767 |
|
| $ | 130,432 |
|
| $ | — |
|
| $ | 1,160,855 |
|
Loan originations |
|
| 249,383 |
|
|
| 140,693 |
|
|
| 6,075 |
|
|
| — |
|
|
| 295 |
|
|
| 396,446 |
|
Principal payments, sales, and maturities |
|
| (140,688 | ) |
|
| (72,034 | ) |
|
| (5,422 | ) |
|
| (4,180 | ) |
|
| (288 | ) |
|
| (222,612 | ) |
Charge-offs, net |
|
| (10,796 | ) |
|
| (897 | ) |
|
| 3 |
|
|
| (17,124 | ) |
|
| — |
|
|
| (28,814 | ) |
Transfer to loan collateral in process of foreclosure, net |
|
| (10,615 | ) |
|
| — |
|
|
| — |
|
|
| (14,934 | ) |
|
| — |
|
|
| (25,549 | ) |
Amortization of origination costs |
|
| (5,853 | ) |
|
| 1,406 |
|
|
| 6 |
|
|
| (131 | ) |
|
| — |
|
|
| (4,572 | ) |
Amortization of loan premium |
|
| (152 | ) |
|
| (248 | ) |
|
| — |
|
|
| (1,001 | ) |
|
| — |
|
|
| (1,401 | ) |
FASB origination costs |
|
| 8,327 |
|
|
| (802 | ) |
|
| — |
|
|
| 36 |
|
|
| — |
|
|
| 7,561 |
|
Paid-in-kind interest |
|
| — |
|
|
| — |
|
|
| 940 |
|
|
| — |
|
|
| — |
|
|
| 940 |
|
Transfer to other foreclosed property |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,800 | ) |
|
| — |
|
|
| (1,800 | ) |
Loans – September 30, 2020 |
| $ | 802,938 |
|
| $ | 315,442 |
|
| $ | 71,369 |
|
| $ | 91,298 |
|
| $ | 7 |
|
| $ | 1,281,054 |
|
The following table illustrates our investments at fair value, grouped by medallion loans, commercial loans, equity investments, and investment securities, and also presents the approximate maturities and sensitivity to changes in interest rates for our loans as of September 30, 2021.
|
| Loan Maturity |
| |||||||||||||||||
|
| Within 1 year |
|
| After 1 to 5 years |
|
| After 5 to 15 years |
|
| After 15 years |
|
| Total |
| |||||
Fixed-rate |
| $ | 38,391 |
|
| $ | 164,745 |
|
| $ | 1,108,495 |
|
| $ | 71,521 |
|
| $ | 1,383,152 |
|
Recreation |
|
| 2,404 |
|
|
| 86,295 |
|
|
| 802,904 |
|
|
| 6,494 |
|
|
| 898,097 |
|
Home improvement |
|
| 22,757 |
|
|
| 22,408 |
|
|
| 290,829 |
|
|
| 65,027 |
|
|
| 401,021 |
|
Commercial |
|
| 9,276 |
|
|
| 46,268 |
|
|
| 14,762 |
|
|
| — |
|
|
| 70,306 |
|
Medallion |
|
| 3,954 |
|
|
| 9,774 |
|
|
| — |
|
|
| — |
|
|
| 13,728 |
|
Adjustable-rate |
| $ | 7,713 |
|
| $ | 2,375 |
|
| $ | — |
|
| $ | — |
|
| $ | 10,088 |
|
Recreation |
|
| 4,725 |
|
|
| 2,375 |
|
|
| — |
|
|
| — |
|
|
| 7,100 |
|
Home improvement |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Commercial |
|
| 1,781 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,781 |
|
Medallion |
|
| 1,207 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,207 |
|
Total(1)(2)(3) |
| $ | 46,104 |
|
| $ | 167,120 |
|
| $ | 1,108,495 |
|
| $ | 71,521 |
|
| $ | 1,393,240 |
|
Provision and Allowance for Loan Loss
During the three months ended September 30, 2021, New York City taxi medallion values remained constant at a net realizable value of $79,500, even as other markets slightly declined, whereas for the three months ended September 30, 2020, the New York City taxi medallion values had decreased to a net realizable value of $90,300 from $119,500 as a result of the initial impact of COVID-19. In addition, the consumer and recreation loan allowance percentages remained relatively static for the three months ended September 30, 2021, whereas, for the three months ended September 30, 2020 due to the change in economic factors due to COVID-19 we increased the reserve percentages for the consumer loan portfolio informationbetween 25 to 50 basis points.
During the nine months ended September 30, 2021, the New York City taxi medallion values remained constant at a net realizable value of $79,500, even as other markets slightly decreased, whereas for Medallion Bank,the nine months ended September 30, 2020 the New York City taxi medallion values had decreased to a net realizable value of $90,300 from $167,000 at December 31, 2019. In addition, the dates indicated.consumer and recreation loan allowance percentages declined slightly for the nine months ended September 30, 2021, whereas, for the nine months ended September 30, 2020 due to the change in economic factors due to COVID-19 we increased the reserve percentages for the consumer loan portfolio between 25 to 100 basis points.
Page 43 of 59
| September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Interest Rate(1) | Investment Balances | Interest Rate (1) | Investment Balances | Interest Rate (1) | Investment Balances | Interest Rate (1) | Investment Balances | Interest Rate (1) | Investment Balances | ||||||||||||||||||||||||||||||
Medallion loans | ||||||||||||||||||||||||||||||||||||||||
New York | 4.25 | % | $ | 190,324 | 4.19 | % | $ | 191,922 | 3.68 | % | $ | 195,882 | 3.67 | % | $ | 202,469 | 3.76 | % | $ | 206,404 | ||||||||||||||||||||
Chicago | 4.81 | 35,675 | 4.81 | 36,158 | 4.54 | 37,300 | 4.54 | 38,091 | 4.57 | 38,432 | ||||||||||||||||||||||||||||||
Boston | 4.48 | 25,374 | 4.47 | 25,442 | 4.50 | 25,515 | 4.52 | 25,857 | 4.58 | 26,010 | ||||||||||||||||||||||||||||||
Newark | 5.31 | 22,483 | 5.31 | 22,792 | 5.27 | 23,040 | 5.27 | 23,267 | 5.27 | 23,776 | ||||||||||||||||||||||||||||||
Cambridge | 4.47 | 4,389 | 4.47 | 4,392 | 4.47 | 4,395 | 4.47 | 4,401 | 4.47 | 4,410 | ||||||||||||||||||||||||||||||
Other | 7.24 | 944 | 7.24 | 950 | 7.25 | 956 | 7.26 | 965 | 7.28 | 985 | ||||||||||||||||||||||||||||||
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Total medallion loans | 4.44 | 279,189 | 4.40 | 281,656 | 4.02 | 287,088 | 4.01 | 295,050 | 4.07 | 300,017 | ||||||||||||||||||||||||||||||
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Deferred loan acquisition costs | 205 | 215 | 256 | 289 | 327 | |||||||||||||||||||||||||||||||||||
Unrealized depreciation on loans | (54,814 | ) | (48,456 | ) | (36,368 | ) | (28,523 | ) | (12,087 | ) | ||||||||||||||||||||||||||||||
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Net medallion loans | $ | 224,580 | $ | 233,415 | $ | 250,976 | $ | 266,816 | $ | 288,257 | ||||||||||||||||||||||||||||||
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Commercial loans | ||||||||||||||||||||||||||||||||||||||||
Secured mezzanine | 13.02 | % | $ | 81,190 | 13.31 | % | $ | 76,478 | 13.07 | % | $ | 71,743 | 13.47 | % | $ | 76,469 | 13.55 | % | $ | 73,502 | ||||||||||||||||||||
Other secured commercial | 9.51 | 2,728 | 9.57 | 2,914 | 9.23 | 3,807 | 9.33 | 8,657 | 9.25 | 9,070 | ||||||||||||||||||||||||||||||
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Total commercial loans | 12.91 | 83,918 | 13.18 | 79,392 | 12.88 | 75,550 | 13.05 | 85,126 | 13.07 | 82,572 | ||||||||||||||||||||||||||||||
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Deferred loan acquisition income | (101 | ) | (108 | ) | (92 | ) | (114 | ) | (119 | ) | ||||||||||||||||||||||||||||||
Unrealized depreciation on loans | (1,057 | ) | (1,192 | ) | (1,710 | ) | (1,378 | ) | (1,343 | ) | ||||||||||||||||||||||||||||||
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Net commercial loans | $ | 82,760 | $ | 78,092 | $ | 73,748 | $ | 83,634 | $ | 81,110 | ||||||||||||||||||||||||||||||
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Investment in Medallion Bank and other controlled subsidiaries | 0.83 | % | $ | 150,902 | 0.00 | % | $ | 146,089 | 0.00 | % | $ | 144,385 | 2.13 | % | $ | 140,610 | 3.88 | % | $ | 154,656 | ||||||||||||||||||||
Unrealized appreciation on subsidiary investments | 152,959 | 155,730 | 156,501 | 152,750 | 53,442 | |||||||||||||||||||||||||||||||||||
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Page 54 of 94
| September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Interest Rate(1) | Investment Balances | Interest Rate (1) | Investment Balances | Interest Rate (1) | Investment Balances | Interest Rate (1) | Investment Balances | Interest Rate (1) | Investment Balances | ||||||||||||||||||||||||||||||
Investment in Medallion Bank and other controlled subsidiaries, net | $ | 303,861 | $ | 301,819 | $ | 300,886 | $ | 293,360 | $ | 208,098 | ||||||||||||||||||||||||||||||
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Equity investments | 0.00 | % | $ | 6,909 | 0.00 | % | $ | 6,608 | 0.00 | % | $ | 6,052 | 0.00 | % | $ | 4,534 | 0.66 | % | $ | 4,760 | ||||||||||||||||||||
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Unrealized appreciation on equities | 3,075 | 3,708 | 3,588 | 3,934 | 3,403 | |||||||||||||||||||||||||||||||||||
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Net equity investments | $ | 9,984 | $ | 10,316 | $ | 9,640 | $ | 8,468 | $ | 8,163 | ||||||||||||||||||||||||||||||
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Investment securities | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | ||||||||||||||||||||
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Unrealized depreciation on investment securities | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
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Net investment securities | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||
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Investments at cost (2) | 4.70 | % | $ | 520,918 | 4.45 | % | $ | 513,745 | 4.15 | % | $ | 513,075 | 4.94 | % | $ | 525,320 | 5.36 | % | $ | 542,005 | ||||||||||||||||||||
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Deferred loan acquisition costs | 104 | 107 | 164 | 175 | 208 | |||||||||||||||||||||||||||||||||||
Unrealized appreciation on controlled subsidiaries and equity investments | 156,034 | 159,438 | 160,089 | 156,684 | 56,845 | |||||||||||||||||||||||||||||||||||
Unrealized depreciation on loans | (55,871 | ) | (49,648 | ) | (38,078 | ) | (29,901 | ) | (13,430 | ) | ||||||||||||||||||||||||||||||
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Net investments | $ | 621,185 | $ | 623,642 | $ | 635,250 | $ | 652,278 | $ | 585,628 | ||||||||||||||||||||||||||||||
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Medallion Bank investments | ||||||||||||||||||||||||||||||||||||||||
Consumer loans | 14.47 | % | $ | 796,230 | 14.59 | % | $ | 738,770 | 14.79 | % | $ | 650,419 | 14.27 | % | $ | 708,524 | 14.44 | % | $ | 683,236 | ||||||||||||||||||||
Medallion loans | 4.32 | 237,913 | 4.22 | 252,425 | 3.82 | 261,308 | 3.75 | 296,436 | 3.83 | 327,134 | ||||||||||||||||||||||||||||||
Commercial loans | 2.47 | 1,753 | 2.63 | 1,904 | 1.98 | 3,313 | 3.40 | 2,567 | 3.48 | 2,950 | ||||||||||||||||||||||||||||||
Investment securities | 2.34 | 38,182 | 2.33 | 39,653 | 2.19 | 36,273 | 2.27 | 37,420 | 2.29 | 36,065 | ||||||||||||||||||||||||||||||
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Medallion Bank investments at cost (2) | 11.77 | 1,074,078 | 11.56 | 1,032,752 | 11.25 | 951,313 | 10.83 | 1,044,947 | 10.68 | 1,049,385 | ||||||||||||||||||||||||||||||
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Deferred loan acquisition costs | 13,347 | 12,439 | 11,188 | 12,371 | 12,657 | |||||||||||||||||||||||||||||||||||
Unrealized depreciation on investment securities | (9 | ) | 83 | (443 | ) | (797 | ) | 742 | ||||||||||||||||||||||||||||||||
Premiums paid on purchased securities | 250 | 271 | 233 | 238 | 258 | |||||||||||||||||||||||||||||||||||
Unrealized depreciation on loans | (55,517 | ) | (54,872 | ) | (47,077 | ) | (54,819 | ) | (48,106 | ) | ||||||||||||||||||||||||||||||
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Medallion Bank net investments | $ | 1,032,149 | $ | 990,673 | $ | 915,214 | $ | 1,001,940 | $ | 1,014,936 | ||||||||||||||||||||||||||||||
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Page 55 of 94
Investment Activity
The following table sets forth the components of investment activity in the investment portfolioallowance for loan losses for the periods indicated.three and nine months ended September 30, 2021 and 2020.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net investments at beginning of period | $ | 623,642 | $ | 644,982 | $ | 652,278 | $ | 606,959 | ||||||||
Investments originated(1) | 7,782 | 7,464 | 16,775 | 320,369 | ||||||||||||
Repayments of investments(1) | (6,345 | ) | (88,639 | ) | (35,858 | ) | (379,060 | ) | ||||||||
Net realized gains (losses) on investments | 944 | 2,499 | 3,785 | (7 | ) | |||||||||||
Net increase in unrealized appreciation (depreciation)(2) | (4,821 | ) | 19,256 | (15,740 | ) | 37,296 | ||||||||||
Accretion of net origination fees | (17 | ) | 66 | (55 | ) | 71 | ||||||||||
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Net increase (decrease) in investments | (2,457 | ) | (59,354 | ) | (31,093 | ) | (21,331 | ) | ||||||||
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Net investments at end of period | $ | 621,185 | $ | 585,628 | $ | 621,185 | $ | 585,628 | ||||||||
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PORTFOLIO SUMMARY
Total Portfolio Yield
Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2021 2020 2021 2020 Allowance for loan losses – beginning balance $ 46,946 $ 66,977 $ 57,548 $ 46,093 Charge-offs Recreation (2,313 ) (3,595 ) (10,038 ) (17,546 ) Home improvement (523 ) (643 ) (1,990 ) (2,202 ) Commercial — — — — Medallion (1,142 ) (15,448 ) (15,047 ) (19,146 ) Total charge-offs (3,978 ) (19,686 ) (27,075 ) (38,894 ) Recoveries Recreation 2,648 2,745 8,704 6,750 Home improvement 763 578 1,753 1,304 Commercial — 3 — 3 Medallion 1,406 144 4,518 2,023 Total recoveries 4,817 3,470 14,975 10,080 Net charge-offs(1) 839 (16,216 ) (12,100 ) (28,814 ) Provision for loan losses (337 ) 39,749 2,000 73,231 Allowance for loan losses – ending balance(2) $ 47,448 $ 90,510 $ 47,448 $ 90,510 The weighted average yield (which is calculated by dividing the aggregate yield
The weighted average yield offollowing tables set forth the total managed portfolio at September 30, 2017 was 10.41% (10.63%allowance for the loan portfolio), an increase of 92 basis points from 9.49% at December 31, 2016, and an increase of 103 basis points from 9.38% at September 30, 2016. The increased yield of the total managed portfolio was mainly due to the higher proportion of consumer loans to the total portfolio as well as an increase in the yield on Medallion loans.
Medallion Loan Portfolio
Our medallion loans comprised 36% of the net portfolio of $621,185,000 at September 30, 2017, compared to 41% of the net portfolio of $652,278,000 at December 31, 2016, and 49% of $585,628,000 at September 30, 2016. Our managed medallion loans of $430,048,000 comprised 28% of the net managed portfolio of $1,507,526,000 at September 30, 2017, compared to 35% of the net managed portfolio of $1,517,592,000 at December 31, 2016, and 40% of $1,450,192,000 at September 30, 2016. The medallion loan portfolio decreasedlosses by $42,235,000 or 16% in 2017 (a decrease of $98,595,000 or 19% on a managed basis), primarily reflecting increased realized and unrealized losses and net amortization of loan principal, especially in the New York and Chicago markets. Total medallion loans serviced for third parties were $26,456,000, $24,796,000, and $24,889,000 at September 30, 2017, December 31, 2016, and September 30, 2016.
The weighted average yield of the medallion loan portfolio at September 30, 2017 was 4.44%, an increase of 43 basis points from 4.01% at December 31, 2016, and an increase of 37 basis points from 4.07% at September 30, 2016. The weighted average yield of the managed medallion loan portfolio at September 30, 2017 was 4.38%, an increase of 50 basis points from 3.88% at December 31, 2016, and an increase of 43 basis points from 3.95% at September 30, 2016. The fluctuation in yield primarily reflected the repricing of the existing portfolio to current market interest rates. At September 30, 2017, 32% of the medallion loan portfolio represented loans outside New York, compared to 31% at December 31, 2016 and September 30, 2016. At September 30, 2017, 22% of the managed medallion loan portfolio represented loans outside New York, compared to 24% at December 31, 2016 and 26% at September 30, 2016.
Commercial Loan Portfolio
Our commercial loans represented 13%, 13%, and 14% of the net investment portfoliotype as of September 30, 2017,2021 and December 31, 2016, and September 30, 2016, and were 6%, 6%, and 6% on a managed basis. Commercial loans decreased by $875,000 or 1% during 2017 (decreased $1,690,000 or 2% on a managed basis). The decreases primarily reflected Medallion Fine Art loan repayments offset by an increase in mezzanine lending. Net commercial loans serviced for third parties were $1,307,000 at September 30, 2017, $1,644,000 at December 31, 2016, and $1,563,000 at September 30, 2016.2020.
September 30, 2021 |
| Amount |
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| Percentage |
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| Allowance as |
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| Allowance as |
| ||||
Recreation |
| $ | 31,556 |
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| 66 | % |
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| 3.38 | % |
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| 88 | % |
Home improvement |
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| 6,496 |
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| 14 |
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| 1.63 |
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| 18.09 |
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Commercial |
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| — |
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| — |
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| — |
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| — |
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Medallion |
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| 9,396 |
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| 20 |
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| 62.92 |
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| 26.17 |
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Total |
| $ | 47,448 |
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| 100 | % |
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| 3.34 | % |
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| 132 | % |
December 31, 2020 |
| Amount |
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| Percentage |
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| Allowance as |
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| Allowance as |
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Recreation |
| $ | 27,348 |
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| 48 | % |
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| 3.45 | % |
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| 378.20 | % |
Home improvement |
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| 5,157 |
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| 9 |
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| 1.54 |
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| NM |
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Commercial |
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| — |
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| — |
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| — |
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| — |
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Medallion |
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| 25,043 |
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| 43 |
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| 66.31 |
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| 68.01 |
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Total |
| $ | 57,548 |
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| 100 | % |
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| 4.68 | % |
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| 93.17 | % |
Page 56 of 94
The weighted average yield of the commercial loan portfolio at September 30, 2017 was 12.91%, a decrease of 14 basis points from 13.05% at December 31, 2016 and a decrease of 16 basis points from 13.07% at September 30, 2016. The weighted average yield of the managed commercial loan portfolio at September 30, 2017 was 12.69%, a decrease of 7 basis points from 12.76% at December 31, 2016, and a decrease of 5 basis points from 12.74% at September 30, 2016. The change primarily reflected changes in the portfolio mix and higher yields on the mezzanine portfolio. At September 30, 2017, variable-rate loans represented approximately 5% of the commercial portfolio, compared to 7% and 5% at December 31, 2016 and September 30, 2016, and were 5%, 7%, and 5% on a managed basis.
Consumer Loan Portfolio
Our managed consumer loans, all of which are held in the portfolio managed by Medallion Bank, represented 52%, 46%, and 47% of the managed net investment portfolio asAs of September 30, 2017,2021, the allowance for loan losses had remained relatively in line with December 31, 2016,2020, mainly driven by the New York City medallion collateral value remaining consistent due to the economy slowly re-opening and September 30, 2016. Medallion Bank originates fixed raterecovering from the COVID-19 pandemic, as well as the consumer loans secured by recreational vehicles, boats, motorcycles, trailers and home improvements located in all 50 states. The portfolio is serviced by a third party.reserve levels remaining unchanged.
The consumer loans increased by $85,822,000 or 12% during 2017, despite the sale of $94,000,000 of consumer loans to a third party investor in the 2017 first quarter.
The weighted average gross yield of the managed consumer loan portfolio was 14.47% at September 30, 2017, an increase of 20 basis points from 14.27% at December 31, 2016, and an increase of 3 basis points from 14.44% at September 30, 2016. The increases in yield primarily reflected the sales in the 2017 first quarter of $94,000,000 of mostly lower-yielding home improvement loans. Adjustable rate loans were 8%, 12%, and 13% of the managed consumer portfolio at September 30, 2017, December 31, 2016, and September 30, 2016, reflecting Medallion Bank no longer offering variable rate loan products.
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,collateral, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequate in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install a new operator to run the business and reduce the debt. We cannot predict the ultimate impact that the ongoing COVID-19 pandemic will have on the loan portfolios due to the greater than typical uncertainty surrounding COVID-19 and its related significant negative effects on the economy and financial markets.
For the consumer loan portfolio, the process to repossess the collateral is generally 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.charged-off in full. 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.recovery. Proceeds collected on charged off accounts are recorded as realized gains.recoveries. All collection, repossession, and recovery efforts are handled on behalf of Medallionthe Bank by the contracted servicer.
Page 44 of 59
Page 57 of 94
The following table shows the trend in loans 90 days or more past due as of the dates indicated.
| September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | % (1) | Amount | % (1) | Amount | % (1) | Amount | % (1) | Amount | % (1) | ||||||||||||||||||||||||||||||
Medallion loans | $ | 98,442 | 27.1 | % | $ | 89,830 | 24.9 | % | $ | 70,572 | 19.5 | % | $ | 71,976 | 18.9 | % | $ | 58,267 | 15.2 | % | ||||||||||||||||||||
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Commercial loans | ||||||||||||||||||||||||||||||||||||||||
Secured mezzanine | 2,117 | 0.6 | 2,117 | 0.6 | 4,425 | 1.2 | 1,390 | 0.4 | 1,390 | 0.4 | ||||||||||||||||||||||||||||||
Other secured commercial | 758 | 0.2 | 618 | 0.2 | 1,010 | 0.3 | 734 | 0.2 | 182 | 0.0 | ||||||||||||||||||||||||||||||
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Total commercial loans | 2,875 | 0.8 | 2,735 | 0.8 | 5,435 | 1.5 | 2,124 | 0.6 | 1,572 | 0.4 | ||||||||||||||||||||||||||||||
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Total loans 90 days or more past due | $ | 101,317 | 27.9 | % | $ | 92,565 | 25.6 | % | $ | 76,007 | 21.0 | % | $ | 74,100 | 19.5 | % | $ | 59,839 | 15.6 | % | ||||||||||||||||||||
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Total Medallion Bank loans | $ | 22,925 | 2.2 | % | $ | 24,841 | 2.5 | % | $ | 20,552 | 2.3 | % | $ | 42,269 | 4.2 | % | $ | 43,733 | 4.3 | % | ||||||||||||||||||||
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Total managed loans 90 days or more past due | $ | 124,242 | 8.9 | % | $ | 117,406 | 8.7 | % | $ | 96,559 | 7.6 | % | $ | 116,369 | 8.4 | % | $ | 103,572 | 7.4 | % | ||||||||||||||||||||
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(1) Percentages are calculated against | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013, the aggregate balancetotal loan portfolio.
We estimate that the weighted average loan-to-value ratio of the participationsour medallion loans was approximately $13.8 million, $12.9 million287%, 327%, and 316% as 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 September 30, 2017, five of the seven secured borrowers had refinanced their2021, December 31, 2020, and September 30, 2020.
Recreation and medallion loans in full with third parties,that reach 120 days past due are charged down to collateral value 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 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 | |||||||||
Page 58loan collateral in process of 94
(Dollars in thousands) | The Company | Medallion Bank | Total | |||||||||
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 sales 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 quarter.
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.
Page 59 of 94
foreclosure. The following tables set forthshow thepre-tax changes activity of loan collateral in our unrealized appreciation (depreciation) on investments,process of foreclosure for the 2017three months ended September 30, 2021 and 2016 quarters shown below.2020.
Three Months Ended September 30, 2021 |
| Recreation |
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| Medallion |
|
| Total |
| |||
Loan collateral in process of foreclosure – June 30, 2021 |
| $ | 882 |
|
| $ | 48,157 |
|
| $ | 49,039 |
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Transfer from loans, net |
|
| 2,085 |
|
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| 397 |
|
|
| 2,482 |
|
Sales |
|
| (1,554 | ) |
|
| (1,640 | ) |
|
| (3,194 | ) |
Cash payments received |
|
| — |
|
|
| (4,525 | ) |
|
| (4,525 | ) |
Collateral valuation adjustments |
|
| (640 | ) |
|
| (618 | ) |
|
| (1,258 | ) |
Loan collateral in process of foreclosure – September 30, 2021 |
| $ | 773 |
|
| $ | 41,771 |
|
| $ | 42,544 |
|
Nine Months Ended September 30, 2021 |
| Recreation |
|
| Medallion |
|
| Total |
| |||
Loan collateral in process of foreclosure – December 31, 2020 |
| $ | 1,432 |
|
| $ | 53,128 |
|
| $ | 54,560 |
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Transfer from loans, net |
|
| 8,118 |
|
|
| 5,027 |
|
|
| 13,145 |
|
Sales |
|
| (5,842 | ) |
|
| (1,871 | ) |
|
| (7,713 | ) |
Cash payments received |
|
| — |
|
|
| (8,948 | ) |
|
| (8,948 | ) |
Collateral valuation adjustments |
|
| (2,935 | ) |
|
| (5,565 | ) |
|
| (8,500 | ) |
Loan collateral in process of foreclosure – September 30, 2021 |
| $ | 773 |
|
| $ | 41,771 |
|
| $ | 42,544 |
|
Three Months Ended September 30, 2020 |
| Recreation |
|
| Medallion |
|
| Total |
| |||
Loan collateral in process of foreclosure – June 30, 2020 |
| $ | 1,258 |
|
| $ | 46,117 |
|
| $ | 47,375 |
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Transfer from loans, net |
|
| 2,833 |
|
|
| 10,611 |
|
|
| 13,444 |
|
Sales |
|
| (1,697 | ) |
|
| — |
|
|
| (1,697 | ) |
Cash payments received |
|
| — |
|
|
| (426 | ) |
|
| (426 | ) |
Collateral valuation adjustments |
|
| (1,395 | ) |
|
| (8,559 | ) |
|
| (9,954 | ) |
Loan collateral in process of foreclosure – September 30, 2020 |
| $ | 999 |
|
| $ | 47,743 |
|
| $ | 48,742 |
|
Nine Months Ended September 30, 2020 |
| Recreation |
|
| Medallion |
|
| Total |
| |||
Loan collateral in process of foreclosure – December 31, 2019 |
| $ | 1,476 |
|
| $ | 51,235 |
|
| $ | 52,711 |
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Transfer from loans, net |
|
| 10,615 |
|
|
| 14,954 |
|
|
| 25,569 |
|
Sales |
|
| (5,684 | ) |
|
| (300 | ) |
|
| (5,984 | ) |
Cash payments received |
|
| — |
|
|
| (2,318 | ) |
|
| (2,318 | ) |
Collateral valuation adjustments |
|
| (5,408 | ) |
|
| (15,828 | ) |
|
| (21,236 | ) |
Loan collateral in process of foreclosure – September 30, 2020 |
| $ | 999 |
|
| $ | 47,743 |
|
| $ | 48,742 |
|
Page 45 of 59
(Dollars in thousands) | Medallion Loans | Commercial Loans | Investments in Subsidiaries | Equity Investments | Investment Securities | Investments Other Than Securities | Total | |||||||||||||||||||||
Balance December 31, 2016 | ($ | 28,523 | ) | ($ | 1,378 | ) | $ | 152,750 | $ | 3,934 | $ | — | $ | 584 | $ | 127,367 | ||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 3,751 | 1,261 | — | — | 5,012 | |||||||||||||||||||||
Depreciation on investments | (8,670 | ) | (332 | ) | — | — | — | — | (9,002 | ) | ||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (2,093 | ) | — | — | (2,093 | ) | |||||||||||||||||||
Losses on investments | 825 | — | — | 486 | — | — | 1,311 | |||||||||||||||||||||
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Balance March 31, 2017 | (36,368 | ) | (1,710 | ) | 156,501 | 3,588 | — | 584 | 122,595 | |||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | (771 | ) | 120 | — | — | (651 | ) | |||||||||||||||||||
Depreciation on investments | (12,425 | ) | (118 | ) | — | — | — | — | (12,543 | ) | ||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | — | — | — | — | |||||||||||||||||||||
Losses on investments | 337 | 636 | — | — | — | — | 973 | |||||||||||||||||||||
Other | — | — | — | — | — | — | — | |||||||||||||||||||||
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Balance June 30, 2017 | (48,456 | ) | (1,192 | ) | 155,730 | 3,708 | — | 584 | 110,374 | |||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | (2,771 | ) | (361 | ) | — | — | (3,132 | ) | ||||||||||||||||||
Depreciation on investments | (6,669 | ) | 75 | — | — | — | (15 | ) | (6,609 | ) | ||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (272 | ) | — | — | (272 | ) | |||||||||||||||||||
Losses on investments | 311 | 60 | — | — | — | — | 371 | |||||||||||||||||||||
Other | — | — | — | — | — | — | — | |||||||||||||||||||||
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Balance September 30, 2017 | ($ | 54,814 | ) | ($ | 1,057 | ) | $ | 152,959 | $ | 3,075 | $ | — | $ | 569 | $ | 100,732 | ||||||||||||
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(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 | — | — | 6,115 | (7 | ) | — | (1,585 | ) | 4,523 | |||||||||||||||||||
Depreciation on investments | (2,359 | ) | 173 | 305 | 12 | (47 | ) | — | (1,916 | ) | ||||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | — | 12 | — | 12 | |||||||||||||||||||||
Losses on investments | — | 348 | — | — | — | — | 348 | |||||||||||||||||||||
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Balance March 31, 2016 | (5,797 | ) | (1,718 | ) | 25,060 | 2,587 | (53 | ) | 27,371 | 47,450 | ||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 2,213 | 1,538 | 7 | (3,170 | ) | 588 | ||||||||||||||||||||
SEGMENT RESULTS
Page 60 of 94
(Dollars in thousands) | Medallion Loans | Commercial Loans | Investments in Subsidiaries | Equity Investments | Investment Securities | Investments Other Than Securities | Total | |||||||||||||||||||||
Depreciation on investments | (2,758 | ) | 245 | — | (8 | ) | 52 | — | (2,469 | ) | ||||||||||||||||||
Reversal of unrealized appreciation | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | — | — | — | — | |||||||||||||||||||||
Losses on investments | 2,346 | 195 | — | — | — | — | 2,541 | |||||||||||||||||||||
Other | — | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||||||
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|
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Balance June 30, 2016 | (6,209 | ) | (1,278 | ) | 27,273 | 4,117 | — | 24,201 | 48,104 | |||||||||||||||||||
Net change in unrealized | ||||||||||||||||||||||||||||
Appreciation on investments | — | — | 26,169 | (111 | ) | — | (14,107 | ) | 11,951 | |||||||||||||||||||
Depreciation on investments | (6,051 | ) | (65 | ) | — | (3 | ) | — | — | (6,119 | ) | |||||||||||||||||
Reversal of unrealized appreciation (depreciation) related to realized | ||||||||||||||||||||||||||||
Gains on investments | — | — | — | (600 | ) | — | — | (600 | ) | |||||||||||||||||||
Losses on investments | 173 | — | — | — | — | — | 173 | |||||||||||||||||||||
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Balance September 30, 2016 | ($ | 12,087 | ) | ($ | 1,343 | ) | $ | 53,442 | $ | 3,403 | $ | — | $ | 10,094 | $ | 53,509 | ||||||||||||
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Page 61 of 94
The following table presents credit-related informationWe manage our business under four operating segments: recreation lending, home improvement lending, commercial lending, and medallion lending. We also show results for the investment portfolios as of the dates shown.
(Dollars in thousands) | September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2016 | September 30, 2016 | |||||||||||||||
Total loans | ||||||||||||||||||||
Medallion loans | $ | 224,580 | $ | 233,415 | $ | 250,976 | $ | 266,816 | $ | 288,257 | ||||||||||
Commercial loans | 82,760 | 78,092 | 73,748 | 83,634 | 81,110 | |||||||||||||||
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Total loans | 307,340 | 311,507 | 324,724 | 350,450 | 369,367 | |||||||||||||||
Investments in Medallion Bank and other controlled subsidiaries | 303,861 | 301,819 | 300,886 | 293,360 | 208,098 | |||||||||||||||
Equity investments(1) | 9,984 | 10,316 | 9,640 | 8,468 | 8,163 | |||||||||||||||
Investment securities | — | — | — | — | — | |||||||||||||||
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|
|
|
|
|
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Net investments | $ | 621,185 | $ | 623,642 | $ | 635,250 | $ | 652,278 | $ | 585,628 | ||||||||||
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Net investments at Medallion Bank and other controlled subsidiaries | $ | 1,032,149 | $ | 990,673 | $ | 915,214 | $ | 1,001,940 | $ | 1,014,936 | ||||||||||
Managed net investments | $ | 1,507,526 | $ | 1,473,084 | $ | 1,410,639 | $ | 1,517,592 | $ | 1,450,192 | ||||||||||
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Unrealized appreciation (depreciation) on investments | ||||||||||||||||||||
Medallion loans | ($ | 54,814 | ) | ($ | 48,456 | ) | ($ | 36,368 | ) | ($ | 28,523 | ) | ($ | 12,087 | ) | |||||
Commercial loans | (1,057 | ) | (1,192 | ) | (1,710 | ) | (1,378 | ) | (1,343 | ) | ||||||||||
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| |||||||||||
Total loans | (55,871 | ) | (49,648 | ) | (38,078 | ) | (29,901 | ) | (13,430 | ) | ||||||||||
Investments in Medallion Bank and other controlled subsidiaries | 152,959 | 155,730 | 156,501 | 152,750 | 53,442 | |||||||||||||||
Equity investments | 3,075 | 3,708 | 3,588 | 3,934 | 3,403 | |||||||||||||||
Investment securities | — | — | — | — | — | |||||||||||||||
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| |||||||||||
Total unrealized appreciation on investments | $ | 100,163 | $ | 109,790 | $ | 122,011 | $ | 126,783 | $ | 43,415 | ||||||||||
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Net unrealized depreciation on investments at Medallion Bank and other controlled subsidiaries | ($ | 55,527 | ) | ($ | 54,789 | ) | ($ | 47,520 | ) | ($ | 55,616 | ) | ($ | 47,364 | ) | |||||
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Managed total unrealized appreciation (depreciation) on investments | ($ | 44,636 | ) | $ | 55,001 | $ | 74,491 | $ | 71,167 | ($ | 3,949 | ) | ||||||||
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Unrealized appreciation (depreciation) as a % of balances outstanding(2) | ||||||||||||||||||||
Medallion loans | (19.63 | %) | (17.20 | %) | (12.67 | %) | (9.67 | %) | (4.03 | %) | ||||||||||
Commercial loans | (1.26 | ) | (1.50 | ) | (2.26 | ) | (1.62 | ) | (1.63 | ) | ||||||||||
Total loans | (15.39 | ) | (13.75 | ) | (10.50 | ) | (7.87 | ) | (3.51 | ) | ||||||||||
Investments in Medallion Bank and other controlled subsidiaries | 101.36 | 106.60 | 108.39 | 108.63 | 34.56 | |||||||||||||||
Equity investments | 44.51 | 56.10 | 59.30 | 86.77 | 71.50 | |||||||||||||||
Investment securities | — | — | — | — | — | |||||||||||||||
Net investments | 19.23 | 21.37 | 23.78 | 24.13 | 8.01 | |||||||||||||||
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Net investments at Medallion Bank and other controlled subsidiaries | (5.17 | %) | (5.31 | %) | (5.00 | %) | (5.32 | %) | (4.51 | %) | ||||||||||
Managed net investments | (3.08 | %) | 3.91 | % | 5.62 | % | 4.96 | % | (0.27 | %) | ||||||||||
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Page 62 of 94
The following table presents the gain/loss experience on the investment portfolios for the three and nine months ended September 30, 20172021 and 2016.2020.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Realized gains (losses) on loans and equity investments | ||||||||||||||||
Medallion loans | $ | (306 | ) | $ | (167 | ) | $ | (1,443 | ) | $ | (2,514 | ) | ||||
Commercial loans | (209 | ) | 1,820 | (838 | ) | 1,281 | ||||||||||
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| |||||||||
Total loans | (515 | ) | 1,653 | (2,281 | ) | (1,233 | ) | |||||||||
Investments in Medallion Bank and other controlled subsidiaries | — | (1 | ) | — | 160 | |||||||||||
Equity investments | 1,459 | 845 | 6,066 | 1,053 | ||||||||||||
Investment securities | — | 2 | — | 13 | ||||||||||||
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| |||||||||
Total realized gains (losses) on loans and equity investments | 944 | 2,499 | 3,785 | (7 | ) | |||||||||||
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| |||||||||
Net realized gains (losses) on investments at Medallion Bank and other controlled subsidiaries | (10,193 | ) | (2,835 | ) | (34,331 | ) | (5,263 | ) | ||||||||
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|
|
| |||||||||
Total managed realized gains (losses) on loans and equity investments | ($ | 9,249 | ) | ($ | 336 | ) | ($ | 30,546 | ) | ($ | 5,270 | ) | ||||
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Realized gains (losses) as a % of average balances outstanding | ||||||||||||||||
Medallion loans | (0.43 | )% | (0.22 | )% | (0.68 | )% | (1.10 | )% | ||||||||
Commercial loans | (1.02 | ) | 8.40 | (1.39 | ) | 1.99 | ||||||||||
Total loans | (0.57 | ) | 1.70 | (0.83 | ) | (0.42 | ) | |||||||||
Investments in Medallion Bank and other controlled subsidiaries | — | (0.00 | ) | — | 0.14 | |||||||||||
Equity investments | 85.96 | 73.53 | 136.20 | 31.06 | ||||||||||||
Investment securities | — | 0.05 | — | 0.05 | ||||||||||||
Net investments | 0.72 | 1.76 | 0.98 | (0.00 | ) | |||||||||||
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|
| |||||||||
Net investments at Medallion Bank and other controlled subsidiaries | (3.83 | ) | (1.07 | ) | (4.46 | ) | (0.66 | ) | ||||||||
Managed net investments | (2.57 | %) | (0.09 | %) | (2.91 | %) | (0.47 | %) | ||||||||
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| |||||||||
Page 63The recreation lending segment is a high-growth prime and non-prime consumer finance business which is a significant source of 94
The table below summarizespre-tax componentsincome for us, accounting for 74% and 75% of unrealized and realized gains and losses in the investment portfolioour interest income for the three and nine months ended September 30, 20172021, and 2016.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net change in unrealized appreciation (depreciation) on investments | ||||||||||||||||
Unrealized appreciation | ($ | 361 | ) | ($ | 110 | ) | $ | 1,132 | $ | 1,429 | ||||||
Unrealized depreciation | (6,594 | ) | (6,119 | ) | (28,253 | ) | (10,829 | ) | ||||||||
Net unrealized appreciation on investments in Medallion Bank and other controlled subsidiaries | 2,035 | 25,913 | 11,089 | 44,221 | ||||||||||||
Realized gains | (272 | ) | (600 | ) | (2,363 | ) | (588 | ) | ||||||||
Realized losses | 371 | 173 | 2,656 | 3,063 | ||||||||||||
Net unrealized losses on investments other than securities and other assets | (15 | ) | (14,107 | ) | (15 | ) | (18,862 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total | ($ | 4,836 | ) | $ | 5,150 | ($ | 15,754 | ) | $ | 18,434 | ||||||
|
|
|
|
|
|
|
| |||||||||
Net realized gains (losses) on investments | ||||||||||||||||
Realized gains | $ | 272 | $ | — | $ | 2,363 | $ | — | ||||||||
Realized losses | (371 | ) | (173 | ) | (2,656 | ) | (3,063 | ) | ||||||||
Other gains | 1,187 | 2,904 | 4,189 | 3,308 | ||||||||||||
Direct chargeoffs | (144 | ) | (232 | ) | (111 | ) | (252 | ) | ||||||||
Realized losses on investments other than securities and other assets | — | — | — | — | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total | $ | 944 | $ | 2,499 | $ | 3,785 | ($ | 7 | ) | |||||||
|
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| |||||||||
Investment in Medallion Bankaccounted for 77% and Other Controlled Subsidiaries
Investment in Medallion Bank and other controlled subsidiaries were 49%, 45%, and 36% of our total portfolio at September 30, 2017, December 31, 2016, and September 30, 2016. The portfolio company investments primarily represent the wholly-owned unconsolidated subsidiaries of ours, substantially all of which is represented by 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. Separately, Medallion Bank declared dividends to us of $3,000,000 in 2016. 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 September 30, 2017, and were 1% at December 31, 2016 and September 30, 2016. Equity investments were less than 1%, 1%, and 1% of our total managed portfolio at September 30, 2017, December 31, 2016, and September 30, 2016. Equity investments are comprised of common stock, limited partnership interests, preferred stock, and warrants.
Investment Securities
Investment securities were 0% of our total portfolio at September 30, 2017, December 31, 2016, and September 30, 2016. Investment securities were 3%, 2%, and 3% of our total managed portfolio at September 30, 2017, December 31, 2016, and September 30, 2016. The investment securities are primarily United States 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
Page 64 of 94
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 as 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 costs76% for the three and nine months ended September 30, 20172020. The loans are secured primarily by RVs, boats, and 2016. Our average balances fortrailers, with RV loans making up 60% of the portfolio, boat loans making up 20% of the portfolio, and trailer loans 9% as of September 30, 2021, compared to 61%, 20% and 12% as of September 30, 2020. Recreation loans are made to borrowers residing in all fifty states, with the highest concentrations in Texas, California, and Florida, at 16%, 10%, and 9% of loans outstanding, compared to 17%, 10%, and 9% as of September 30, 2020, and with no other states over 10%.
During the three and nine months ended September 30, 2017 decreased reflecting2021, the fluctuation in the investmentrecreation portfolio and Medallion Bank’s average balances decreased, reflecting the sale of $94,000,000 of consumer loanscontinued to a third party, offset by strong growth in the consumer loan portfolio. The increase in borrowing costs primarily reflected the repricing of term borrowings, and Medallion Bank’s increased reflecting a lengthening of their maturity profile.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
(Dollars in thousands) | Interest Expense | Average Balance | Average Borrowing Costs | Interest Expense | Average Balance | Average Borrowing Costs | ||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||
DZ loan | $ | 764 | $ | 102,125 | 2.97 | % | $ | 2,137 | $ | 103,683 | 2.76 | % | ||||||||||||
Notes payable to banks | 846 | 82,315 | 4.08 | 2,376 | 85,093 | 3.73 | ||||||||||||||||||
SBA debentures | 773 | 79,820 | 3.84 | 2,328 | 80,506 | 3.87 | ||||||||||||||||||
Retail notes | 875 | 33,625 | 10.32 | 2,629 | 33,625 | 10.45 | ||||||||||||||||||
Preferred securities | 285 | 33,000 | 3.43 | 815 | 33,000 | 3.30 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 3,543 | $ | 330,885 | 4.25 | $ | 10,285 | $ | 335,907 | 4.09 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Medallion Bank borrowings | $ | 3,660 | $ | 920,528 | 1.58 | $ | 9,952 | $ | 901,507 | 1.48 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total managed borrowings | $ | 7,203 | $ | 1,251,413 | 2.28 | $ | 20,237 | $ | 1,237,414 | 2.19 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||
DZ loan | $ | 606 | $ | 109,633 | 2.20 | % | $ | 2,018 | $ | 123,566 | 2.18 | % | ||||||||||||
Notes payable to banks | 780 | 100,658 | 3.08 | 2,357 | 109,867 | 2.87 | ||||||||||||||||||
SBA debentures | 800 | 79,985 | 3.98 | 2,314 | 78,232 | 3.95 | ||||||||||||||||||
Retail notes | 919 | 33,625 | 10.87 | 1,623 | 20,432 | 10.61 | ||||||||||||||||||
Preferred securities | 241 | 33,000 | 2.90 | 692 | 33,000 | 2.80 | ||||||||||||||||||
Margin loans | 27 | 7,042 | 1.54 | 269 | 25,375 | 1.42 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 3,373 | $ | 363,943 | 3.69 | $ | 9,273 | $ | 390,472 | 3.17 | ||||||||||||||
|
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|
|
|
|
| |||||||||||||||||
Medallion Bank borrowings | $ | 3,027 | $ | 924,897 | 1.30 | $ | 8,730 | $ | 929,846 | 1.25 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total managed borrowings | $ | 6,400 | $ | 1,288,840 | 1.98 | $ | 18,003 | $ | 1,320,318 | 1.82 | ||||||||||||||
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| |||||||||||||||||
We will continue to seek SBA funding through Medallion Capitalgrow compared 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 SBIAthree 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. Atnine months ended September 30, 2017 and 2016, short-term adjustable rate debt constituted 59% of total debt, and was 15% and 17% on a fully managed basis including2020, with the borrowings of Medallion Bank.
Factors Affecting Net Assets
Factors that affect our net assets include net realized gain or loss on investments and changeinterest yield 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.
Page 65 of 94
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 suchboth periods decreasing 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 conduct a thorough valuation analysis as described previously, 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 on at least an annual basis. Our analysis includes factors such as various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from nonfinancial 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, 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 operationsthe change in portfolio mix as the best estimate of changes in fair value,portfolio continues to grow. Additionally, reserve rates were stable, while delinquencies and recordedcharge-offs improved. Also, 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’s 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 factorsallowance percentages slightly declined, whereas in the Medallion Bank’s fair value analysisprior period there had been an increase due to the uncertainty regarding the COVID-19 pandemic.
The following table presents certain financial data and the Boardratios as 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 $563,000 was recorded in 2017. See Note 3 for additional information about Medallion Bank.
Page 66 of 94
SELECTED FINANCIAL DATA
Summary Consolidated Financial Data
You should read the consolidated financial information below with the Consolidated Financial Statements and Notes thereto for the three and nine months ended September 30, 20172021 and 2016.2020.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Selected Earnings Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest income |
| $ | 30,529 |
|
| $ | 28,962 |
|
| $ | 86,857 |
|
| $ | 82,525 |
|
Total interest expense |
|
| 2,305 |
|
|
| 3,476 |
|
|
| 7,962 |
|
|
| 10,268 |
|
Net interest income |
|
| 28,224 |
|
|
| 25,486 |
|
|
| 78,895 |
|
|
| 72,257 |
|
Provision for loan losses |
|
| 916 |
|
|
| 1,812 |
|
|
| 5,546 |
|
|
| 20,705 |
|
Net interest income after loss provision |
|
| 27,308 |
|
|
| 23,674 |
|
|
| 73,349 |
|
|
| 51,552 |
|
Other income (expense), net |
|
| (8,856 | ) |
|
| (7,246 | ) |
|
| (21,774 | ) |
|
| (21,115 | ) |
Net income before taxes |
|
| 18,452 |
|
|
| 16,428 |
|
|
| 51,575 |
|
|
| 30,437 |
|
Income tax provision |
|
| (4,752 | ) |
|
| (4,201 | ) |
|
| (13,281 | ) |
|
| (7,783 | ) |
Net income after taxes |
| $ | 13,700 |
|
| $ | 12,227 |
|
| $ | 38,294 |
|
| $ | 22,654 |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total loans, gross |
|
|
|
|
|
|
| $ | 933,790 |
|
| $ | 802,938 |
| ||
Total loan allowance |
|
|
|
|
|
|
|
| 31,556 |
|
|
| 27,982 |
| ||
Total loans, net |
|
|
|
|
|
|
|
| 902,234 |
|
|
| 774,956 |
| ||
Total assets |
|
|
|
|
|
|
|
| 916,109 |
|
|
| 788,459 |
| ||
Total borrowings |
|
|
|
|
|
|
|
| 712,474 |
|
|
| 628,528 |
| ||
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Return on average assets |
|
| 6.09 | % |
|
| 6.22 | % |
|
| 6.08 | % |
|
| 4.04 | % |
Return on average equity |
|
| 30.46 |
|
|
| 31.11 |
|
|
| 30.39 |
|
|
| 20.20 |
|
Interest yield |
|
| 13.78 |
|
|
| 14.97 |
|
|
| 14.05 |
|
|
| 14.99 |
|
Net interest margin |
|
| 12.74 |
|
|
| 13.18 |
|
|
| 12.76 |
|
|
| 13.13 |
|
Reserve coverage |
|
| 3.38 |
|
|
| 3.48 |
|
|
| 3.38 |
|
|
| 3.48 |
|
Delinquency status(1) |
|
| 0.34 |
|
|
| 0.52 |
|
|
| 0.34 |
|
|
| 0.52 |
|
Charge-off % |
|
| (0.15 | ) |
|
| 0.44 |
|
|
| 0.22 |
|
|
| 1.96 |
|
Page 46 of 59
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Statement of operations | ||||||||||||||||
Investment income | $ | 5,567 | $ | 5,269 | $ | 13,604 | $ | 20,091 | ||||||||
Interest expense | 3,543 | 3,373 | 10,285 | 9,273 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net interest income | 2,024 | 1,896 | 3,319 | 10,818 | ||||||||||||
Noninterest income | 8 | 104 | 22 | 165 | ||||||||||||
Operating expenses | 3,676 | 4,606 | 9,583 | 12,952 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net investment loss before income taxes | (1,644 | ) | (2,606 | ) | (6,242 | ) | (1,969 | ) | ||||||||
Income tax (provision) benefit | (846 | ) | — | 2,024 | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net investment loss after income taxes | (2,490 | ) | (2,606 | ) | (4,218 | ) | (1,969 | ) | ||||||||
Net realized gains (losses) on investments | 944 | 2,499 | 3,785 | (7 | ) | |||||||||||
Net change in unrealized appreciation on Medallion Bank and other controlled subsidiaries(1) | 2,035 | 25,913 | 11,089 | 44,221 | ||||||||||||
Net change in unrealized depreciation on investments other than securities | — | (14,107 | ) | — | (18,862 | ) | ||||||||||
Net change in unrealized depreciation on investments(1) | (6,871 | ) | (6,656 | ) | (26,843 | ) | (6,925 | ) | ||||||||
Income tax benefit | 7,001 | — | 13,120 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase in net assets resulting from operations | $ | 619 | $ | 5,043 | $ | (3,067 | ) | $ | 16,458 | |||||||
|
|
|
|
|
|
|
| |||||||||
Per share data | ||||||||||||||||
Net investment income (loss) | ($ | 0.07 | ) | ($ | 0.10 | ) | $ | (0.26 | ) | ($ | 0.08 | ) | ||||
Income tax benefit | 0.26 | — | 0.63 | — | ||||||||||||
Net realized gains (losses) on investments | 0.04 | 0.10 | 0.16 | — | ||||||||||||
Net change in unrealized appreciation (depreciation) on investments(1) | (0.20 | ) | 0.21 | (0.66 | ) | 0.76 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in net assets resulting from operations | $ | 0.03 | $ | 0.21 | $ | (0.13 | ) | $ | 0.68 | |||||||
|
|
|
|
|
|
|
| |||||||||
Distributions declared per share | $ | 0.00 | $ | 0.05 | $ | 0.00 | $ | 0.35 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 23,930,086 | 24,136,807 | 23,916,334 | 24,173,898 | ||||||||||||
Diluted | 24,083,919 | 24,184,518 | 23,916,334 | 24,227,068 | ||||||||||||
The home improvement lending segment works with contractors and financial service providers to finance home improvements and is concentrated in roofs, swimming pools, and windows at 28%, 26%, and 13% of total loans outstanding as of September 30, 2021, as compared to 22%, 22%, and 14% as of September 30, 2020, with no other collateral types over 10%. Home improvement loans are made to borrowers residing in all fifty states, with the highest concentrations in Florida, Texas, and Ohio at 11%, 11%, and 8% of loans outstanding September 30, 2021, compared to 11%, 11%, and 10% as of September 30, 2020, and with no other states over 6%.
Page 67 of 94
| Balance sheet data | September 30, 2017 | December 31, 2016 | ||||||
Net investments | $ | 621,185 | $ | 652,278 | ||||
Total assets | 665,420 | 689,377 | ||||||
Total funds borrowed | 330,138 | 349,073 | ||||||
Total liabilities | 371,840 | 403,281 | ||||||
Total shareholders’ equity | 283,580 | 286,096 | ||||||
|
|
|
| |||||
Managed balance sheet data(2) | ||||||||
Net investments | $ | 1,507,526 | $ | 1,517,592 | ||||
Total assets | 1,618,267 | 1,605,435 | ||||||
Total funds borrowed | 1,274,339 | 1,257,515 | ||||||
Total liabilities | 1,334,687 | 1,319,340 | ||||||
|
|
|
| |||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Selected financial ratios and other data | ||||||||||||||||
Return on average assets (ROA)(3) | ||||||||||||||||
Net investment loss after taxes | (1.50 | )% | (1.56 | %) | (0.84 | %) | (0.38 | %) | ||||||||
Net increase (decrease) in net assets resulting from operations | 0.37 | 3.03 | (0.61 | ) | 3.22 | |||||||||||
Return on average equity (ROE)(4) | ||||||||||||||||
Net investment loss after taxes | (3.48 | ) | (3.73 | ) | (1.97 | ) | (0.95 | ) | ||||||||
Net increase(decrease) in net assets resulting from operations | 0.86 | 7.23 | (1.44 | ) | 7.90 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average yield | 3.55 | % | 3.55 | % | 2.88 | % | 4.45 | % | ||||||||
Weighted average cost of funds | 2.26 | 2.27 | 2.18 | 2.05 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net interest margin(5) | 1.29 | 1.28 | 0.70 | 2.40 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Noninterest income ratio(6) | 0.01 | % | 0.07 | % | 0.00 | % | 0.04 | % | ||||||||
Total expense ratio (7) | 0.68 | 5.37 | 1.00 | 4.93 | ||||||||||||
Operating expense ratio(8) | 2.34 | 3.10 | 2.03 | 2.87 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| As a percentage of net investment portfolio | September 30, 2017 | December 31, 2016 | ||||||
Medallion loans | 36 | % | 41 | % | ||||
Commercial loans | 13 | 13 | ||||||
Investments in Medallion Bank and other controlled subsidiaries | 49 | 45 | ||||||
Equity investments | 2 | 1 | ||||||
Investment securities | — | — | ||||||
|
|
|
| |||||
Investments to assets (9) | 95 | % | 95 | % | ||||
Equity to assets(10) | 43 | 42 | ||||||
Debt to equity(11) | 116 | 122 | ||||||
|
|
|
| |||||
Page 68 of 94
Consolidated Results of Operations
2017 Third Quarter and Nine Months compared to the 2016 periodsprior year.
Net increase (decrease) in net assets resulting from operations was $619,000 or $0.03 per diluted common shareThe following table presents certain financial data and ($3,067,000) or ($0.13) inratios as of and for the 2017 third quarterthree and nine months down $4,424,000ended September 30, 2021 and 2020.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Selected Earnings Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest income |
| $ | 8,586 |
|
| $ | 7,218 |
|
| $ | 24,732 |
|
| $ | 19,431 |
|
Total interest expense |
|
| 958 |
|
|
| 1,655 |
|
|
| 3,309 |
|
|
| 4,178 |
|
Net interest income |
|
| 7,628 |
|
|
| 5,563 |
|
|
| 21,423 |
|
|
| 15,253 |
|
Provision for loan losses |
|
| 369 |
|
|
| 745 |
|
|
| 1,575 |
|
|
| 3,041 |
|
Net interest income after loss provision |
|
| 7,259 |
|
|
| 4,818 |
|
|
| 19,848 |
|
|
| 12,212 |
|
Other income (expense), net |
|
| (3,437 | ) |
|
| (2,700 | ) |
|
| (7,989 | ) |
|
| (7,002 | ) |
Net income before taxes |
|
| 3,822 |
|
|
| 2,118 |
|
|
| 11,859 |
|
|
| 5,210 |
|
Income tax provision |
|
| (951 | ) |
|
| (541 | ) |
|
| (3,054 | ) |
|
| (1,332 | ) |
Net income after taxes |
| $ | 2,871 |
|
| $ | 1,577 |
|
| $ | 8,805 |
|
| $ | 3,878 |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total loans, gross |
|
|
|
|
|
|
| $ | 398,774 |
|
| $ | 315,442 |
| ||
Total loan allowance |
|
|
|
|
|
|
|
| 6,496 |
|
|
| 4,751 |
| ||
Total loans, net |
|
|
|
|
|
|
|
| 392,278 |
|
|
| 310,691 |
| ||
Total assets |
|
|
|
|
|
|
|
| 405,439 |
|
|
| 321,084 |
| ||
Total borrowings |
|
|
|
|
|
|
|
| 296,509 |
|
|
| 255,778 |
| ||
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Return on average assets |
|
| 2.89 | % |
|
| 2.06 | % |
|
| 3.20 | % |
|
| 1.84 | % |
Return on average equity |
|
| 14.43 |
|
|
| 10.29 |
|
|
| 16.02 |
|
|
| 9.19 |
|
Interest yield |
|
| 9.04 |
|
|
| 9.73 |
|
|
| 9.37 |
|
|
| 9.62 |
|
Net interest margin |
|
| 8.03 |
|
|
| 7.50 |
|
|
| 8.11 |
|
|
| 7.53 |
|
Reserve coverage |
|
| 1.63 |
|
|
| 1.51 |
|
|
| 1.63 |
|
|
| 1.51 |
|
Delinquency status(1) |
|
| 0.04 |
|
|
| 0.03 |
|
|
| 0.04 |
|
|
| 0.03 |
|
Charge-off % |
|
| (0.25 | ) |
|
| 0.09 |
|
|
| 0.09 |
|
|
| 0.44 |
|
Page 47 of 59
Commercial Lending
We originate both senior and $19,525,000 or 119% from $5,043,000 or $0.21 per share and $16,458,000 or $0.68subordinated loans nationwide to businesses in a variety of industries, more than 62% of which are located in the 2016 third quarterMidwest region, with the rest scattered across the country. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $2,000,000 to $5,000,000 at origination, and typically include an equity component as part of the financing. The commercial lending business has concentrations in manufacturing and administrative and support services, making up 42% and 14% of the loans outstanding as of September 30, 2021, compared to 56% and 13% as of September 30, 2021.
The following table presents certain financial data and ratios as of and for the three and nine months primarily reflecting higher unrealized depreciation onended September 30, 2021 and 2020. The commercial segment encompasses the investment portfolio, lower interest income frommezzanine lending business, and the medallion loan portfolio, lower dividend income from controlled subsidiaries, higher interest expensesother legacy commercial loans (immaterial to total) have been allocated to corporate and lower realized gains, offset by lower operating expenses, and higher income tax benefits. Net investment loss after income taxes was ($2,490,000) or ($0.10) per share and ($4,218,000) or ($0.18)other investments. The commercial segment increased in the 2017 quarter and nine months, down $116,000 or 4% and $2,249,000 or 114% from ($2,606,000) or ($0.11) per share and ($1,969,000) or ($0.08) in the 2016 quarter and nine months.
Investmentcurrent year as originations exceeded repayments. Net income was $5,567,000 and $13,604,000 in the 2017 third quarter and nine months, up $298,000 or 6% and down $6,487,000 or 32% from $5,269,000 and $20,091,000 in the year ago periods. This included $1,845,000 and $4,691,000 of interest reversalsimproved, driven by equity gains related to nonaccrual loans insuccessful portfolio company exits.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Selected Earnings Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest income |
| $ | 2,055 |
|
| $ | 1,791 |
|
| $ | 4,920 |
|
| $ | 5,275 |
|
Total interest expense |
|
| 662 |
|
|
| 663 |
|
|
| 1,950 |
|
|
| 1,937 |
|
Net interest income |
|
| 1,393 |
|
|
| 1,128 |
|
|
| 2,970 |
|
|
| 3,338 |
|
Provision for loan losses |
|
| — |
|
|
| - |
|
|
| — |
|
|
| - |
|
Net interest income after loss provision |
|
| 1,393 |
|
|
| 1,128 |
|
|
| 2,970 |
|
|
| 3,338 |
|
Other income (expense), net |
|
| 636 |
|
|
| (712 | ) |
|
| 107 |
|
|
| (2,191 | ) |
Net income before taxes |
|
| 2,029 |
|
|
| 416 |
|
|
| 3,077 |
|
|
| 1,147 |
|
Income tax provision |
|
| (510 | ) |
|
| (104 | ) |
|
| (773 | ) |
|
| (286 | ) |
Net income after taxes |
| $ | 1,519 |
|
| $ | 312 |
|
| $ | 2,304 |
|
| $ | 861 |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total loans, gross |
|
|
|
|
|
|
| $ | 70,232 |
|
| $ | 68,042 |
| ||
Total loan allowance |
|
|
|
|
|
|
|
| — |
|
|
| — |
| ||
Total loans, net |
|
|
|
|
|
|
|
| 70,232 |
|
|
| 68,042 |
| ||
Total assets |
|
|
|
|
|
|
|
| 92,257 |
|
|
| 80,247 |
| ||
Total borrowings |
|
|
|
|
|
|
|
| 73,806 |
|
|
| 65,906 |
| ||
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Return on average assets |
|
| — | % |
|
| 1.49 | % |
|
| 3.68 | % |
|
| 1.37 | % |
Return on average equity |
|
| 32.99 |
|
|
| 6.82 |
|
|
| 18.38 |
|
|
| 6.56 |
|
Interest yield |
|
| 12.04 |
|
|
| 10.51 |
|
|
| 10.56 |
|
|
| 10.58 |
|
Net interest margin |
|
| 8.16 |
|
|
| 6.62 |
|
|
| 6.37 |
|
|
| 6.69 |
|
Reserve coverage(1) |
|
| — |
|
|
| — |
|
|
| (0.00 | ) |
|
| - |
|
Delinquency status(1) (2) |
|
| 0.10 |
|
|
| 2.67 |
|
|
| 0.10 |
|
|
| 2.67 |
|
Charge-off %(3) |
|
| — |
|
|
| (0.02 | ) |
|
| — |
|
|
| (0.01 | ) |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
Geographic Concentrations (Dollars in thousands) |
| Total Gross |
|
| % of Market |
|
| Total Gross |
|
| % of Market |
| ||||
Illinois |
| $ | 16,341 |
|
|
| 23 | % |
| $ | 9,454 |
|
|
| 14 | % |
Michigan |
|
| 10,837 |
|
|
| 15 |
|
|
| 10,419 |
|
|
| 15 |
|
North Carolina |
|
| 7,266 |
|
|
| 10 |
|
|
| 5,348 |
|
|
| 8 |
|
Minnesota |
|
| 5,607 |
|
|
| 8 |
|
|
| 5,713 |
|
|
| 8 |
|
Texas |
|
| 5,568 |
|
|
| 8 |
|
|
| 5,557 |
|
|
| 8 |
|
California |
|
| 5,021 |
|
|
| 7 |
|
|
| 4,989 |
|
|
| 7 |
|
New Jersey |
|
| 4,164 |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
Kansas |
|
| 4,107 |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
Other(1) |
|
| 11,321 |
|
|
| 17 |
|
|
| 26,562 |
|
|
| 40 |
|
Total |
| $ | 70,232 |
|
|
| 100 | % |
| $ | 68,042 |
|
|
| 100 | % |
Page 48 of 59
Medallion Lending
The yield on the investment portfolio was 3.55% in the 2017 quarter, consistent with 2016, and was 2.88% in the 2017 nine months, down 35% from 4.45% in the 2016 nine months. Excluding the dividends in prior year, the 2017 third quarter and nine month yields were unchanged and down 24% from 3.55% and 3.79% in the 2016 quarter and nine months, reflecting the increases in the level of loans on nonaccrual and interest applied to principal. Average investments outstanding were up 5% to $622,908,000 in the 2017 quarter and were up 5% to $631,832,000 in the nine months, from $591,257,000 and $602,399,000 in the year ago periods, primarily reflecting portfolio growth.
Medallion loans were $224,580,000 at quarter end, down $63,677,000 or 22% from $288,257,000 a year ago, representing 36% of the investment portfolio compared to 49% a year ago, and were yielding 4.44% compared to 4.22% a year ago, an increase of 5%, reflecting portfolio shrinkage and the repricing of the existing portfolio to higher current market interest rates. The decrease in outstandings was primarily concentratedmedallion lending segment operates mainly in the New York City, Newark, and Chicago markets. We have a long history of owning, managing, and financing taxi fleets, taxi medallions, and corporate car services. During the three and nine months ended September 30, 2021, taxi medallion values remained consistent in the New York City market althougheven as other markets saw declines. We continue to not recognize interest income with all markets declined,loans being placed on nonaccrual as of September 30, 2020, and reflected increased realizedby removing underperforming loans from the portfolio being transferred to loan collateral in process of foreclosure with charge-offs to collateral value, once loans become more than 120 days past due. All the loans are secured by taxi medallions and unrealized lossesenhanced by personal guarantees of the shareholders and owners.
The following table presents certain financial data and ratios as of and for the three and nine months ended September 30, 2021 and 2020.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Selected Earnings Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest income |
| $ | 1 |
|
| $ | (909 | ) |
| $ | (1,543 | ) |
| $ | 86 |
|
Total interest expense |
|
| 2,009 |
|
|
| (56 | ) |
|
| 5,903 |
|
|
| 2,781 |
|
Net interest loss |
|
| (2,008 | ) |
|
| (853 | ) |
|
| (7,446 | ) |
|
| (2,695 | ) |
Provision (benefit) for loan losses |
|
| (1,944 | ) |
|
| 37,196 |
|
|
| (5,931 | ) |
|
| 49,489 |
|
Net interest loss after loss provision |
|
| (64 | ) |
|
| (38,049 | ) |
|
| (1,515 | ) |
|
| (52,184 | ) |
Other income (expense), net |
|
| 2,073 |
|
|
| (9,738 | ) |
|
| (1,228 | ) |
|
| (20,603 | ) |
Net income (loss) before taxes |
|
| 2,009 |
|
|
| (47,787 | ) |
|
| (2,743 | ) |
|
| (72,787 | ) |
Income tax benefit |
|
| (504 | ) |
|
| 11,908 |
|
|
| 689 |
|
|
| 18,138 |
|
Net loss after taxes |
| $ | 1,505 |
|
| $ | (35,879 | ) |
| $ | (2,054 | ) |
| $ | (54,649 | ) |
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total loans, gross |
|
|
|
|
|
|
| $ | 14,934 |
|
| $ | 91,298 |
| ||
Total loan allowance |
|
|
|
|
|
|
|
| 9,396 |
|
|
| 57,777 |
| ||
Total loans, net |
|
|
|
|
|
|
|
| 5,538 |
|
|
| 33,521 |
| ||
Total assets |
|
|
|
|
|
|
|
| 93,683 |
|
|
| 142,450 |
| ||
Total borrowings |
|
|
|
|
|
|
|
| 74,941 |
|
|
| 113,009 |
| ||
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Return on average assets |
|
| 6.12 | % |
|
| (85.70 | %) |
|
| (2.52 | %) |
|
| (38.80 | %) |
Return on average equity |
|
| 30.62 |
|
| NM |
|
|
| (12.60 | ) |
|
| (192.88 | ) | |
Interest yield |
|
| 0.09 |
|
|
| (5.34 | ) |
|
| (23.55 | ) |
|
| 0.13 |
|
Net interest margin |
|
| (139.64 | ) |
|
| (3.89 | ) |
|
| (113.66 | ) |
|
| (4.12 | ) |
Reserve coverage |
|
| 49.98 |
|
|
| 63.28 |
|
|
| 49.98 |
|
|
| 63.28 |
|
Delinquency status(1) |
|
| — |
|
|
| 8.31 |
|
|
| — |
|
|
| 8.31 |
|
Charge-off % |
|
| (43.01 | ) |
|
| 89.89 |
|
|
| 143.94 |
|
|
| 26.21 |
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
Geographic Concentration (Dollars in thousands) |
| Total Gross |
|
| % of Market |
|
| Total Gross |
|
| % of Market |
| ||||
New York City |
| $ | 12,661 |
|
|
| 85 | % |
| $ | 82,014 |
|
|
| 90 | % |
Newark |
|
| 2,217 |
|
|
| 15 |
|
|
| 8,561 |
|
|
| 9 |
|
Chicago |
|
| 23 |
|
|
| 0 |
|
|
| 450 |
|
|
| 1 |
|
All Other |
|
| 33 |
|
|
| 0 |
|
|
| 273 |
|
|
| 0 |
|
Total |
| $ | 14,934 |
|
|
| 100 | % |
| $ | 91,298 |
|
|
| 100 | % |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
Geographic Concentration (Dollars in thousands) |
| Total Loan Collateral in Process of Foreclosure Loans |
|
| % of Market |
|
| Total Loan Collateral in Process of Foreclosure Loans |
|
| % of Market |
| ||||
New York City |
| $ | 26,620 |
|
|
| 63 | % |
| $ | 25,588 |
|
|
| 54 | % |
Newark |
|
| 4,713 |
|
|
| 11 |
|
|
| 3,579 |
|
|
| 7 |
|
Chicago |
|
| 2,257 |
|
|
| 5 |
|
|
| 6,341 |
|
|
| 13 |
|
All Other |
|
| 8,954 |
|
|
| 21 |
|
|
| 12,235 |
|
|
| 26 |
|
Total |
| $ | 42,544 |
|
|
| 100 | % |
| $ | 47,743 |
|
|
| —( | %) |
Page 49 of 59
RPAC
We are the majority owner and managing member of RPAC Racing, LLC, a performance and marketing company for NASCAR. Revenues are mainly earned through sponsorships and race winning activity over the ten month race season (February through November) during the year. As a result of COVID-19, the prior year race season had been suspended from March 15, 2020 through May 17, 2020. As states began to reopen, NASCAR began racing and completed all races on a revised schedule.
The following table presents certain financial data and ratios as of and for the three and nine months ended September 30, 2021 and 2020.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Selected Earnings Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sponsorship, race winnings, and other income |
| $ | 3,335 |
|
| $ | 8,962 |
|
| $ | 10,153 |
|
| $ | 15,161 |
|
Race team and other expenses |
|
| 4,490 |
|
|
| 5,139 |
|
|
| 12,908 |
|
|
| 12,310 |
|
Interest expense |
|
| 38 |
|
|
| 42 |
|
|
| 113 |
|
|
| 122 |
|
Total expenses |
|
| 4,528 |
|
|
| 5,181 |
|
|
| 13,021 |
|
|
| 12,432 |
|
Net income (loss) before taxes |
|
| (1,193 | ) |
|
| 3,781 |
|
|
| (2,868 | ) |
|
| 2,729 |
|
Income tax (provision) |
|
| 299 |
|
|
| (942 | ) |
|
| 720 |
|
|
| (680 | ) |
Net income (loss) after taxes |
| $ | (894 | ) |
| $ | 2,839 |
|
| $ | (2,148 | ) |
| $ | 2,049 |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | — |
|
| $ | — |
|
| $ | 30,969 |
|
| $ | 40,112 |
|
Total borrowings |
|
| — |
|
|
| — |
|
|
| 8,054 |
|
|
| 8,652 |
|
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Return on average assets |
|
| (11.28 | %) |
|
| 31.97 | % |
|
| (8.89 | %) |
|
| 8.27 | % |
Return on average equity |
|
| (11 | ) |
| NM |
|
|
| (387 | ) |
| NM |
| ||
Corporate and Other Investments
This non-operating segment relates to our equity and investment securities as well as our legacy commercial business, and other assets, liabilities, revenues, and expenses not allocated to the operating segments. Commencing with the 2020 second quarter, the Bank began issuing loans related to the new strategic partnership business, which is currently included within this segment, for a total of $95,000 in net amortizationloans as of loan principal. September 30, 2021. This segment also reflects the elimination of all intercompany activity among the consolidated entities, as well as the gains (losses) on the dispositions of certain non-core assets.
The managed medallion loan portfolio, which includes loans at Medallion Bankfollowing table presents certain financial data and those servicedratios as of and for third parties, was $456,504,000 at quarter end, down $155,511,000 or 25% from $612,015,000 a year ago, reflecting the above. three and nine months ended September 30, 2021 and 2020.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(Dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Selected Earnings Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest income |
| $ | 326 |
|
| $ | 378 |
|
| $ | 987 |
|
| $ | 1,253 |
|
Total interest expense |
|
| 1,454 |
|
|
| 2,604 |
|
|
| 4,481 |
|
|
| 6,933 |
|
Net interest loss |
|
| (1,128 | ) |
|
| (2,226 | ) |
|
| (3,494 | ) |
|
| (5,680 | ) |
Provision for loan losses |
|
| 322 |
|
|
| (4 | ) |
|
| 810 |
|
|
| — |
|
Net interest loss after loss provision |
|
| (1,450 | ) |
|
| (2,222 | ) |
|
| (4,304 | ) |
|
| (5,680 | ) |
Other income (expense), net |
|
| (778 | ) |
|
| (1,148 | ) |
|
| (2,637 | ) |
|
| (8,842 | ) |
Net loss before taxes |
|
| (2,228 | ) |
|
| (3,370 | ) |
|
| (6,941 | ) |
|
| (14,522 | ) |
Income tax benefit |
|
| 251 |
|
|
| 2,261 |
|
|
| (874 | ) |
|
| 4,426 |
|
Net loss after taxes |
| $ | (1,977 | ) |
| $ | (1,109 | ) |
| $ | (7,815 | ) |
| $ | (10,096 | ) |
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total loans, gross |
|
|
|
|
|
|
| $ | 1,951 |
|
| $ | 3,344 |
| ||
Total loan allowance |
|
|
|
|
|
|
|
| — |
|
|
| — |
| ||
Total loans, net |
|
|
|
|
|
|
|
| 1,951 |
|
|
| 3,344 |
| ||
Total assets |
|
|
|
|
|
|
|
| 266,777 |
|
|
| 231,923 |
| ||
Total borrowings |
|
|
|
|
|
|
|
| 258,358 |
|
|
| 199,312 |
| ||
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Return on average assets |
|
| (2.65 | %) |
|
| (8.78 | %) |
|
| (3.68 | %) |
|
| (5.45 | %) |
Return on average equity |
|
| (19.79 | ) |
|
| (54.58 | ) |
|
| (27.18 | ) |
|
| (22.64 | ) |
Page 50 of 59
Summary Consolidated Financial Data
The commercial loan portfolio was $82,760,000 at quarter end,table below presents our selected financial data for the three and nine months ended September 30, 2021 and 2020.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(Dollars in thousands, except per share data) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Return on average assets (ROA) |
|
| 3.73 | % |
|
| (5.69 | )% |
|
| 2.73 | % |
|
| (3.43 | )% |
Return on average equity (ROE) |
|
| 19.81 |
|
|
| (29.77 | ) |
|
| 14.47 |
|
|
| (17.02 | ) |
Dividend payout ratio |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net interest margin |
|
| 9.48 |
|
|
| 8.72 |
|
|
| 9.19 |
|
|
| 8.58 |
|
Other income ratio(3) |
|
| 2.13 |
|
|
| 0.29 |
|
|
| 1.73 |
|
|
| 0.29 |
|
Total expense ratio(4) |
|
| 9.55 |
|
|
| 5.61 |
|
|
| 9.58 |
|
|
| 7.07 |
|
Equity to assets(2) |
|
| 18.76 |
|
|
| 18.53 |
|
|
| 18.76 |
|
|
| 18.53 |
|
Debt to equity (1) |
|
| 3.98 |
|
|
| 4.28 |
|
|
| 3.98 |
|
|
| 4.28 |
|
Loans receivable to assets |
|
| 76.01 | % |
|
| 74.00 | % |
|
| 76.01 | % |
|
| 74.00 | % |
Net charge-offs(5) |
| $ | 839 |
|
| $ | (16,216 | ) |
| $ | (12,100 | ) |
| $ | (28,814 | ) |
Net charge-offs as a % of average loans receivable |
|
| (0.38 | )% |
|
| 5.36 | % |
|
| 1.17 | % |
|
| 3.30 | % |
Allowance coverage ratio |
|
| 3.34 |
|
|
| 7.07 |
|
|
| 3.34 |
|
|
| 7.07 |
|
Consolidated Results of Operations
Three and Nine Months Ended September 30, 2021 compared to $81,110,000 a year ago, an increase of $1,650,000the Three and Nine Months Ended September 30, 2020
Net income attributable to shareholders was $15,940,000, or 2%,$0.64 per share, and represented 13% of$34,638,000, or $1.39 per share, for the investment portfoliothree and nine months ended September 30, 2021, compared to 14% a year ago.net loss attributable to shareholders of $23,630,000, or $0.97 per share, and $41,250,000, or $1.69 per share, for the three and nine months ended September 30, 2020.
Total interest income was $41,497,000 for the three months ended September 30, 2021, compared to $37,440,000 for the three months ended September 30, 2020. The increase reflectsin interest income reflected the continued growth in the secured mezzanine portfolio.consumer lending segments, which was offset by contraction in the medallion lending segment, driven by all medallion loans being on nonaccrual status. For the nine months ended September 30, 2021, total interest income was $115,953,000, compared to $108,570,000 for the nine months ended September 30, 2020 similarly reflective of growth in the consumer lending segments, with higher volumes partially offset by lower rates, and offset by contraction in the medallion lending segment and higher amortization. The net managedyield on interest earning assets was 11.55% and 11.56% for the three and nine months ended September 30, 2021, compared to 11.23% and 11.31% for the three and nine months ended September 30, 2020. Average interest earning assets were $1,429,101,000 for the three months ended September 30, 2021, an increase from $1,325,970,000 for the three months ended September 30, 2020. For the nine months ended September 30, 2021, average interest earning assets were $1,344,569,000, an increase from $1,282,708,000 for the nine months ended September 30, 2020.
Loans before allowance for loan losses were $1,419,681,000 as of September 30, 2021, comprised of recreation ($933,790,000), home improvement ($398,774,000), commercial ($72,088,000), medallion ($14,934,000), and strategic partnership ($95,000) loans. We had an allowance for loan portfolio,losses as of September 30, 2021 of $47,448,000, which includeswas attributable to the recreation (66%), medallion (20%), and home improvement (14%) loan portfolios. As of December 31, 2020, loans at Medallion Bankbefore allowance for loan losses were $1,229,838,000, comprised of recreation ($792,686,000), home improvement ($334,033,000), commercial ($65,327,000), medallion ($37,768,000), and those servicedstrategic partnership ($24,000) loans. We had an allowance for loan losses as of December 31, 2020 of $57,548,000, which was attributable to recreation (48%), medallion (43%), and home improvement (9%) loans.
Loans increased $189,843,000, or 15%, from December 31, 2020 as a result of $554,722 of loan originations, offset by third parties, was $85,817,000 at quarter end, up $195,000 or less than 1% from $85,622,000 a year ago. Investments in Medallion Bank and other controlled subsidiaries were $303,861,000 at quarter end, up $95,763,000 or 46% from $208,098,000 a year ago, primarily reflecting appreciation of Medallion Bankprincipal payments, and to a lesser extent other portfolio company investments,transfers to loan collateral in process of foreclosure and which represented 49%net charge-offs. The provision for loan losses was a benefit of $337,000 for the investment portfolio,three months ended September 30, 2021, compared to 36%a loss of $39,749,000 for the three months ended September 30, 2020. The improvement from a year ago and which yielded 0.83% atis a result of the entire medallion loan portfolio being placed on non-accrual status in the 2020 third quarter, end,resulting in all medallion loans being reserved down to collateral value, in addition to lower net charge offs in the consumer portfolios. The provision for loan loss was $2,000,000 for the nine months ended September 30, 2021, compared to 3.88%$73,231,000 for the nine months ended September 30, 2020. The improvement over the prior year is similarly attributable the entire medallion loan portfolio being placed on non-accrual status and reserved down to collateral value in the 2020 period, along with increases in reserve rates between 50 and 100 basis points on the recreational subprime loan business, as well as lower net charge offs in the recreational loan portfolio. The charge-off ratios on the loan portfolios was a year ago, primarily reflectingbenefit of 0.38% for the reduced dividends from Medallion Bank offsetthree months ended September 30, 2021 compared to 5.36% for the three months ended September 30, 2020, and was 1.17% for the nine months ended September 30, 2021 compared to 3.30% for the nine months ended September 30, 2020, both driven by increased dividends from other controlled subsidiaries.the medallion segment as a result of deferrals granted and the temporary suspension of delinquencies and nonperforming treatment under the CARES Act. See Notes 3 and 11 of the consolidated financial statementsNote 4 for additional information about Medallion Bankon loans and the other controlled subsidiaries. Equity investments were $9,984,000 at quarter end, up $1,821,000 or 22% from $8,163,000 a year ago, primarily reflecting increased investments and represented 2%allowance for loan losses.
Page 51 of the investment portfolio at quarter end, compared to 1% a year ago, and had a dividend yield of 0.00%, compared to 0.66% a year ago.59
Interest expense was $3,543,000$7,426,000 and $10,285,000 in$23,718,000 for the 2017 quarterthree and nine months up $170,000 or 5%ended September 30, 2021, compared to $8,384,000 and $1,012,000 or 11% from $3,373,000$26,219,000 for the three and $9,273,000 in the 2016 periods. The increase in interest expense was primarilynine months ended September 30, 2020, due to increased borrowing costs.higher average debt outstanding partially offset by lower cost of borrowed funds. The average cost of borrowed funds was 4.25%2.12% and 4.09% in2.37% for the 2017 quarterthree and nine months ended September 30, 2021, compared to 3.69%2.55% and 3.17%2.79% for the three and nine months ended September 30, 2020, both mainly driven by the decline in market rates for deposits, the year ago periods, an increaserepayment of 15% and 29%, reflectingretail notes, offset to a lesser extent with the adjustablereplacement of notes payable to banks with higher fixed rate nature of much of our borrowings, and changes in our funding mix.private notes. Average debt outstanding was down 9% to $330,885,000$1,391,350,000 and $1,342,581,000 for the 2017 quarter,three and was down 14% to $335,907,000 in the nine months comparedended September 30, 2021, up from $1,309,787,000 and $1,255,053,000 for the three and nine months ended September 30, 2020, as we issued additional certificates of deposits to $363,943,000increase our liquidity, along with the new issuance of privately placed notes, offset by the repayment of publicly traded retail notes and $390,472,000 in the year ago periods, primarily reflecting decreased borrowings required to fund the contracting loan and investment securities portfolios.other bank borrowings. See page 6538-39 for a table which showstables that show average balances and cost of funds for our funding sources.
Page 69 of 94
Net interest income was $2,024,000$34,071,000 and $3,319,000$92,235,000 for the three and nine months ended September 30, 2021, compared to $29,056,000 and $82,351,000 for the three and nine months ended September 30, 2020. The net interest margin was 1.29% and 0.70%9.48% for the 2017 third quarterthree months ended September 30, 2021, compared to 8.72%, for the three months ended September 30, 2020, and was 9.19%, for the nine months up $128,000 or 7% and down $7,499,000 or 69% from $1,896,000 and $10,818,000 a year ago, which represented net interest margins of 1.28% and 2.40% allended September 30, 2021, compared to 8.58% for the nine months ended September 30, 2020, reflecting the items discussed above.
NoninterestNet other income (loss), which is comprised of managementsponsorship and race winnings, prepayment fees, servicing fee income, late charges, servicing fees, prepayment fees,write-downs of loan collateral, impairment of equity investments, and other miscellaneous income was $8,000$7,206,000 for the three months ended September 30, 2021, compared to $960,000 for the three months ended September 30, 2020. The improvement was due to gains on the disposal of equity investments, lower write-downs due to reductions in collateral values, offset by lower race team related income. For the nine months ended September 30, 2021, there was income of $16,909,000, compared to a loss of $2,764,000 for the nine months ended September 30, 2020. The improvement was mainly due to gains recorded on the extinguishment of debt and $22,000gains on the disposal of equity investments in the 2017 third quartercurrent year, offset by lower write-downs of the loan collateral in process of foreclosure and nine months, down $96,000 or 92% and $143,000 or 87% from $104,000 and $165,000 alosses of equity investing recorded in the prior year ago, primarily reflecting lower servicing and other fees generated from the portfolio base at Medallion Bank.period.
Operating expenses were $3,676,000 and $9,583,000 in$18,723,000 for the 2017 third quarter and ninethree months down $930,000 or 20% and $3,369,000 or 26% from $4,606,000 and $12,952,000 inended September 30, 2021, compared to $18,681,000 for the 2016 periods.three months ended September 30, 2020. Salaries and benefits expense was $2,224,000 and $5,086,000were $7,957,000 for the three months ended September 30, 2021, compared to $7,081,000 for the three months ended September 30, 2020, with the increase mainly attributable to compensation in the third quarter and nine months, down $815,000 and $3,730,000 or 27% and 42% from $3,039,000 and $8,816,000 in 2016, primarily due to a reduction in bonus costs recorded in theconnection with current period.year performance. Professional fees were $567,000 and $1,875,000 in$1,963,000 for the quarter and ninethree months down $8,000 or 1% and up $534,000 or 40% from $575,000 and $1,341,000 a year ago,ended September 30, 2021, compared to $1,651,000 for the three months ended September 30, 2020, primarily reflecting higher legal expensescosts for a variety of corporate and investment-related matters. Race team costs were $2,424,000 for the three months ended September 30, 2021, compared to $2,636,000 for the three months ended September 30, 2020. Loan servicing costs were $1,684,000 for the three months ended September 30, 2021, slightly lower than $1,729,000 for the three months ended September 30, 2020. Occupancy and other operating expense was $885,000expenses were $4,695,000 for the three months ended September 30, 2021, decreasing from $5,584,000 for the three months ended September 30, 2020, due primarily to lower loan collection costs, rent costs, and $2,622,000 inother operating costs.
Operating expenses were $53,185,000 for the quarter and nine months down $107,000 or 11%ended September 30, 2021, compared to $54,138,000 for the nine months ended September 30, 2020. Salaries and down $173,000 or 6%benefits were $21,542,000 for the nine months ended September 30, 2021, up from $992,000 and $2,795,000$20,716,000 for the nine months ended September 30, 2020, with the increase mainly attributable to compensation in connection with current year performance. Professional fees were $4,694,000 for the 2016 periods,nine months ended September 30, 2021, compared to $6,559,000 for the nine months ended September 30, 2020, primarily reflecting higher leaselower legal costs infor a variety of corporate matters. Race team costs were $7,219,000 for the nine month periodmonths ended September 30, 2021, compared to $6,584,000 for the nine months ended September 30, 2020, reflective of a full race team in 2021 as compared to the shortened 2020 season due to the COVID-19 pandemic. Loan servicing costs were $5,062,000 for the nine months ended September 30, 2021, down slightly from the prior year nine months. Occupancy and offset by higher business development reimbursements from Medallion Bank inother operating expenses were $14,668,000 for the current periods.nine months ended September 30, 2021 compared to $15,209,000 for the nine months ended September 30, 2020.
Total income tax benefitexpense was $6,155,000 and $15,144,000 in$6,167,000 for the 2017 third quarter and ninethree months compared to $0 and $0 in the year ago periods, and was comprised of two components, a $846,000 provision and $2,024,000 benefit related to the net investment loss in the 2017 third quarter and nine months, and benefits of $7,001,000 and $13,120,000 related to unrealized losses on investments. The tax benefit recorded in 2017 reflected the change in the Company’s tax status that was determined at the end of 2016. See Note 5 for more information.
Net change in unrealized appreciation on investments before tax was depreciation of $4,836,000 and $15,754,000 in the 2017 third quarter and nine months, compared to appreciation of $5,150,000 and $18,434,000 in the 2016 third quarter and nine months, a decrease in appreciation of $9,986,000 in the quarter and $34,188,000 in the nine months. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries, was depreciation of $6,871,000 and $26,843,000 in the 2017 quarter and nine months, compared to depreciation of $20,763,000 and $25,787,000 in the 2016 periods, resulting in decreased depreciation of $13,892,000 and increased depreciation of $1,056,000 in the 2017 quarter and nine months. 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 net appreciation on Medallion Bank and other controlled subsidiaries of $2,035,000 ($11,089,000 in the nine months) and by reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $371,000 ($2,656,000 in the nine months), offset by net unrealized depreciation on equity investments, investment securities and loans of $6,955,000 ($27,122,000 of net depreciation in the nine months.) The 2016 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $25,913,000 ($44,221,000 in the nine months) and by reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $173,000 ($3,063,000 in the nine months), partially offset by net depreciation on foreclosed property of $14,107,000 ($18,862,000 in the nine months), net unrealized depreciation on equity investments, investment securities and loans of $6,229,000 ($9,400,000 of net depreciation in the nine months).
Our net realized gains on investments were $944,000 and $3,785,000 in the 2017 quarter and nine months,ended September 30, 2021, compared to a gainbenefit of $2,499,000 and loss of $7,000 in$8,381,000 for the 2016 quarter and ninethree months a decrease in realized gains of $1,555,000 in the quarter and an increase in realized gains of $3,792,000 in the nine months. The 2017 activity reflected $1,187,000 ($4,189,000 in the nine months) of other gains, offset by net realized losses and recoveries of $243,000 ($404,000 in the nine months).
Our net realized/unrealized losses on investments beforeended September 30, 2020. Total income tax were $3,892,000 and $11,969,000 in the 2017 quarter and nine months, compared to gains of $7,649,000 and $18,427,000 in the 2016 periods, a decrease of $11,541,000 or 151% in the quarter and $30,396,000 or 165% inexpense was $16,573,000 for the nine months ended September 30, 2021, compared to a benefit of net gains$12,483,000 for the nine months ended September 30, 2020. The 2021 nine months included $1,833,000 of tax expense related to a valuation allowance with respect to certain tax assets which we believe it will not be realized.
Loan collateral in process of foreclosure was $42,544,000 at September 30, 2021, a decline from $54,560,000 at December 31, 2020. The decrease was primarily reflective of cash payments received, sales, and to a lesser extent, the 2017 periods, reflectingdecline in collateral values offset by the above.additional loans having reached 120 days past due being charged-down to their collateral value and reclassified to loan collateral in process of foreclosure. See page 44 for a table that shows the changes during the quarter.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of medallion,consumer, commercial, and consumer loans;medallion loans, and investment securities) reprice on a different basis over time in comparison to our
Page 52 of 59
interest-bearing liabilities (consisting primarily of bank certificates of deposit, credit facilities withand borrowings from banks and other lenders, bank certificates of deposit, and SBA debentures)debentures and borrowings).
Page 70 of 94
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.
values. In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years. We had outstanding SBA debentures of $79,733,000 with a weighted average interest rate of 3.39%, constituting 24% of our total indebtedness, and retail notes of $33,625,000 with a weighted average interest rate of 9.00%, constituting 10% of total indebtedness as of September 30, 2017. Also, as of September 30, 2017, certain of the certificates of deposit were for terms of up to 57 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 September 30, 2017, compared to the respective positions at the end of 2016 and 2015.2021. The principal amounts of interest earning assets are assigned to the time frames in which such principal amounts are contractually obligated to be repriced. We have not reflected an assumed annual prepayment rate for such assets in this table.
September 30, 2017 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 | ||||||||||||||||||||||||
Earning assets | ||||||||||||||||||||||||||||||||
Floating-rate | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Adjustable rate | 30,413 | 1,436 | — | — | — | — | — | 31,849 | ||||||||||||||||||||||||
Fixed-rate | 196,117 | 62,917 | 20,544 | 16,109 | 17,813 | 7,177 | 10,581 | 331,258 | ||||||||||||||||||||||||
Cash | 19,281 | — | — | — | — | — | — | 19,281 | ||||||||||||||||||||||||
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Total earning assets | $ | 245,811 | $ | 64,353 | $ | 20,544 | $ | 16,109 | $ | 17,813 | $ | 7,177 | $ | 10,581 | $ | 382,388 | ||||||||||||||||
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Interest bearing liabilities | ||||||||||||||||||||||||||||||||
DZ Loan | $ | 101,354 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 101,354 | ||||||||||||||||
Notes payable to banks | 82,426 | — | — | — | — | — | — | 82,426 | ||||||||||||||||||||||||
SBA debentures | — | — | 31,233 | 8,500 | — | 5,000 | 35,000 | 79,733 | ||||||||||||||||||||||||
September 30, 2021 Cumulative Rate Gap(1) (Dollars in thousands) Less Than 1 More Than More Than More Than More Than More Than Thereafter Total Earning assets Floating-rate $ — $ — $ — $ — $ — $ — $ — $ — Adjustable rate 7,713 867 1,485 — 23 — — 10,088 Fixed-rate 38,391 21,520 26,214 59,190 57,821 63,134 1,116,882 1,383,152 Cash, cash equivalents, and 84,124 — — 500 750 — — 85,374 Investment securities 5,342 2,436 8,287 3,146 3,509 7,787 17,005 47,512 Total earning assets $ 135,570 $ 24,823 $ 35,986 $ 62,836 $ 62,103 $ 70,921 $ 1,133,887 $ 1,526,126 Interest bearing liabilities Deposits $ 443,666 $ 212,403 $ 266,598 $ 117,798 $ 158,340 $ — $ — $ 1,198,805 Retail and privately placed notes — — 36,000 — 31,250 — 53,750 121,000 SBA debentures and borrowings — 5,000 14,909 14,000 14,000 — 16,000 63,909 Preferred securities — — — — — — 33,000 33,000 Notes payable to banks 8,054 — — — — — — 8,054 Other borrowings — — — — — — — — Total liabilities $ 451,720 $ 217,403 $ 317,507 $ 131,798 $ 203,590 $ — $ 102,750 $ 1,424,768 Interest rate gap $ (316,150 ) $ (192,580 ) $ (281,521 ) $ (68,962 ) $ (141,487 ) $ 70,921 $ 1,031,137 $ 101,358 Cumulative interest rate gap $ (316,150 ) $ (508,730 ) $ (790,251 ) $ (859,213 ) $ (1,000,700 ) $ (929,779 ) $ 101,358 $ — December 31, 2020(2) $ (366,801 ) $ (570,449 ) $ (719,385 ) $ (827,236 ) $ (907,295 ) $ (860,941 ) $ 52,347 $ — December 31, 2019(2) $ (260,024 ) $ (500,953 ) $ (651,546 ) $ (689,819 ) $ (748,187 ) $ (706,935 ) $ 83,402 $ — Page 71
Year
1 and Less
Than 2
Years
2 and Less
Than 3
Years
3 and Less
Than 4
Years
4 and Less
Than 5
Years
5 and Less
Than 6
Years
federal funds sold
September 30, 2017 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 | ||||||||||||||||||||||||
Retail notes | — | — | — | 33,625 | — | — | — | 33,625 | ||||||||||||||||||||||||
Preferred securities | 33,000 | — | — | — | — | — | 33,000 | |||||||||||||||||||||||||
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Total liabilities | $ | 216,780 | $ | — | $ | 31,233 | $ | 42,125 | $ | — | $ | 5,000 | $ | 35,000 | $ | 330,138 | ||||||||||||||||
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Interest rate gap | $ | 29,031 | $ | 64,353 | ($ | 10,689 | ) | ($ | 26,016 | ) | $ | 17,813 | $ | 2,177 | ($ | 24,419 | ) | $ | 52,250 | |||||||||||||
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Cumulative interest rate gap(2) | $ | 29,031 | $ | 93,384 | $ | 82,695 | $ | 56,679 | $ | 74,492 | $ | 76,669 | $ | 52,250 | — | |||||||||||||||||
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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 | — | ||||||||||||||||
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|
| |||||||||||||||||
Our interest rate sensitive assets were $382,388,000$1,526,126,000 and interest rate sensitive liabilities were $330,138,000$1,424,768,000 at September 30, 2017.2021. Theone-year cumulative interest rate gap was a positive $29,031,000negative $316,150,000 or 8%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. However, using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a positive gap of $55,776,000 or 15% at September 30, 2017.assets. We seek to manage interest rate risk by originating adjustable-rate loans, by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, and by other options consistent with managing interest rate risk.
OnWe are currently reviewing the impact on our loans and borrowings with the cessation of LIBOR at the end of 2021. We do not have lendings tied to LIBOR and do not expect a combined basis with Medallion Bank,significant impact on our loans. We have trust preferred securities that bear a variable rate of interest rate sensitive assets were $1,488,897,000 and interest rate sensitive liabilities were $1,274,239,000of 90 day LIBOR (0.13% at September 30, 2017. The one year cumulative interest rate gap was a negative $214,686,000 or 14% of interest rate sensitive assets, compared2021) plus 2.13%. We expect to a negative $160,931,000 or 11% and $220,686,000 or 14% at December 31, 2016 and 2015. Usingrely on our estimated 40% prepayment/refinancing rate for medallion loanslenders to adjust the interestand communicate rate gap resulted inadjustments; however, we do not expect a negative gapmaterial impact on our borrowings.
Page 53 of $160,261,000 or 11% at September 30, 2017.59
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 $0 and $19,000 for the three and nine months ended September 30, 2017, and $10,000 for the comparable 2016 periods, and all are carried at $0 on the balance sheet at September 30, 2017.
Liquidity and Capital Resources
Our sources of liquidity are with a variety of local and regional banking institutions,include, 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 our other assets, of the Company, and dividends from Medallion Capital and the Bank, 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 becameare subject to taxation as a corporation under Subchapter Ccompliance with regulatory ratios. As of September 30, 2021, the Code. Additionally, there were $5,500,000remaining balance of unfunded commitments from the SBA, $3,500,000$16,500,000 is drawable, $9,500,000 of which would be issued without furtherupon the infusion of $4,750,000 of capital contributionfrom either the capitalization of retained earnings or a capital infusion from us.
Additionally, Medallionthe 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. MedallionThe Bank has $25,000,000up to $45,000,000 available under Fed Funds lines with several commercial banks.
In addition, MedallionFebruary 2021, we completed a private placement to certain institutional investors of $25,000,000 aggregate principal amount of 7.25% unsecured senior notes due February 2026, with interest payable semiannually. Follow-on offerings of these notes in March and April 2021 raised an additional $3,250,000 and $3,000,000.
In December 2020, we completed a private placement to certain institutional investors of $33,600,000 aggregate principal amount of 7.50% unsecured senior notes due December 2027, with interest payable semiannually. Follow-on offerings of these notes in February and March 2021 raised an additional $8,500,000. In April 2021, we raised an additional $11,650,000 in a follow-on offering, and repaid substantially all of our remaining bank borrowings.
The net proceeds from the December 2020, February 2021, March 2021 and April 2021 private placements have been used for general corporate purposes, including repayment of outstanding debts, including repayment of our 9.00% retail notes at maturity in April 2021 and to pay down other borrowings, including some borrowings at a discount.
In December 2019, the Bank closed an initial public offering of $46,000,000 aggregate liquidation amount, yielding net proceeds of $42,485,000, of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F. Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is allowedexpected to retain all earningsbe three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.
In March 2019, we completed a private placement to certain institutional investors of $30,000,000 aggregate principal amount of 8.25% unsecured notes due 2024, with interest payable semiannually. A follow-on offering of these notes in the business to fund future growth.
Page 72 of 94
The table below presents the components of our debt were as follows at September 30, 2017.2021, exclusive of deferred financing costs of $7,098,000. See Note 45 to the consolidated financial statements on page 20 for details of the contractual terms of our borrowings.
(Dollars in thousands) |
| Balance |
|
| Percentage |
|
| Rate (1) |
| |||
Deposits(2) |
| $ | 1,199,555 |
|
|
| 84 | % |
|
| 1.26 | % |
Retail and privately placed notes |
|
| 121,000 |
|
|
| 8 |
|
|
| 7.66 |
|
SBA debentures and borrowings |
|
| 63,909 |
|
|
| 5 |
|
|
| 2.92 |
|
Preferred securities |
|
| 33,000 |
|
|
| 2 |
|
|
| 2.24 |
|
Other borrowings |
|
| 8,054 |
|
|
| 1 |
|
|
| 2.00 |
|
Total outstanding debt |
| $ | 1,425,518 |
|
|
| 100 | % |
|
| 1.90 | % |
(Dollars in thousands) | Balance | Percentage | Rate (1) | |||||||||
DZ loan | $ | 101,354 | 31 | % | 2.93 | % | ||||||
Notes payable to banks | 82,426 | 25 | 3.80 | |||||||||
SBA debentures and borrowings | 79,733 | 24 | 3.39 | |||||||||
Retail notes | 33,625 | 10 | 9.00 | |||||||||
Preferred securities | 33,000 | 10 | 3.44 | |||||||||
|
|
|
| |||||||||
Total outstanding debt | $ | 330,138 | 100 | % | 3.93 | |||||||
|
|
|
|
|
| |||||||
Deposits and other borrowings at Medallion Bank | 944,101 | — | 1.47 | % | ||||||||
Total outstanding debt, including Medallion Bank | $ | 1,274,239 | — | 2.11 | ||||||||
|
|
|
|
|
| |||||||
Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all contractual obligations at September 30, 2017.2021.
|
| Payments due by period |
| |||||||||||||||||||||||||
(Dollars in thousands) |
| Less than |
|
| 1 – 2 years |
|
| 2 – 3 years |
|
| 3 – 4 years |
|
| 4 – 5 years |
|
| More than |
|
| Total(1) |
| |||||||
Deposits(2) |
| $ | 443,666 |
|
| $ | 212,403 |
|
| $ | 266,598 |
|
| $ | 117,798 |
|
| $ | 158,340 |
|
| $ | — |
|
| $ | 1,198,805 |
|
Privately placed notes |
|
| — |
|
|
| — |
|
|
| 36,000 |
|
|
| — |
|
|
| 31,250 |
|
|
| 53,750 |
|
|
| 121,000 |
|
SBA debentures and borrowings |
|
| — |
|
|
| 5,000 |
|
|
| 14,909 |
|
|
| 14,000 |
|
|
| 14,000 |
|
|
| 16,000 |
|
|
| 63,909 |
|
Preferred securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 33,000 |
|
|
| 33,000 |
|
Other borrowings |
|
| 8,054 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,054 |
|
Total |
| $ | 451,720 |
|
| $ | 217,403 |
|
| $ | 317,507 |
|
| $ | 131,798 |
|
| $ | 203,590 |
|
| $ | 102,750 |
|
| $ | 1,424,768 |
|
| 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 | |||||||||||||||||||||
DZ loan | $ | 101,354 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 101,354 | ||||||||||||||
Notes payable to banks | 82,426 | — | — | — | — | — | 82,426 | |||||||||||||||||||||
SBA debentures and borrowings | 1,917 | 3,047 | 26,269 | 8,500 | — | 40,000 | 79,733 | |||||||||||||||||||||
Retail notes | — | — | — | 33,625 | — | — | 33,625 | |||||||||||||||||||||
Preferred securities | — | — | — | — | — | 33,000 | 33,000 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 185,697 | $ | 3,047 | $ | 26,269 | $ | 42,125 | $ | — | $ | 73,000 | $ | 330,138 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Deposits and other borrowings at Medallion Bank | 444,318 | 268,028 | 106,036 | 55,375 | 70,344 | — | 944,101 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total, including Medallion Bank | $ | 630,015 | $ | 271,075 | $ | 132,305 | $ | 97,500 | $ | 70,344 | $ | 73,000 | $ | 1,274,239 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
MostApproximately $669,000,000 of our borrowing relationshipsborrowings have maturity dates during 2017 and 2018. We have been in active and ongoing discussions with eachthe next two years, including $656,000,000 of these lenders and have extended eachbrokered CDs. Additionally, on April 15, 2021, we paid off the $33,625,000 aggregate principal amount of the facilities as they matured except as set forth in the following paragraph. 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 theour retail notes, and payment and borrowing base calculationsrepaid substantially all notes payable to banks which we anticipate will facilitate our operations for the foreseeable future.had maturities in less than one year.
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
Page 73 of 94
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 second quarter of 2015, we first became aware of external interest in Medallion Bank and its portfolio’s 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 was recorded in 2016, and $563,000 was recorded in 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
Page 54 of 59
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 September 30, 20172021 by $1,217,000$895,000 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 aan one year period would have been ($1,422,000)$1,294,000 at September 30, 2017, compared to ($792,000) at December 31, 2016.2021. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net 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 spin offspinoff of certain assets or divisions, the development of a securitization conduit program, and other independent financing for certain subsidiaries or asset classes. These financing options would also provide additional sources of funds for both external expansion and continuation of internal growth.
Page 74 of 94
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 September 30, 2017.2021. See Note 45 to the consolidated financial statements for additional information about each credit facility.
(Dollars in thousands) |
| Medallion |
|
| MFC |
|
| MCI |
|
| FSVC |
|
| MB |
|
| All Other |
|
| September 30, |
|
| December 31, |
| ||||||||
Cash, cash equivalents and federal funds sold |
| $ | 18,063 |
| (1) | $ | 442 |
|
| $ | 8,913 |
| (2) | $ | 844 |
| (2) | $ | 55,987 |
|
| $ | 1,125 |
|
| $ | 85,374 |
|
| $ | 112,040 |
|
Brokered CD's & other funds borrowed |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,199,555 |
| (3) |
|
|
|
| 1,199,555 |
|
|
| 1,068,072 |
| |||||
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1.26 | % |
|
|
|
|
| 1.26 | % |
|
| 1.71 | % | |||||
Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| 10/21-9/26 |
|
|
|
|
| 10/21-9/26 |
|
| 1/21-12/25 |
| ||||||||
Retailed notes and privately placed borrowings |
|
| 121,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 121,000 |
|
|
| 103,225 |
| |||||
Average interest rate |
|
| 7.66 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7.66 | % |
|
| 8.25 | % | |||||
Maturity |
| 3/24-12/27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3/24-12/27 |
|
| 4/21-12/27 |
| ||||||||
SBA debentures & borrowings |
|
|
|
|
|
|
|
| 70,500 |
|
|
| 9,909 |
|
|
|
|
|
|
|
|
| 80,409 |
|
|
| 93,008 |
| ||||
Amounts available |
|
|
|
|
|
|
|
| 16,500 |
|
|
|
|
|
|
|
|
|
|
|
| 16,500 |
|
|
| 25,000 |
| |||||
Amounts outstanding |
|
|
|
|
|
|
|
| 54,000 |
|
|
| 9,909 |
|
|
|
|
|
|
|
|
| 63,909 |
|
|
| 68,008 |
| ||||
Average interest rate |
|
|
|
|
|
|
|
| 2.85 | % |
|
| 3.25 | % |
|
|
|
|
|
|
|
| 2.91 | % |
|
| 3.36 | % | ||||
Maturity |
|
|
|
|
|
|
| 3/23- 9/31 |
|
|
| 45,412 |
|
|
|
|
|
|
|
| 3/23- 9/31 |
|
| 3/21-9/30 |
| |||||||
Bank Loans |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
| 31,261 |
| |||||
Average interest rate |
| NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NA |
|
|
| 3.67 | % | |||||||
Maturity |
| NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NA |
|
| 2/21-12/23 |
| ||||||||
Preferred Securities |
|
| 33,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 33,000 |
| �� |
| 33,000 |
| |||||
Average interest rate |
|
| 2.24 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2.24 | % |
|
| 2.35 | % | |||||
Maturity |
| 9/37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9/37 |
|
|
| 9/37 |
| |||||||
Other borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,054 |
|
|
| 8,054 |
|
|
| 8,689 |
| |||||
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2.00 | % |
|
| 2.00 | % |
|
| 1.91 | % | |||||
Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 44,561 |
|
|
| 44,561 |
|
| 12/21-6/25 |
| ||||||
Total Cash |
| $ | 18,063 |
|
| $ | 442 |
|
| $ | 8,913 |
|
| $ | 844 |
|
| $ | 55,987 |
|
| $ | 1,125 |
|
| $ | 85,374 |
|
| $ | 112,040 |
|
Total debt outstanding |
| $ | 154,000 |
|
| $ | - |
|
| $ | 54,000 |
|
| $ | 9,909 |
|
| $ | 1,199,555 |
|
| $ | 8,054 |
|
| $ | 1,425,518 |
|
| $ | 1,312,255 |
|
(Dollars in thousands) | The Company | MFC | MCI | FSVC | MB | 9/30/2017 | 12/31/2016 | |||||||||||||||||||||
Cash | $ | 9,999 | (1) | $ | 1,350 | $ | 6,220 | $ | 1,712 | $ | — | $ | 19,281 | $ | 20,962 | |||||||||||||
Bank loans | 60,021 | 22,405 | — | — | — | 82,426 | 94,219 | |||||||||||||||||||||
Average interest rate | 3.98 | % | 3.34 | % | — | — | — | 3.80 | % | 3.22 | % | |||||||||||||||||
Maturity | 10/17-7/18 | 10/16-12/17 | — | — | — | 10/16-7/18 | 10/16-12/20 | |||||||||||||||||||||
Preferred securities | 33,000 | — | — | — | — | 33,000 | 33,000 | |||||||||||||||||||||
Average interest rate | 3.44 | % | — | — | — | — | 3.44 | % | 3.07 | % | ||||||||||||||||||
Maturity | 9/37 | — | — | — | — | 9/37 | 9/37 | |||||||||||||||||||||
Retail notes | 33,625 | — | — | — | — | 33,625 | 33,625 | |||||||||||||||||||||
Average interest rate | 9.00 | % | 9.00 | % | 9.00 | % | ||||||||||||||||||||||
Maturity | 4/21 | 4/21 | 4/21 | |||||||||||||||||||||||||
DZ loan | — | 101,354 | — | — | — | 101,354 | 106,244 | |||||||||||||||||||||
Average interest rate | — | 2.93 | % | — | — | — | 2.93 | % | 2.36 | % | ||||||||||||||||||
Maturity | — | 3/18 | — | — | — | 3/18 | 6/17 | |||||||||||||||||||||
Margin loans | — | — | — | — | — | — | — | |||||||||||||||||||||
Average interest rate | — | % | — | — | — | — | — | % | — | % | ||||||||||||||||||
Maturity | N/A | — | — | — | — | N/A | N/A | |||||||||||||||||||||
SBA debentures and other borrowings | — | — | 54,000 | 31,233 | — | 85,233 | 87,485 | |||||||||||||||||||||
Amounts undisbursed (2) | — | — | 5,500 | (2) | — | — | 5,500 | 5,500 | ||||||||||||||||||||
Amounts outstanding | — | — | 48,500 | 31,233 | — | 79,733 | 81,985 | |||||||||||||||||||||
Average interest rate | — | — | 3.48 | % | 3.25 | % | — | 3.39 | % | 3.63 | % | |||||||||||||||||
Maturity | — | — | 3/21-3/27 | 2/20 | — | 2/20-3/27 | 3/19-3/27 | |||||||||||||||||||||
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Total debt outstanding | $ | 126,646 | $ | 123,759 | $ | 48,500 | $ | 31,233 | $ | — | $ | 330,138 | $ | 349,073 | ||||||||||||||
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Including Medallion Bank | ||||||||||||||||||||||||||||
Cash | — | — | — | — | $ | 32,431 | $ | 32,431 | $ | 30,881 | ||||||||||||||||||
Deposits and other borrowings | — | — | — | — | 944,101 | 944,101 | 908,442 | |||||||||||||||||||||
Average interest rate | — | — | — | — | 1.47 | % | 1.47 | % | 1.22 | % | ||||||||||||||||||
Maturity | — | — | — | — | 10/17-7/22 | 10/17-7/22 | 1/17-12/21 | |||||||||||||||||||||
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Total cash | $ | 9,999 | $ | 1,350 | $ | 6,220 | $ | 1,712 | $ | 32,431 | $ | 51,712 | $ | 51,843 | ||||||||||||||
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Total debt outstanding | $ | 126,646 | $ | 123,759 | $ | 48,500 | $ | 31,233 | $ | 944,101 | $ | 1,274,239 | $ | 1,257,515 | ||||||||||||||
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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 Medallionthe 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,liquidity; however, given current market conditions, we cannot assure youthere can be no assurance that we will be able to secure additional liquidity on terms favorable to us or at all. If that occurs, we may decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become more favorable; or we may be required to dispose of assets when we would not otherwise do so, and at prices which may be below the net book value of such assets in order for us to repay indebtedness on a timely basis. Also, Medallion Bank is not a RIC, and therefore is able to retain earnings to finance growth.
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Recently Issued Accounting Standards
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. We are assessing the impact the update will have on our 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. We do not believe this update will have a material impact on our financial condition.
In AugustJune 2016, the FASB issued ASU2016-15, “Statement 2016-13, Financial Instruments—Credit Losses, or Topic 326: Measurement of Cash Flows (Topic 230): ClassificationCredit Losses on Financial Instruments, or ASU 2016-13. The main objective of Certain Cash Receiptsthis new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and Cash Payments.”other commitments to extend credit held by a reporting entity at each reporting date. Under the new standard, the concepts used by entities to account for credit losses on financial instruments will fundamentally change. The update clarifies how entities should classify certain cash receiptsexisting “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 do not expect the adoption ofCECL (current expected credit loss) model. ASU2016-15 to have a material impact on our consolidated financial statements.
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 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 20182019 for public entities, and is effectivewith early adoption permitted. In November 2019, the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such as us, to fiscal years beginning after December 15, 2019 for all other entities, with early adoption permitted.2022. We are assessing the impact the update will have on our financial conditionstatements, and results of operations.
In January 2016,expect 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 isupdate 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. We do not believe this update will have a material impact on our accounting for estimated credit losses on our loans.
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements, or Topic 205: Depository and Lending, or Topic 942: and Financial Services – Investment Companies, or Topic 946: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This new standard amends certain SEC paragraphs from the Codification in response to the issuance of SEC Final Rule No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses and SEC Rule No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. We have assessed the impact the update and determined it does not have a material impact on the accompanying financial condition.statements.
Common StockDividends
Our common stock is quotedWe have not paid dividends on NASDAQ under the symbol “MFIN.” Our common stock commenced trading on May 23, 1996. As of November 8, 2017, there were approximately 301 holders of record of our common stock.
On November 8, 2017, the last reported sale price of our common stock was $2.39 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 premiumsince 2016 and do not currently anticipate paying dividends. We may, however, re-evaluate paying dividends in the future.future depending on market conditions.
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 | |||||||||
Third Quarter | $ | 0.00 | $ | 2.64 | $ | 2.10 | ||||||
Second Quarter | 0.00 | 2.93 | 1.84 | |||||||||
First Quarter | 0.00 | 3.33 | 1.68 | |||||||||
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 | |||||||||
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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.
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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 Purchases of Equity Securities (1)
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 September 30, 2017 | — | — | — | 22,874,509 | ||||||||||||
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Total | 2,931,125 | 8.39 | 2,931,125 | |||||||||||||
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Control Statutes
Because Medallionthe 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, Medallionthe Bank, without, in most cases, prior written approval of the FDIC or the Commissioner 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
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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.isnotguaranteedbytheFDICandissubjecttoloss. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in disclosure regarding quantitative and qualitative disclosures about market risk since we filed our Annual Report on Form10-K for the year ended December 31, 2016.
ITEM 4. CONTROLS AND PROCEDURES
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting pursuant to Rules 13a—15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, and have concluded that they are effective as of September 30, 2017. In addition, based on our evaluation as of September 30, 2017, there have been no changes that occurred during the 2017 nine months that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
Risks Relating to Our Business and Structure
Changes in the taxicab andfor-hire vehicle industries have resulted in 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 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 poses an increased risk of competition because such operators are able to pass the cost savings of not having to comply with certain regulations to its passengers. According to the TLC, between January 2016 and October 2017 approximately 30,600 newfor-hire vehicle licenses were issued, increasing the total number offor-hire vehicles to approximately 102,100 as of October 31, 2017, a 43% increase from January 2016.
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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 pickup 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 4,200 are active.
TLC annualized data through December 2016 has shown a 9.3% reduction in total New York City taxicab fares, compared to the same period in 2015, and a 10.7% 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 September 30, 2017, 22.8% of our managed medallion loan portfolio and 35.3% of ouron-balance sheet medallion loan portfolio was 90 days or more past due, compared to 18.8% and 24.4% at December 31, 2016. 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 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 range of prices during the 2017 third quarter. Like many other financial institutions, we evaluate the transactions and cash flows underlying borrower performance and determined that a market value of $370,000, $359,000 net of liquidation costs, was appropriate, reflecting a blend of transactional activity and values supported by borrower cash flows. In March 2017, the New York City Council made changes to the medallion classes, eliminating the distinction between individual and corporate medallions. We are not yet sure of the ultimate impact of this change.
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 $60,000 as of September 30, 2017.
Decreases in the value of our medallion loan collateral have 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 143% as of September 30, 2017 and 129% as of December 31, 2016. If taxicab medallion values continue to decline, there would 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 would be diminished, which would result in material losses on defaulted medallion loans which would have a material adverse effect on our business. A substantial decrease in the value of our Chicago medallions purchased out of foreclosure would 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 would realize less than the value at which we had previously recorded such medallions.
We borrow money, which magnifies the potential for gain or loss on amounts invested, and may increase 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.
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As of September 30, 2017, we had $330,138,000 of outstanding indebtedness, which had a weighted average borrowing cost of 3.93% at September 30, 2017, and our wholly-owned unconsolidated portfolio companies, primarily Medallion Bank, had $944,101,000 of outstanding indebtedness at a weighted average borrowing cost of 1.47%.
Most of our borrowing relationships have maturity dates during 2017 and 2018. 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. Certain lenders have worked with us to extend and change the terms of the borrowing agreements. See note 4 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.
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.
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. 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 or to engage in other business activities.
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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. The departure of Messrs. Murstein or Mr. Hall, or any member of our senior management team, could have a material adverse effect on our ability to achieve our investment objective.
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 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 take advantage 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 orders 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. If we do not remain a BDC, we might be regulated as aclosed-end investment company under the 1940 Act, which would further significantly decrease our operating flexibility.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted in 2010. The Dodd-Frank Act significantly changed federal financial services regulation and affects, among other things, the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. In addition to the statutory requirements under the Dodd-Frank Act, the legislation also delegated authority to US banking, securities and derivatives regulators to impose additional restrictions through required rulemaking. The Dodd-Frank Act requires a company that owns an industrial bank to serve as a “source of strength” to the institution. We believe that we have historically served, 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 do not believe that the “Volcker Rule” materially impacts our operations as presently conducted.
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Other changes in the laws or regulations applicable to us more generally, may negatively impact the profitability of our business activities, require us to change certain of our business practices, materially affect our business model, limit the activities in which we may engage, affect retention of key personnel, require us to raise additional regulatory capital, increase the amount of liquid assets that we hold, 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.
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. AlthoughtheBankisan“insureddepositoryinstitution”withinthemeaningoftheFederalDepositInsuranceActandtheChangeinBankControlAct,yourinvestmentinthe Companyisnotinsured or guaranteedbytheFDIC,or any other agency, andissubjecttoloss. Under the Utah Financial Institutions Act, control is defined as the power directly or indirectly or through or in concert with one or more persons to (1) direct or exercise a controlling influence over the management or policies of us or the election of a majority of the directors of us, or (2) to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an individual. If any holder of any series of the Bank’s preferred stock is or becomes entitled to vote for the election of the Bank’s directors, such series will be deemed a class of voting stock, and any other person will be required to obtain the non-objection of the FDIC under the Change in Bank Control Act to acquire or maintain 10% or more of that series. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval. 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.
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Regulations governing our operation as a BDC may affect our ability to, and the way in which, we raise additional capital.
Our business may periodically require capital. We may acquire additional capital from the following sources:
SeniorSecuritiesandOtherIndebtedness. 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:
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Changes to laws of states in which we do business could affect the operating environment in substantial and unpredictable ways. We cannot predict whether such changes will occur or, if they occur, the ultimate effect they would have agreed thatupon our financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in disclosure regarding quantitative and qualitative disclosures about market risk since we will meetfiled our Annual Report on Form 10-K for the applicable asset coverage ratios both individuallyyear ended December 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and on a consolidated basis. As of September 30, 2017, our asset coverage was approximately 291% calculated on a consolidated basis,Procedures
Our Chief Executive Officer and 276% calculated on an unconsolidated basis.
Additional CommonStock. We1934, and have concluded that they 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. 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.
Since our investments in assets that are not “qualifying assets” exceeded 30% of our total assetseffective as of September 30, 2017, we are precluded from making anyfollow-on investments2021 to provide reasonable assurance that information required to be disclosed by the Company in Medallion Bankreports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, 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, atreported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our internal control over financial reporting to determine whether any changes occurred during the 2021 third 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 2021 third quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 “Commitments and Contingencies” subsections (c) and (d) to the consolidated financial statements included in Item 1 of such acquisition, at least 70%this Quarterly Report on Form 10-Q for details of the Company’s legal proceedings.
ITEM 1A. RISK FACTORS
Except as described below, there have been no material changes in our risk factors from those disclosed in Part 1, Item 1A 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 securitiesAnnual Report on the consolidated balance sheet, arenon-qualifying assets. As of September 30, 2017, the percentage of our total assets that were invested innon-qualifying assets were up to 56.8% on an unconsolidated basis and up to 46.6% 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
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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.
We are exploring measures to return the amount of qualifying assets to at least 70% of our total assets. However, we cannot guarantee that we will be able to do so. At the end of each fiscal quarter, we may take proactive steps to prospectively preserve investment flexibility in the next quarter which is assessed against our total assets at our most recent quarter end. We can accomplish this in many ways including purchasing US Treasury bills or other investment-grade debt securities, and closing out our position on a net cash basis subsequent to quarter end. However, if such proactive measures are ineffective or our primary investments are deemed not to be qualifying assets, or if the fair value of ournon-qualifying assets increases or is determined to be higher than previously determined, or if the fair value of our qualifying assets decreases or is determined to be lower than previously determined, we could continue to fail to satisfy the requirement that no more than 30% of our total assets be comprised ofnon-qualifying assets.
Change in the Company’s Tax Classification.
RIC qualification rules require 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, 2016 our largest investment subject to this test was our investment in Medallion Bank, representing 51.1% 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 2016. As of September 30, 2017 our investment in Medallion Bank was 51.1% of our RIC assets, which would make us ineligible to file as a RIC for 2017.
Because we do not meet the qualifications for RIC tax treatmentForm 10-K for the taxfiscal year ended December 31, 2016,2020, which was filed with the Securities and now weExchange Commission on March 16, 2021.
We are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution 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 qualified in the past, we cannot assure you that we will qualify for such treatment in the future.
If we do not qualify as a RIC for more than two consecutive years, and then seek to requalify and elect RIC status, we would be required 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 requirements to be treated as 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 origination of a loan or possibly in other circumstances, or contractual payment-
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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.
Since, in certain cases, we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the annual distribution requirement necessary 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 fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.
As Medallion Bank grows, a greater portion of our business will be subject to corporate-level tax.
Medallion Bank must pay corporate-level US federal and state income taxes. As Medallion Bank grows its business, more of its income will be taxed, which will reduce the amount of cash available for distribution to us and, in turn, to our shareholders.
Our SBIC subsidiaries may be unable to meet the investment company requirements,SEC investigation, which could result 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 may result in loss of RIC statuscharges and a consequent imposition 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.
Our SBIC subsidiaries are licensed by the SBA, and are therefore subject to SBA regulations.
Our SBIC subsidiaries are licensed to operate as SBICs and are regulated by the SBA. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause the SBIC subsidiaries to forego attractive investment opportunities that are not permitted under SBA regulations.
Further, SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of an SBIC. If the SBIC subsidiaries fail to comply with applicable SBIC regulations, the SBA could, depending on the severity of the violation, limit or prohibit their use of debentures, declare outstanding debentures immediately due and payable, and/or limit them from making new investments. In addition, the SBA could revoke or suspend an SBIC license or 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 may materially change our corporate structure and the nature of our business.
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), which could result in material dispositions of various assets, changes in our corporate form, withdrawal of our election to be regulated as a BDC, our conversion from an investment company to an operating companyfines or other fundamental changes. If we were no longer an investment company, our accounting practices, among others would changesanctions and lead to the consolidation of certain majority owned companies for financial reporting purposes that we do not currently consolidate as an investment company. Additionally, if we were no longer an investment company, our shareholders would not benefit from the investor protections provided by the 1940 Act. 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. No decisions have been made with respect to any such changes and there is no timetable for making any decisions, including any decision not to proceed with any such changes.
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We operate in a highly competitive market for investment opportunities.
We compete for 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 as a BDC.
We cannot assure you that the competitive pressures we face will notaccordingly have a material adverse effect on our business, reputation, 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 investment income.
Because we borrow to fund our 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 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 or stock price.
As described in Note 10 “Commitments and Contingencies” to the consolidated financial statements included in this Quarterly Report on Form 10-Q, the staff of the SEC has conducted an investigation of the Company relating to certain issues that occurred during the period 2015 to 2017, including (i) the Company’s retention of third parties in 2015 and 2016 concerning posting information about the Company on certain financial websites and (ii) the Company’s financial reporting and disclosures concerning certain assets, including Medallion Bank, in 2016 and 2017, a period when the Company had previously reported as a business development company (“BDC”) under the Investment Company Act of 1940. Since April 2018, the Company does not report as a BDC, and has not worked with such third parties since 2016.The Company does not expect to change previously reported financial results.
Although the Company is currently engaged in discussions and is cooperating with the SEC staff regarding a potential settlement of some or all aspects of the investigation, there can be no assurance that a settlement will be reached, or the terms and timing of any such settlement. Any such settlement, if reached, is expected to include a civil fine in an amount that is not currently estimable, but which may be material. If a full settlement is not reached, litigation may ensue and result in charges and material fines or other sanctions against the Company and/or one or more of its officers. In either event, the Company could incur a loss that could be materially adversely affected if a substantial numbermaterial to the Company, its results of operations or financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not repurchase any of our portfolio companies elect to prepay amounts owed to us and we are not able to reinvestshares during 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% leverage ratio (Tier 1 capital to average assets). As ofnine months ended September 30, 2017 Medallion Bank’s leverage ratio was 15.4% and Medallion Bank may be restricted from declaring and paying dividends if doing so were to cause the leverage ratio to fall below 15%.
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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. 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.
Our investment portfolio is, and will continue to be, recorded at fair value as determined in good faith2021. Accordingly, under our Stock Repurchase Program previously authorized by our Board of Directors, and, as a result, there is, and will continueup to be, uncertainty as to$22,874,509 of shares remain authorized for repurchase under the valueprogram. We extended the terms of our portfolio investments which could adversely affect our net asset value.
UnderStock Repurchase Program until May 2022. If we do not repurchase the 1940 Act,remaining shares of common stock by the end of the period set forth above, 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 byextend 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 mostterm 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 reviews 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 September 30, 2017, our net unrealized appreciation on investments was $100,163,000 or 19.2% of our investment portfolio at cost, and the appreciation on our investments other than securities and other assets was $569,000 or 6% of our investments other than securities and other assets at cost.
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. Collateral values for medallion loans reflect recent sales prices and are typically obtained from the regulatory agency in a particular local market. We rely on the integrity of the 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 a significantly lower fair market value measurement 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.
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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. 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” as of September 30, 2017 by $1,217,000 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 ($1,422,000) at September 30, 2017, compared to ($792,000) at December 31, 2016. 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 companies 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 realized and unrealized gains or 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.
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 our data centers, and on our networks. The secure processing, maintenance, and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure 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.
Terrorist attacks, other acts of violence or war, and natural disasters may affect any market for our securities, impact the businesses in which we invest, and harm our operations and profitability.
Terrorist attacks and natural disasters may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the US or US businesses or major natural disasters hitting the United States. Such attacks or natural disasters in the US or elsewhere may impact the businesses in which we directly or indirectly invest by undermining economic conditions in the United States. In addition, a substantial portion of our business is focused in the New York City metropolitan area, which suffered a terrorist attack in 2001. Another terrorist attack in New York City or elsewhere could severely impact our results of operations. Losses resulting from terrorist attacks are generally uninsurable.
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Our financial condition and results of operations will depend on our ability to manage growth effectively.
Our ability to achieve our 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 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.
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.
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 Relating to Our 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. 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.
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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, 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 September 30, 2017, investments in New York City taxi medallion loans represented approximately 78% of our managed taxi medallion loans, which in turn represented 28% of our managed net investment 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 investments perform poorly or if we need to write down the value of any one investment. 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 adversely affected if the New York City taxicab industry experiences a sustained economic downturn.
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 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 certain of our 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.
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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. 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 September 30, 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 57Stock Repurchase Program for additional information regarding this matter.180 day periods.
There may be circumstances where our debt investments could be subordinated to claimsPage 57 of other creditors or we could be subject to lender liability claims.59
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 our portfolio companies.
We may not control many of our portfolio companies, even though we may have board representation or board observation rights, and our debt agreements may contain certain restrictive covenants. As a result, we are subject to the risk that a 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.
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EXHIBITS
Number | Description | |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
IMPORTANT INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform ActPage 58 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-Q 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-Q 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 the control of the Company. Accordingly, there can be no assurance that the forward-looking statements contained in this Form10-Q 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-Q 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-Q. The inclusion of the forward-looking statements contained in this Form10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form10-Q will be achieved. In light of the foregoing, readers of thisForm 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein. These risks and others that are detailed in this Form10-Q and other documents that the Company files from time to time with the Securities and Exchange Commission, including annual reports on Form10-K, quarterly reports on Form10-Q, and any current reports on Form8-K must be considered by any investor or potential investor in the Company.59
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MEDALLION FINANCIAL CORP. | |||
Date: | November 8, 2021 | ||
By: | /s/ Alvin Murstein | ||
Alvin Murstein | |||
Chairman and Chief Executive Officer | |||
By: | /s/ Larry D. Hall | ||
Larry D. Hall | |||
Senior Vice President and | |||
Chief Financial Officer | |||
Signing on behalf of the registrant as principal financial and accounting officer. | |||
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