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 Endedquarterly period ended June 30, 20182019

OR

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

For the transition period fromto

Commission file number001-37747

 

MEDALLION FINANCIAL CORP.

(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Its Charter)

 

 

DELAWARE

04-3291176

DELAWARE04-3291176

(State of Incorporation)

(IRS Employer

Identification No.)

437 MADISON AVENUE, 38th Floor

NEW YORK, NEW YORK 10022

(Address of principal executive offices)Principal Executive Offices) (Zip Code)

(212)328-2100

(Registrant’s telephone number, including area code)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

on which registered

Common Stock, par value $0.01 per share

9.000% Senior Notes due 2021

MFIN

MFINL

NASDAQ Global Select Market

NASDAQ Global Select Market

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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

Indicate by check mark whether the 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      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

Large Accelerated Filer

Accelerated Filer

Non-accelerated filer

Smaller reporting company

Non-Accelerated Filer

Emerging growth company

Smaller Reporting Company

Emerging growth company  ☐

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

Indicate by check mark whether the 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 August 10, 20186, 2019 was 24,438,823.24,609,815.

 

 


 


MEDALLION FINANCIAL CORP.

FORM10-Q

TABLE OF CONTENTS

 

Page

PART I – FINANCIAL INFORMATION

3

ITEM  1. FINANCIAL STATEMENTS

3

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

54

45

ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

81

73

ITEM 4. CONTROLS AND PROCEDURES

82

73

PART II—OTHER INFORMATION

82

74

ITEM 1. LEGAL PROCEEDINGS

82

74

ITEM 1A. RISK FACTORS

83

74

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

97

74

ITEM 6. EXHIBITS

97

75

SIGNATURES

CERTIFICATIONSSIGNATURES

76

CERTIFICATIONS

The following discussion should be read in conjunction with our financial statements and the notes to those statements and other financial information appearing elsewhere in this report.

This report contains forward-looking statements relating to future events and future performance applicable to us within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words expects, anticipates, intends, believes, or similar language. 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. 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 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 9776



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASIS OF PREPARATION

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

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

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

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

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

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

We are a commercial finance company that historically hashave had a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. Recently, our strategic growth has been through Medallion Bank a wholly-owned subsidiary of ours, which originates consumer loans for the purchase of recreational vehicles, boats, and trailers, and to finance small-scale home improvements. Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17% (20%16% (19% if there had been no loan sales during 2016, 2017, and 2017)2018). In January 2017, we announced our plans to transform our overall strategy. We are transitioning away from medallion lending and placing our strategic focus on our growing consumer finance portfolio. Total assets under management, which includes our portfolio, as well as assets serviced for third party investors, were $1,561,000,000$1,620,000,000 as of June 30, 2018,2019, and were $1,593,000,000 and $1,606,000,000$1,522,000,000 as of December 31, 2017 and June 30, 2017,2018, 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/declaredpaid distributions in excess of $263,060,000 or $14.66 per share.

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

Medallion Bank, or the Bank, an FDIC-insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activity;activities, and has a separate board of directors with a majority of independent directors;

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

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

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

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

Page 3 of 97


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

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

Our consolidated balance sheet as of June 30, 2018,2019, and the related consolidated statements of operations, consolidated statements of other comprehensive loss, consolidated statementstatements of stockholdersstockholders’ equity and cash flows for the quarter and six months then ended included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the US have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the quarter and six months ended June 30, 20182019 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, 2017.

2018.

 

Page 43 of 9776



MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

   Bank Holding
Company
Accounting
  Investment
Company
Accounting
 

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

  UNAUDITED
June 30, 2018
  December 31, 2017 

Assets

   

Cash

  $10,344  $12,690 

Federal funds sold

   25,237   —   

Equity investments

   10,773   —   

Equity investments, at fair value

   —     5,213 

Equity investments in affiliated entities, at fair value

   —     4,308 

Investment securities

   44,717   —   

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

   —     302,147 

Loans

   1,150,123   —   

Medallion loans, at fair value

   —     208,279 

Commercial loans, at fair value

   —     53,737 

Commercial loans to affiliated entities, at fair value

   —     999 

Commercial loans to controlled subsidiaries, at fair value

   —     35,452 

Allowance for losses

   (21,425  —   
  

 

 

  

 

 

 

Net loans receivable

   1,128,698   —   
  

 

 

  

 

 

 

Net investments

   —     610,135 
  

 

 

  

 

 

 

Accrued interest receivable

   7,360   547 

Property and equipment, net

   1,128   235 

Loan collateral in process of foreclosure

   60,052   —   

Goodwill and intangible assets

   211,123   —   

Deferred tax assets and other tax receivables, net

   3,460   —   

Investments other than securities

   —     7,450 

Other assets

   31,637   4,465 
  

 

 

  

 

 

 

Total assets

  $1,534,529  $635,522 
  

 

 

  

 

 

 

Liabilities

   

Accounts payable and accrued expenses

  $—    $4,373 

Accrued interest payable

   4,246   3,831 

Deposits

   896,402   —   

Short-term borrowings

   179,692   —   

Deferred tax liabilities and other tax payables

   —     12,536 

Other liabilities

   19,025   —   

Long-term debt

   150,248   —   

Funds borrowed

   —     327,623 
  

 

 

  

 

 

 

Total liabilities

   1,249,613   348,363 
  

 

 

  

 

 

 

Commitments and contingencies

   —     —   

Stockholders’ equity

   

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

   —     —   

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

   274   273 

Additional paid in capital

   274,012   273,716 

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

   (24,919  (24,919

Accumulated undistributed net investment loss

   —     (65,592

Net unrealized appreciation on investments, net of tax

   —     103,681 

Accumulated other comprehensive loss

   (255  —   

Retained earnings

   8,568   —   
  

 

 

  

 

 

 

Total stockholders’ equity

   257,680   287,159 
  

 

 

  

 

 

 

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

 

UNAUDITED

June 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Cash (1)

 

$

35,138

 

 

$

23,842

 

Federal funds sold

 

 

37,010

 

 

 

33,871

 

Equity investments

 

 

9,797

 

 

 

9,197

 

Investment securities

 

 

44,820

 

 

 

45,324

 

Loans

 

 

1,088,475

 

 

 

1,017,882

 

Allowance for losses

 

 

(40,670

)

 

 

(36,395

)

Net loans receivable

 

 

1,047,805

 

 

 

981,487

 

Accrued interest receivable

 

 

7,742

 

 

 

7,413

 

Property, equipment, and right-of-use lease asset, net

 

 

12,821

 

 

 

1,222

 

Loan collateral in process of foreclosure (2)

 

 

52,368

 

 

 

49,495

 

Goodwill

 

 

150,803

 

 

 

150,803

 

Intangible assets, net

 

 

53,259

 

 

 

53,982

 

Other assets

 

 

30,390

 

 

 

25,210

 

Total assets

 

$

1,481,953

 

 

$

1,381,846

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (3)

 

$

20,223

 

 

$

18,789

 

Accrued interest payable

 

 

4,205

 

 

 

3,852

 

Deposits

 

 

927,658

 

 

 

848,040

 

Short-term borrowings

 

 

46,688

 

 

 

55,178

 

Deferred tax liabilities and other tax payables

 

 

5,412

 

 

 

6,973

 

Operating lease liabilities

 

 

11,273

 

 

 

 

Long-term debt

 

 

180,990

 

 

 

158,810

 

Total liabilities

 

 

1,196,449

 

 

 

1,091,642

 

Commitments and contingencies (4)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

Common stock (50,000,000 shares of $0.01 par value stock authorized- 27,550,801

   shares at June 30, 2019 and 27,385,600 shares at December 31, 2018 issued)

 

 

275

 

 

 

274

 

Additional paid in capital

 

 

274,796

 

 

 

274,292

 

Treasury stock (2,951,243 shares at June 30, 2019 and December 31, 2018)

 

 

(24,919

)

 

 

(24,919

)

Accumulated other comprehensive income (loss)

 

 

1,145

 

 

 

(82

)

Retained earnings

 

 

6,771

 

 

 

13,043

 

Total stockholders’ equity

 

 

258,068

 

 

 

262,608

 

Non-controlling interest in consolidated subsidiaries

 

 

27,436

 

 

 

27,596

 

Total equity

 

 

285,504

 

 

 

290,204

 

Total liabilities and equity

 

$

1,481,953

 

 

$

1,381,846

 

Number of shares outstanding

 

 

24,599,558

 

 

 

24,434,357

 

Book value per share

 

$

10.49

 

 

$

10.75

 

 

Page 5 of 97


   Bank Holding
Company
Accounting
   Investment
Company
Accounting
 

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

  UNAUDITED
June 30, 2018
   December 31, 2017 

Non-controlling interest in consolidated subsidiaries

   27,236    —   
  

 

 

   

 

 

 

Total equity

   284,916    287,159 
  

 

 

   

 

 

 

Total liabilities and equity

  $1,534,529   $635,522 
  

 

 

   

 

 

 

Number of shares outstanding

   24,438,823    24,438,084 

Book value per share/net asset value per share

  $10.54   $11.80 
  

 

 

   

 

 

 

(1)

Includes restricted cash of $2,475 as of June 30, 2019.

(2)

Includes financed sales of this collateral to third parties that are reported separately from the loan portfolio, and that are conducted by the Bank of $4,290 as of June 30, 2019 and $3,134 as of December 31, 2018.

(3)

Includes the short-term portion of lease liabilities of $1,872 as of June 30, 2019. Refer to Note 8 for more details.

(4)

Refer to Note 14 for details.

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

 

Page 64 of 9776



MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   Bank Holding
Company
Accounting
  Investment
Company
Accounting
  Combined  Investment Company Accounting 

(Dollars in thousands, except per share data)

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

Interest and fees on loans

  $32,026  $—    $32,026  $—    $—   

Interest income on investments

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

Dividend income from controlled subsidiaries

   —     28   28   —     —   

Interest income from affiliated investments

   —     654   654   765   1,392 

Interest income from controlled subsidiaries

   —     10   10   44   126 

Medallion lease income

   30   40   70   52   119 

Interest and dividends on investment securities

   588   14   602   —     —   

Dividends and interest income on short-term investments

   —     —     —     11   15 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Interest on deposits

   4,200   —     4,200   —     —   

Interest on short-term borrowings

   1,859   —     1,859   —     —   

Interest on long-term debt

   1,866   —     1,866   —     —   

Interest expense

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest expense(2)

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income/net investment income

   24,719   482   25,201   379   1,295 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provision for loan losses

   30,576   —     30,576   —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest loss after provision for loan losses

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other income (loss)

      

Sponsorship and race winnings

  ��5,228   —     5,228   —     —   

Impairment of equity investments

   (474  —     (474  —     —   

Writedown of loan collateral in process of foreclosure

   (96  —     (96  —     —   

Other income

   220   60   280   12   14 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other income

   4,878   60   4,938   12   14 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other expenses

      

Salaries and employee benefits

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

Race team related expenses

   2,540   —     2,540   —     —   

Professional fees

   2,246   723   2,969   616   1,308 

Loan servicing fees

   1,128   —     1,128   —     —   

Collection costs

   837   —     837   —     —   

Travel, meals and entertainment

   603   206   809   220   415 

Rent expense

   591   243   834   262   527 

Regulatory fees

   582   —     582   —     —   

Amortization of intangible assets

   361   —     361   —     —   

Other expenses(3)

   2,399   587   2,986   487   796 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other expenses

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income tax benefit

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss after taxes/net investment loss after taxes

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net realized gains (losses) on investments(5)

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

 

 

Bank Holding

Company Accounting

 

 

Bank Holding

Company

Accounting

 

 

Combined (1)

 

(Dollars in thousands, except per share data)

 

For the Three

Months Ended

June 30, 2019

 

 

For the Six

Months Ended

June 30, 2019

 

 

For the Three

Months Ended

June 30, 2018

 

 

For the Six

Months Ended

June 30, 2018

 

Interest and fees on loans

 

$

31,313

 

 

$

60,752

 

 

$

32,026

 

 

$

32,026

 

Interest and dividends on investment securities

 

 

669

 

 

 

1,235

 

 

 

588

 

 

 

602

 

Medallion lease income

 

 

33

 

 

 

71

 

 

 

30

 

 

 

70

 

Interest income on investments

 

 

 

 

 

 

 

 

 

3,287

 

Dividend income from controlled subsidiaries

 

 

 

 

 

 

 

 

 

28

 

Interest income from affiliated investments

 

 

 

 

 

 

 

 

 

654

 

Interest income from controlled subsidiaries

 

 

 

 

 

 

 

 

 

10

 

Total interest income(2)/total investment income(2)

 

 

32,015

 

 

 

62,058

 

 

 

32,644

 

 

 

36,677

 

Interest on deposits

 

 

5,485

 

 

 

10,406

 

 

 

4,200

 

 

 

4,200

 

Interest on short-term borrowings

 

 

904

 

 

 

1,886

 

 

 

1,859

 

 

 

1,859

 

Interest on long-term debt

 

 

2,432

 

 

 

4,251

 

 

 

1,866

 

 

 

1,866

 

Interest expense

 

 

 

 

 

 

 

 

 

3,551

 

Total interest expense(3)

 

 

8,821

 

 

 

16,543

 

 

 

7,925

 

 

 

11,476

 

Net interest income/net investment income

 

 

23,194

 

 

 

45,515

 

 

 

24,719

 

 

 

25,201

 

Provision for loan losses

 

 

15,171

 

 

 

28,514

 

 

 

30,576

 

 

 

30,576

 

Net interest income (loss) after provision for loan losses

 

 

8,023

 

 

 

17,001

 

 

 

(5,857

)

 

 

(5,375

)

Other income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sponsorship and race winnings

 

 

4,889

 

 

 

8,068

 

 

 

5,228

 

 

 

5,228

 

Change in collateral value on in process of foreclosure

 

 

(1,972

)

 

 

(4,091

)

 

 

(96

)

 

 

(96

)

Gain on the extinguishment of debt

 

 

 

 

4,145

 

 

 

 

 

 

 

Impairment of equity investments

 

 

 

 

 

 

(474

)

 

 

(474

)

Other income (loss)

 

 

(1,234

)

 

 

424

 

 

 

220

 

 

 

280

 

Total other income, net

 

 

1,683

 

 

 

8,546

 

 

 

4,878

 

 

 

4,938

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,321

 

 

 

11,662

 

 

 

5,639

 

 

 

7,988

 

Race team related expenses

 

 

2,550

 

 

 

4,548

 

 

 

2,540

 

 

 

2,540

 

Collection costs

 

 

2,253

 

 

 

2,891

 

 

 

837

 

 

 

957

 

Professional fees

 

 

2,048

 

 

 

3,684

 

 

 

2,246

 

 

 

2,969

 

Loan servicing fees

 

 

1,293

 

 

 

2,487

 

 

 

1,128

 

 

 

1,128

 

Rent expense

 

 

577

 

 

 

1,177

 

 

 

591

 

 

 

834

 

Regulatory fees

 

 

448

 

 

 

895

 

 

 

582

 

 

 

582

 

Amortization of intangible assets

 

 

362

 

 

 

723

 

 

 

361

 

 

 

361

 

Travel, meals, and entertainment

 

 

205

 

 

 

470

 

 

 

603

 

 

 

809

 

Other expenses(4)

 

 

2,127

 

 

 

4,349

 

 

 

2,399

 

 

 

2,866

 

Total other expenses

 

 

18,184

 

 

 

32,886

 

 

 

16,926

 

 

 

21,034

 

Loss before income taxes/net investment loss before taxes(5)

 

 

(8,478

)

 

 

(7,339

)

 

 

(17,905

)

 

 

(21,471

)

Income tax benefit

 

 

1,835

 

 

 

2,091

 

 

 

4,021

 

 

 

4,357

 

Net loss after taxes/net investment loss after taxes

 

 

(6,643

)

 

 

(5,248

)

 

 

(13,884

)

 

 

(17,114

)

Net realized losses on investments(6)

 

 

 

 

 

 

 

 

 

 

 

(34,745

)

Income tax benefit

 

 

 

 

 

 

 

 

 

 

 

8,426

 

Total net realized losses on investments

 

 

 

 

 

 

 

 

 

 

 

(26,319

)

Net change in unrealized appreciation on Medallion Bank and other

   controlled subsidiaries

 

 

 

 

 

 

 

 

 

 

 

29,115

 

Net change in unrealized depreciation on investments other than securities

 

 

 

 

 

 

 

 

 

 

 

(1,915

)

Net change in unrealized depreciation on investments

 

 

 

 

 

 

 

 

 

 

 

(4,403

)

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

(8,122

)

Net unrealized appreciation on investments

 

 

 

 

 

 

 

 

 

 

 

14,675

 

Net realized/unrealized losses on investments

 

 

 

 

 

 

 

 

 

 

 

(11,644

)

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

 

 

(6,643

)

 

 

(5,248

)

 

 

(13,884

)

 

 

(28,758

)

Less: income attributable to the noncontrolling interest

 

 

857

 

 

 

1,024

 

 

 

763

 

 

 

763

 

Total net loss attributable to Medallion Financial

   Corp./net decrease on net assets resulting from operations

 

$

(7,500

)

 

$

(6,272

)

 

$

(14,647

)

 

$

(29,521

)

Basic and diluted net loss per share

 

$

(0.31

)

 

$

(0.26

)

 

$

(0.60

)

 

$

(1.22

)

Distributions declared per share

 

$

 

 

$

 

 

$

 

 

$

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

24,359,280

 

 

 

24,323,967

 

 

 

24,230,815

 

 

 

24,193,057

 

 

Page 7 of 97


   Bank Holding
Company
Accounting
  Investment
Company
Accounting
  Combined  Investment Company Accounting 

(Dollars in thousands, except per share data)

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

Income tax benefit

   —     8,426   8,426   —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total net realized gains (losses) on investments

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

   —     29,115   29,115   930   9,054 

Net change in unrealized depreciation on investments other than securities

   —     (1,915  (1,915  —     —   

Net change in unrealized depreciation on investments

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

Income tax (provision) benefit

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net unrealized appreciation (depreciation) on investments

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net realized/unrealized losses on investments

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Less: income attributable to the noncontrolling interest

   763   —     763   —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Basic and diluted net loss per share

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Distributions declared per share

  $—    $—    $—    $—    $—   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average common shares outstanding

      

Basic and diluted

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Results include the three months ended June 30, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under Investment Company Accounting.

(2)

Included in interest and investment income is $487$188 and $978$425 of paid in kind interest for the three and six months ended June 30, 20182019 and $502$487 and $990$978 for the comparable 20172018 periods.

Page 5 of 76


(2)

(3)

Average borrowings outstanding were $1,197,450$1,127,509 and $1,201,386,$1,108,512, and the related average borrowing costs were 2.65%3.14% and 1.93%3.01% for the three and six months ended June 30, 2018,2019, and were $335,010$1,197,450 and $338,459$1,201,386 and 4.08%2.65% and 4.02%1.93% for the comparable 20172018 periods.

(3)

(4)

See Note 1112 for the components of other operating expenses.expenses as of March 31, 2018.

(4)

(5)

Includes $256 of net revenues received from Medallion Bank for the three months ended March 31, 2018, and $230 and $457 for the three and six months ended June 30, 2017, primarily for expense reimbursements. See Notes 6 and 1315 for additional information.

(5)

(6)

There were no net losses on investment securities of affiliated issuers for the three months ended March 31, 2018 and June 30, 2017 and for the six months ended June 30, 2017.2018.

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

 

Page 86 of 9776



MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSSINCOME/(LOSS)

(UNAUDITED)

 

   Bank Holding
Company
Accounting
  Investment
Company
Accounting
  Combined  Investment Company Accounting 

(Dollars in thousands)

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

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

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

Other comprehensive loss, net of tax

   (255  —     (255  —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive loss

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Less: comprehensive income attributable to the noncontrolling interest

   763   —     763   —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive loss attributable to Medallion Financial Corp.

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

Bank Holding

Company

Accounting

 

 

Bank Holding

Company

Accounting

 

 

Combined (1)

 

(Dollars in thousands)

 

For the Three

Months Ended

June 30, 2019

 

 

For the Six

Months Ended

June 30, 2019

 

 

For the Three

Months Ended

June 30, 2018

 

 

For the Six

Months Ended

June 30, 2018

 

Net loss after taxes/net decrease on net assets resulting

   from operations

 

$

(6,643

)

 

$

(5,248

)

 

$

(13,884

)

 

$

(28,758

)

Other comprehensive income (loss), net of tax

 

 

558

 

 

 

1,227

 

 

 

(255

)

 

 

(255

)

Total comprehensive loss

 

 

(6,085

)

 

 

(4,021

)

 

 

(14,139

)

 

 

(29,013

)

Less: comprehensive income attributable to the noncontrolling

   interest

 

 

857

 

 

 

1,024

 

 

 

763

 

 

 

763

 

Total comprehensive loss attributable to Medallion

   Financial Corp.

 

$

(6,942

)

 

$

(5,045

)

 

$

(14,902

)

 

$

(29,776

)

 

Page 9 of 97


MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND CHANGES IN NET ASSETS

(UNAUDITED)

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

(Dollars in
thousands)

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

Balance at December 31, 2017

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

Net decrease in net assets resulting from operations

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

Stock based compensation expense

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

Issuance of restricted stock, net

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at March 31, 2018

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

Adoption of Bank Holding Company Accounting

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at April 2, 2018

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

Net loss

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

Distributions on noncontrolling interest

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

Stock based compensation

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

Issuance of restricted stock, net

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

Net change in unrealized losses on investments, net of tax

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Results include the three months ended June 30, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under Investment Company Accounting.

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

 

Page 107 of 9776



MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTSSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND CHANGES IN NET ASSETS

(UNAUDITED)

 

   Investment Company Accounting 

(Dollars in thousands, except per share data)

  Three Months
Ended June 30,

2017
  Six Months Ended
June 30, 2017
 

Net investment loss after income taxes

  $(1,293 $(1,728

Net realized gains on investments, net of tax

   1,996   2,841 

Net unrealized depreciation on investments, net of tax

   (5,500  (4,799
  

 

 

  

 

 

 

Net decrease in net assets resulting from operations

   (4,797  (3,686
  

 

 

  

 

 

 

Investment income, net

   —     —   

Return of capital

   —     —   

Realized gains from investment transactions, net

   —     —   
  

 

 

  

 

 

 

Distributions to shareholders (1)

   —     —   
  

 

 

  

 

 

 

Stock-based compensation expense

   201   329 

Exercise of stock options

   —     —   
  

 

 

  

 

 

 

Capital share transactions

   201   329 
  

 

 

  

 

 

 

Total decrease in net assets

   (4,596  (3,357

Net assets at the beginning of the period

   287,335   286,096 
  

 

 

  

 

 

 

Net assets at the end of the period(2)

  $282,739  $282,739 
  

 

 

  

 

 

 

Capital share activity

   

Common stock issued, beginning of period

   27,076,016   26,976,064 

Exercise of stock options

   —     —   

Issuance of restricted stock, net

   151,275   251,227 
  

 

 

  

 

 

 

Common stock issued, end of period

   27,227,291   27,227,291 
  

 

 

  

 

 

 

Treasury stock, beginning of period

   (2,951,243  (2,951,243

Treasury stock acquired

   —     —   
  

 

 

  

 

 

 

Treasury stock, end of period

   (2,951,243  (2,951,243
  

 

 

  

 

 

 

Common stock outstanding

   24,276,048   24,276,048 
  

 

 

  

 

 

 

 

 

Bank Holding Company Accounting

 

(Dollars in thousands)

 

Common

Stock

Shares

 

 

Common

Stock

 

 

Preferred

Stock

 

 

Capital in

Excess of

Par

 

 

Treasury

Stock

Shares

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Stockholders’

Equity

 

 

Non-

controlling

Interest

 

 

Total

Equity

 

Balance at December 31, 2018

 

 

27,385,600

 

 

$

274

 

 

 

 

 

$

274,292

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

13,043

 

 

$

(82

)

 

$

262,608

 

 

$

27,596

 

 

$

290,204

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,228

 

 

 

 

 

 

1,228

 

 

 

167

 

 

 

1,395

 

Distributions to non-

   controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(592

)

 

 

(592

)

Stock-based compensation

 

 

 

 

 

1

 

 

 

 

 

 

164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

165

 

 

 

 

 

 

165

 

Issuance of restricted stock, net

 

 

163,098

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

 

 

(1,699

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains

   on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

669

 

 

 

669

 

 

 

 

 

 

669

 

Balance at March 31, 2019

 

 

27,546,999

 

 

$

275

 

 

 

 

 

$

274,456

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

14,271

 

 

$

587

 

 

$

264,670

 

 

$

27,171

 

 

$

291,841

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,500

)

 

 

 

 

 

(7,500

)

 

 

857

 

 

 

(6,643

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(592

)

 

 

(592

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

340

 

 

 

 

 

 

340

 

Issuance of restricted stock, net

 

 

4,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

 

 

(949

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains

   on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

558

 

 

 

558

 

 

 

 

 

 

558

 

Balance at June 30, 2019

 

 

27,550,801

 

 

$

275

 

 

 

 

 

$

274,796

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

6,771

 

 

$

1,145

 

 

$

258,068

 

 

$

27,436

 

 

$

285,504

 

 

(1)

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

(2)

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

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

Page 8 of 76


 

 

Bank Holding & Investment Company Accounting

 

 

Investment Company Accounting

 

 

Bank Holding Company Accounting

 

 

Bank Holding &

Investment Company

Accounting

 

(Dollars in thousands)

 

Common

Stock Shares

 

 

Common

Stock

 

 

Preferred

Stock

 

 

Capital in

Excess of

Par

 

 

Treasury

Stock Shares

 

 

Treasury

Stock

 

 

Accumulated

undistributed

net

investment

loss

 

 

Accumulated

undistributed

net realized

gains on

investments

 

 

Net

unrealized

appreciation

on

investments,

net of tax

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Stockholders’

Equity

 

 

Noncontrolling

Interest

 

 

Total

Equity

 

Balance at December 31, 2017

 

 

27,294,327

 

 

$

273

 

 

 

 

 

$

273,716

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

(65,592

)

 

 

 

 

$

103,681

 

 

$

 

 

$

 

 

$

287,159

 

 

$

 

 

$

287,159

 

Net decrease in net assets resulting

   from operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,299

)

 

 

 

 

 

23,425

 

 

 

 

 

 

 

 

 

(14,874

)

 

 

 

 

 

(14,874

)

Stock-based compensation expense

 

 

 

 

 

1

 

 

 

 

 

 

151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

152

 

 

 

 

 

 

152

 

Issuance of restricted stock, net

 

 

95,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

 

27,390,053

 

 

 

274

 

 

 

 

 

 

273,867

 

 

 

(2,951,243

)

 

 

(24,919

)

 

$

(103,891

)

 

 

 

 

 

127,106

 

 

 

 

 

 

 

 

 

272,437

 

 

 

 

 

 

272,437

 

Adoption of Bank Holding

   Company Accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103,891

 

 

 

 

 

 

(127,106

)

 

 

23,215

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 2, 2018

 

 

27,390,053

 

 

 

274

 

 

 

 

 

 

273,867

 

 

 

(2,951,243

)

 

 

(24,919

)

 

 

 

 

 

 

 

 

 

 

 

23,215

 

 

 

 

 

 

272,437

 

 

 

27,065

 

 

 

299,502

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,647

)

 

 

 

 

 

(14,647

)

 

 

763

 

 

 

(13,884

)

Distributions to noncontrolling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(592

)

 

 

(592

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145

 

 

 

 

 

 

145

 

Issuance of restricted stock, net

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized losses on

   investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(255

)

 

 

(255

)

 

 

 

 

 

(255

)

Balance at June 30, 2018

 

 

27,390,066

 

 

$

274

 

 

 

 

 

$

274,012

 

 

 

(2,951,243

)

 

$

(24,919

)

 

 

 

 

 

 

 

 

 

$

8,568

 

 

$

(255

)

 

$

257,680

 

 

$

27,236

 

 

$

284,916

 

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

 

Page 119 of 9776



MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Bank Holding
Company
Accounting
  Investment
Company
Accounting
  Combined  Investment
Company
Accounting
 

(Dollars in thousands)

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

CASH FLOWS FROM OPERATING ACTIVITIES

     

Net loss

  $(13,884 $(14,874 $(28,758 $(3,686

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

     

Provision for loan losses

   30,576   —     30,576   —   

Loans originated

   —     (8,193  (8,193  (8,993

Proceeds from principal receipts, sales, and maturities of loans

   —     13,279   13,279   28,918 

Paid-in-kind interest

   (487  (491  (978  —   

Depreciation and amortization

   1,037   246   1,283   276 

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

   (654  3,858   3,204   (7,645

Amortization of origination fees, net

   1,032   13   1,045   38 

Net change in loan collateral in process of foreclosure

   2,967   —     2,967   —   

Capital returned by Medallion Bank and other controlled subsidiaries, net

   —     93   93   595 

Net realized losses on sale of investments

   96   —     96   —   

Net change in unrealized depreciation on investments

   592   4,403   4,995   19,973 

Net change in unrealized depreciation on investment other than securities

   —     1,915   1,915   —   

Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries

   —     (29,115  (29,115  (9,054

Net realized (gains) losses on investments

   —     34,745   34,745   (2,841

Stock-based compensation expense

   145   152   297   329 

Decrease in accrued interest receivable

   —     130   130   14 

Increase in other liabilities

   2,779   —     2,779   —   

(Increase) decrease in other assets

   (4,899  54   (4,845  263 

Decrease in accounts payable and accrued expenses

   —     (675  (675  (1,211

Increase (decrease) in accrued interest payable

   —     (249  (249  284 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   19,300   5,291   24,591   17,260 

CASH FLOWS FROM INVESTING ACTIVITIES

     

Loans originated

   (135,205  —     (135,205  —   

Proceeds from principal receipts, sales, and maturities of loans

   64,631   —     64,631   —   

Purchases of investments

   (4,940  —     (4,940  —   

Proceeds from principal receipts, sales, and maturities of investments

   732   —     732   —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash (used for) investing activities

   (74,782  —     (74,782  —   

CASH FLOWS FROM FINANCING ACTIVITIES

     

Proceeds from time deposits and funds borrowed

   173,737   —     173,737   —   

Repayments of time deposits and funds borrowed

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

Purchase of federal funds

   8,000   —     8,000   —   

Repayments of federal funds

   —     —     —     —   

Distributions to noncontrolling interests

   (592  —     (592  —   

Payments of declared distributions

   —     (64  (64  (139
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by (used for) financing activities

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

 

 

  

 

 

  

 

 

  

 

 

 

 

 

Bank Holding

Company

Accounting

 

 

Combined (1)

 

(Dollars in thousands)

 

For the Six

Months Ended

June 30, 2019

 

 

For the Six

Months Ended

June 30, 2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net (loss)/net (decrease) in net assets resulting from operations

 

$

(5,248

)

 

$

(28,758

)

Adjustments to reconcile net loss/net decrease in net assets resulting from operations to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

28,514

 

 

 

30,576

 

Paid-in-kind interest

 

 

(425

)

 

 

(978

)

Depreciation and amortization

 

 

4,186

 

 

 

1,283

 

(Decrease) increase in deferred and other tax liabilities

 

 

(1,560

)

 

 

3,204

 

Amortization of origination fees, net

 

 

2,389

 

 

 

1,045

 

Proceeds from the sale and principal payments on loan collateral in process

   of foreclosure

 

 

9,167

 

 

 

 

Net change in loan collateral in process of foreclosure

 

 

7,411

 

 

 

2,967

 

Net change in unrealized depreciation on investments

 

 

(96

)

 

 

4,995

 

Stock-based compensation expense

 

 

505

 

 

 

297

 

Gain on extinguishment of debt

 

 

(4,145

)

 

 

 

(Increase) decrease in accrued interest receivable

 

 

(329

)

 

 

130

 

Increase in other assets

 

 

(5,505

)

 

 

(4,845

)

Decrease (increase) in accounts payable and accrued expenses

 

 

139

 

 

 

(675

)

Increase (decrease) in accrued interest payable

 

 

353

 

 

 

(249

)

Loans originated

 

 

 

 

(8,193

)

Proceeds from principal receipts, sales, and maturities of loans

 

 

 

 

13,279

 

Capital returned by Medallion Bank and other controlled subsidiaries, net

 

 

 

 

93

 

Net realized losses on sale of investments

 

 

 

 

96

 

Net change in unrealized depreciation on investment other than securities

 

 

 

 

1,915

 

Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries

 

 

 

 

(29,115

)

Net realized losses on investments

 

 

 

 

34,745

 

Increase in other liabilities

 

 

 

 

2,779

 

Net cash provided by operating activities

 

 

35,356

 

 

 

24,591

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Loans originated

 

 

(240,523

)

 

 

(135,205

)

Proceeds from principal receipts, sales, and maturities of loans

 

 

122,106

 

 

 

64,631

 

Purchases of investments

 

 

(1,650

)

 

 

(4,940

)

Proceeds from principal receipts, sales, and maturities of investments

 

 

2,877

 

 

 

732

 

Net cash (used for) investing activities

 

 

(117,190

)

 

 

(74,782

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from time deposits and funds borrowed

 

 

292,725

 

 

 

173,737

 

Repayments of time deposits and funds borrowed

 

 

(195,272

)

 

 

(137,822

)

Purchase of federal funds

 

 

 

 

8,000

 

Distributions to noncontrolling interests

 

 

(1,184

)

 

 

(592

)

Payments of declared distributions

 

 

 

 

(64

)

Net cash provided by financing activities

 

 

96,269

 

 

 

43,259

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND

   RESTRICTED CASH

 

 

14,435

 

 

 

(6,932

)

Cash and cash equivalents and restricted cash, beginning of period (2)

 

 

57,713

 

 

 

42,513

 

Cash and cash equivalents and restricted cash, end of period (3)

 

$

72,148

 

 

$

35,581

 

SUPPLEMENTAL INFORMATION

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

15,077

 

 

$

10,038

 

Cash paid during the period for income taxes

 

 

120

 

 

 

42

 

 

Page 12 of 97


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

   (5,198  (1,734  (6,932  1,164 

Cash and cash equivalents,beginning of period(1)

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

 

 

  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents,end of period(2)

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

 

 

  

 

 

  

 

 

  

 

 

 

SUPPLEMENTAL INFORMATION

     

Cash paid during the period for interest

  $6,461  $3,577  $10,038  $6,231 

Cash paid during the period for income taxes

   42   —     42   48 
  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Included inResults include the three months ended June 30, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under Investment Company Accounting.

(2)

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

(2)

(3)

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

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

Page 10 of 76


 

Page 13 of 97


MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 20182019

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

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

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

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

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

MFC established a wholly-owned subsidiary, Taxi Medallion Loan Trust III (Trust III), was established for the purpose of owning medallion loans originated by MFC or others. Trust III is a variable interest entity (VIE), and MFC was the primary beneficiary. As a result, the Company consolidated Trust III in its financial results until the consummation of a restructuring in the 2018 fourth quarter. For a discussion of the restructuring, see Note 19. Trust III is a separate legal and corporate entity with its own creditors who,which, in any liquidation of Trust III, will be entitled to be satisfied out of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders. The assets of Trust III aggregating $72,462,000 at June 30, 2018, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC. As of June 30, 2018, Trust III had a deficit of $26,590,000, as a result of losses taken on the medallion loans in Trust III. This amount exceeded our maximum exposure to Trust III, which is solely due to a limited guarantee by MFC of $6,065,000, by $20,525,000. Due to technical consolidation accounting rules, we are required to record these losses, even though we are under no obligation to cover them financially. The Company is exploring alternative approaches to this investment to allow for full or partial recovery of these amounts as well as to not incur additional losses in this entity going forward. There can be no assurance that the Company will be able to do so.

The Company established a wholly-owned subsidiary, Medallion Financing Trust I (Fin Trust) for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,143,000$36,140,000 at June 30, 2018,2019, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.

MFC, through several wholly-owned subsidiaries (together, Medallion Chicago), purchased $8,689,000 of City of Chicago taxicab medallions out of foreclosure, some of which are leased to fleet operators while being held for sale. The 159 medallions are carried at a net realizable value of $5,535,000$3,091,000 in other assets on the Company’s consolidated balance sheet at June 30, 20182019, compared to faira net realizable value of $7,450,000$4,305,000 and $9,510,000$5,535,000 at December 31, 20172018 and June 30, 2017.2018.

Page 11 of 76


 

Page 14 of 97


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Change to Bank Holding Company Accounting

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

Use of Estimates

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

Principles of Consolidation

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

The consolidated financial statements have been prepared in accordance with GAAP. The Company consolidates all entities it controls through a majority voting interest, a controlling interest through other contractual rights, or as being identified as the primary beneficiary of VIEs. The primary beneficiary is the party who has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (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 entities that are less than wholly owned, the third-party’s holding is 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. Cash includes $2,475,000 of an interest reserve associated with the private placement of debt in March 2019, which cannot be used for any other purpose until March 2022.

Fair Value of Assets and Liabilities

The Company follows FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (FASB ASC 820), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e. a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entity’s own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 1416 and 1517 to the consolidated financial statements.

Page 12 of 76


Equity Investments

Equity investments of $10,773,000$9,797,000 and $9,197,000 at June 30, 2019 and December 31, 2018, comprised mainly of nonmarketable stock and stock warrants, are recorded at cost and are evaluated for impairment periodically. Prior to April 2, 2018, equity investments were recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of investments that had no ready market were determined in good faith by the Board of Directors, based upon the financial condition and operating performance of the underlying investee companies as well as general market trends for businesses in the same industry. Included in the equity investments werenon-marketable securities of $9,521,000 at December 31, 2017.

Investment Securities (Bank Holding Company Accounting)

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

Page 15 of 97


totaled $212,000,$129,000 at June 30, 2019 and $154,000 at December 31, 2018, and $13,000 and $25,000 was amortized to interest income for the three and six months ended June 30, 2019, and $21,000 was amortized to interest income for the three months ended June 30, 2018. Medallion Bank, a previously unconsolidated subsidiary under Investment Company Accounting for the period, had net premium on investment securities of $265,000, and $20,000 and $40,000 was amortized to interest income for the three and six months ended June 30, 2017. Refer to Note 3 for more details. ASC 320 further requiresthat held-to-maturity securities be reported at amortized cost andavailable-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the consolidated financial statements, and reported in accumulated other comprehensive income (loss) as a separate component of shareholder’sshareholders’ equity, net of the effect of income taxes, until they are sold. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in shareholder’sshareholders’ equity, which were recorded net of the income tax effect, will be reversed.

Other Investment Valuation (Investment Company Accounting)

Prior to April 2, 2018, under the 1940 Act, the Company’s investment in Medallionthe Bank, as a wholly owned portfolio investment, was subject to quarterly assessments of fair value. The Company conducted a thorough valuation analysis, and also received an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallionthe Bank on at least an annual basis. The Company’s analysis included factors such as various regulatory restrictions that were established at Medallionthe 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 Medallionthe Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallionthe Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the 2015 second quarter, the Company first became aware of external interest in Medallionthe Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallionthe Bank from both investment bankers and interested parties has continued. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallionthe Bank had a fair value in excess of book value. In addition, in the 2016 third quarter there was a court ruling involving a marketplace lender that the Company believes heightensheightened the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallionthe Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016, $7,849,000 was recorded in 2017, and $39,826,000 was recorded in the first quarter of 2018. Refer to Note 6 for additional details.

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

Loans

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

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At June 30, 20182019 and December 31, 2017,2018, net loan origination costs were $13,696,000$16,786,000 and $90,000 ($11,187,000 when combined$14,416,000. The majority of these loan origination costs were capitalized into the loan balances on April 2, 2018 in connection with Medallion Bank).the change in reporting status. Net amortization to income for the three months ended June 30, 2019 and 2018 was $1,238,000 and 2017 was $1,040,000, and $18,000 ($852,000 when combined with Medallion Bank),was $2,389,000 and was $1,053,000 ($1,918,000 when combined with Medallion Bank) and $38,000 ($1,701,000 when combined with Medallionthe Bank) for the comparable six month periods.period.

Page 13 of 76


Interest income is recorded on the accrual basis. Taxicab medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. The consumer portfolio has different characteristics, typified by a larger number of lower dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is likely the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Management considers loans that are in bankruptcy status, but have notbeen charged-off, to be impaired. These loans are placed on nonaccrual, when they become 90 days past due, or earlier if they enter bankruptcy, and are charged offcharged-off in their entirety when deemed

Page 16 of 97


uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. For the recreationalrecreation consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged off.charged-off. If the collateral is repossessed, a loss is recorded to write the collateral down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off. Proceeds collected on charged offcharged-off accounts are recorded as a recovery. Total loans more than 90 days past due were $15,161,000$8,255,000 at June 30, 2018,2019, or 1.32%0.78% of the total loan portfolio, compared to $60,450,000,$20,154,000, or 18.9%2.03% at December 31, 2017.2018.

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

The Company had $126,052,000$32,871,000 and $183,529,000$40,500,000 of net loans and loans in process of foreclosure pledged as collateral under borrowing arrangements at June 30, 20182019 and December 31, 2017.2018.

The Company accountedaccounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing (FASB ASC 860), which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, the Company had elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $26,583,000$134,122,000 at June 30, 20182019 and $338,867,000$140,180,000 at December 31, 2017, which included $311,988,000 of loans serviced for Medallion Bank.2018. The Company hadhas evaluated the servicing aspect of its business in accordance with FASB ASC 860, most of which relates to servicing assets held by Medallion Bank,MFC (related to the remaining assets in Trust III) and determined that no material servicing asset or liability existed as of June 30, 20182019 and December 31, 2017.2018. The Company assigned its servicing rights toof the Medallion Bank portfolio to MSC. The costs of servicing were allocated to MSC by the Company, and the servicing fee income was billed to and collected from Medallionthe Bank by MSC.

Allowance for Loan Losses (Bank Holding Company Accounting)

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. In analyzing the adequacy of the allowance for loan losses, the Company uses historical delinquency and actual loss rates with a one year lookback period for consumer loans. For commercial loans deemed nonperforming, the historical loss experience and other projections are looked at, and for medallion loans, non performingnonperforming loans are valued at the median sales price over the most recent quarter.quarter, and performing medallion loans are reserved utilizing historical loss ratios over a three-year lookback period. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. As a result, reserves areof $5,247,000 were recorded aboveby the calculated amountsCompany as a general reserve on medallion loans as an additional buffer against future losses.losses, not including the Bank’s general reserve of $17,351,000 which was netted against loan balances at consolidation on April 2, 2018. Subsequent to April 2, 2018, the Bank recorded general reserves of $6,092,000. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.

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

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

Page 14 of 76


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

Page 17 of 97


Goodwill and Intangible Assets

The Company’s goodwill and intangible assets arose as a result of the excess of fair value over book value for several of the Company’s previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under the Company’s new Bank Holding Company reporting, and was subject to a purchase price accounting allocation process conducted by an independent third party expert to arrive at the current categories and amounts. Goodwill is not amortized, but is subject to quarterly review by management to determine whether additional impairment testing is needed, said testing which is performed at least on an annual basis. Intangible assets are amortized over their useful life of approximately 20 years. See below for detailed informationAs of June 30, 2019, December 31, 2018, and June 30, 2018, the Company had goodwill of $150,803,000, which all related to the Bank, and intangible assets of $53,259,000, $53,982,000 and $60,320,000, and the Company recognized $362,000 and $361,000 of amortization expense on the fair value allocationintangible assets for the three months ended June 30, 2019 and 2018, and $723,000 of amortization expense on the intangible assets for the six months ended June 30, 2019. Additionally, loan portfolio premiums of $12,387,000 were determined as of April 2, 2018.2018, of which $6,875,000, $9,048,000, and $12,387,000 were outstanding at June 30, 2019, December 31, 2018, and June 30, 2018, and of which $1,081,000 and $0 was amortized to interest income for the three months ended June 30, 2019 and 2018, and of which $2,173,000 was amortized to interest income for the six months ended June 30, 2019. The Company engaged an expert to assess the goodwill and intangibles for impairment at December 31, 2018, who concluded there was no impairment on the Bank and impairment on the RPAC intangible asset of $5,615,000, which was recorded in the 2018 fourth quarter.

The table below shows the details of the intangible assets as of the periods presented.

 

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

Medallion Bank

    

Assets

    

Net loans(1)

  $    $890,000 

Other assets

     130,393 

Liabilities

    

Funds borrowed and other liabilities

     (853,650
  

 

 

   

 

 

 

Total fair value excluding goodwill and intangibles

     166,743 

Goodwill

     150,803 

Intangibles

     28,900
  

 

 

   

 

 

 

Total fair value(2)

  $346,446   $346,446 
  

 

 

   

 

 

 

(Dollars in thousands)

 

June 30,

2019

 

 

December 31,

2018

 

Brand-related intellectual property

 

$

20,625

 

 

$

21,176

 

Home improvement contractor relationships

 

 

6,469

 

 

 

6,641

 

Race organization

 

 

26,165

 

 

 

26,165

 

Total intangible assets

 

$

53,259

 

 

$

53,982

 

 

(1)

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

(2)

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

(in thousands)

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

RPAC Racing LLC

    

Assets

    

Cash

  $    $1,647 

Net fixed assets

     774 

Race cars and parts, net

     203 

Race cars held for sale

     916 

Other assets

     1,902 

Liabilities

    

Deferred revenue

     (6,531

Notes payable(1)

     (27,220

Other liabilities

     (2,275
  

 

 

   

 

 

 

Total fair value excluding goodwill and intangibles

     (30,584

Intangibles

     31,779 
  

 

 

   

 

 

 

Total fair value(2)

  $1,195   $1,195 
  

 

 

   

 

 

 

(1)

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

(2)

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

Page 18 of 97


Fixed Assets

Fixed assets are carried at cost less accumulated depreciation and amortization, and are depreciated on a straight-line basis over their estimated useful lives of 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated economic useful life of the improvement. Depreciation and amortization expense was $135,000$105,000 and $24,000$135,000 for the quartersthree months ended June 30, 2019 and 2018, and 2017,was $205,000 and was $158,000 and $49,000 for the comparable six months.

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 and life of the respective pool. Amortization expense was $541,000$597,000 and $240,000 ($591,000 had Medallion Bank been consolidated)$541,000 for the quartersthree months ended June 30, 2019 and 2018, and 2017,was $1,118,000 and was $764,000 and $468,000 ($1,164,000 had Medallion Bank been consolidated) for the comparable six months, recorded as interest expense.months. In addition, the Company capitalizes certain costs for transactions in the process of completion (other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon completion or termination of the transaction, any accumulated amounts are amortized against income over an appropriate period, or written off. The amount on the Company’s balance sheet for all of these purposes was $5,012,000, $3,070,000 ($5,011,000 had Medallion Bank been consolidated),$5,584,000, $4,461,000, and $3,567,000 ($5,623,000 had Medallion Bank been consolidated)$5,012,000 as of June 30, 2018,2019, December 31, 20172018, and June 30, 2017.2018.

Page 15 of 76


Income Taxes

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

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 based upon the contract terms of the sponsorship contract. Race winnings revenue is recognized after each race during the season based upon terms provided by NASCAR and the placement of the driver.

Earnings (Loss) Per Share (EPS)

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

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

 

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

(Dollars in thousands, except per share data)

  2018   2017   2018   2017 

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

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

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding applicable to basic EPS

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

Effect of dilutive stock options

   —      —      —      —   

Effect of restricted stock grants

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted EPS

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

 

 

   

 

 

   

 

 

   

 

 

 

Basic loss per share

  ($0.60  ($0.20  ($1.22  ($0.15

Diluted loss per share

   (0.60   (0.20   (1.22   (0.15
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in thousands, except per share data)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss/net decrease in net assets resulting from operations

   available to common shareholders

 

$

(7,500

)

 

$

(14,647

)

 

$

(6,272

)

 

$

(29,521

)

Weighted average common shares outstanding applicable to

   basic EPS

 

 

24,359,280

 

 

 

24,230,815

 

 

 

24,323,967

 

 

 

24,193,057

 

Effect of dilutive stock options

 

 

 

 

 

 

 

 

 

 

 

 

Effect of restricted stock grants

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted average common shares outstanding

   applicable to diluted EPS

 

 

24,359,280

 

 

 

24,230,815

 

 

 

24,323,967

 

 

 

24,193,057

 

Basic loss per share

 

$

(0.31

)

 

$

(0.60

)

 

$

(0.26

)

 

$

(1.22

)

Diluted loss per share

 

 

(0.31

)

 

 

(0.60

)

 

 

(0.26

)

 

 

(1.22

)

 

Page 19 of 97


Potentially dilutive common shares excluded from the above calculations aggregated 100,000498,714 and 682,000100,000 shares as of June 30, 20182019 and 2017.2018.

Stock Compensation

The Company follows FASB ASC Topic 718 (ASC 718), “CompensationCompensation – 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 income (loss)/increase in net increase (decrease) in income/net assets resulting from operations for any new grants using the fair values established by usage of the Black-Scholes option pricing model, expensed over the vesting period of the underlying option. Stock-based employee compensation costs pertaining to restricted stock are reflected in net income (loss)/income/net increase in net assets resulting from operations for any new grants using the grant date fair value of the shares granted, expensed over the vesting period of the underlying stock.

Page 16 of 76


During the six months ended June 30, 20182019 and 2017,2018, the Company issued 98,164167,849 and 258,23298,164 of restricted shares of stock-based compensation awards, and 24,000375,481 and 12,00024,000 shares of other stock-based compensation awards,stock options, and recognized $340,000 and $505,000, or $0.01 and $0.02 per share for the 2019 second quarter and six months, and $145,000 and $296,000, or $0.01 per share for the 2018 second quarter and six months, and $200,000 and $329,000, or $0.01 and $0.01 per share ineach of the comparable 20172018 periods, ofnon-cash stock-based compensation expense related to the grants. As of June 30, 2018,2019, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $533,000,$1,831,000, which is expected to be recognized over the next 1215 quarters (see Note 9)10).

Derivatives

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

Regulatory Capital

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

FDIC-insured banks, including 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, such as certain purchases of assets, with the Company or its affiliates.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for federal deposit insurance, the FDIC ordered that the Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%, which would preclude its ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As of June 30, 2018,2019, the Bank’s Tier 1 leverage capital ratio was 14.95%15.96%. The Bank’s actual capital amounts and ratios, and the regulatory minimum ratios are presented in the following table.

 

Page 20 of 97


  Regulatory     

 

Regulatory

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

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

 

Minimum

 

 

Well-

Capitalized

 

 

June 30,

2019

 

 

December 31,

2018

 

Common equity tier 1 capital

   —     —    $127,258  $137,494 

Common equity Tier 1 capital

 

 

 

 

 

 

 

$

144,886

 

 

$

141,608

 

Tier 1 capital

   —     —     153,561  163,797 

 

 

 

 

 

 

 

 

171,189

 

 

 

167,911

 

Total capital

   —     —     167,344  176,876 

 

 

 

 

 

 

 

 

185,117

 

 

 

180,917

 

Average assets

   —     —     1,027,419  1,127,087 

 

 

 

 

 

 

 

 

1,072,712

 

 

 

1,059,461

 

Risk-weighted assets

   —     —     1,045,884  995,145 

 

 

 

 

 

 

 

 

1,068,566

 

 

 

993,374

 

Leverage ratio(1)

   4.0 5.0  14.9 14.5

 

 

4.0

%

 

 

5.0

%

 

 

16.0

%

 

 

15.8

%

Common equity tier 1 capital ratio (2)

   4.5  6.5   12.2  13.8 

Common equity Tier 1 capital ratio(2)

 

 

7.0

 

 

 

6.5

 

 

 

13.6

 

 

 

14.3

 

Tier 1 capital ratio(3)

   6.0  8.0   14.7  16.5 

 

 

8.5

 

 

 

8.0

 

 

 

16.0

 

 

 

16.9

 

Total capital ratio(3)

   8.0  10.0   16.0  17.8 

 

 

10.5

 

 

 

10.0

 

 

 

17.3

 

 

 

18.2

 

 

(1)

Calculated by dividing Tier 1 capital by average assets.

(2)

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

(3)

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

In addition, the Bank is subject to a Common Equity Tier 1 capital conservation buffer on top of the minimum risk-based capital ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increaseincreased by 0.625% each subsequent January 1 until January 1, 2019. Including the buffer, byas of January 1, 2019, the Bank will beis required to maintain the following minimum capital ratios: a Common Equity Tier 1 risk-based capital ratio of greater than 7.0%, a Tier 1 risk-based capital ratio of greater than 8.5% and a total risk-based capital ratio of greater than 10.5%. Since the FDIC’s new capital rule has been fully phased in, the minimum capital requirements plus the capital conservation buffer exceed the Prompt Corrective Action well-capitalized thresholds.

Page 17 of 76


Recently Issued Accounting Standards

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value. The objective of this update is to modify the disclosure requirements as they relate to the fair value of assets and liabilities. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe this update will have a material impact on its financial condition.

In January 2017, the FASB issued ASU2017-04 Intangibles— Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of this update is to simplify the subsequent measurement of goodwill, by eliminating step 2 from the goodwill impairment test. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe this update will have a material impact on its financial condition.

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

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 GAAP. ASU2016-02 applies to all entities and is effective for fiscal years beginning after December 15, 2018 for public entities. The Company has assessed the impact the update will have on its financial condition and does not believe this update will have a material impact on its financial condition.

Page 21 of 97


(3) INVESTMENT SECURITIES (Bank Holding Company Accounting)

Fixed maturity securities available for sale atas of June 30, 2019 and December 31, 2018 consisted of the following:

 

(Dollars in thousands)

  Amortized Cost   Gross
Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 

June 30, 2019

(Dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of US federal agencies

  $35,924   $14   $(1,025  $34,913 

 

$

31,083

 

 

$

488

 

 

$

(31

)

 

$

31,540

 

State and municipalities

   10,128    3    (327   9,804 

 

 

13,155

 

 

 

218

 

 

 

(93

)

 

 

13,280

 

  

 

   

 

   

 

   

 

 

Total

  $46,052   $17   $(1,352  $44,717 

 

$

44,238

 

 

$

706

 

 

$

(124

)

 

$

44,820

 

  

 

   

 

   

 

   

 

 

December 31, 2018

(Dollars in thousands)

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of

   US federal agencies

 

$

32,184

 

 

$

15

 

 

$

(742

)

 

$

31,457

 

State and municipalities

 

 

14,239

 

 

 

35

 

 

 

(407

)

 

 

13,867

 

Total

 

$

46,423

 

 

$

50

 

 

$

(1,149

)

 

$

45,324

 

The amortized cost and estimated market value of investment securities as of June 30, 20182019 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
 

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

  $3  $3

 

$

20

 

 

$

20

 

Due after one year through five years

   7,802    7,597 

 

 

8,889

 

 

 

8,959

 

Due after five years through ten years

   14,272    13,830 

 

 

12,112

 

 

 

12,298

 

Due after ten years

   23,975    23,287 

 

 

23,217

 

 

 

23,543

 

  

 

   

 

 

Total

  $46,052   $44,717 

 

$

44,238

 

 

$

44,820

 

  

 

   

 

 

Information

Page 18 of 76


The following table shows information pertaining to securities with gross unrealized losses at June 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows.position.

 

 

Less than Twelve Months

 

 

Twelve Months and Over

 

  Less than Twelve Months   Twelve Months and Over 

(Dollars in thousands)

  Gross Unrealized
Losses
   Fair Value   Gross Unrealized
Losses
   Fair Value 

June 30, 2019

(Dollars in thousands)

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of US federal agencies

  $(523  $20,798   $(502  $11,975 

 

$

 

 

$

 

 

$

(31

)

 

$

7,401

 

State and municipalities

   (164   6,121    (163   3,506 

 

 

 

 

 

 

 

 

(93

)

 

 

8,016

 

  

 

   

 

   

 

   

 

 

Total

  $(687  $26,919   $(665  $15,481 

 

$

 

 

$

 

 

$

(124

)

 

$

15,417

 

  

 

   

 

   

 

   

 

 

 

 

Less than Twelve Months

 

 

Twelve Months and Over

 

December 31, 2018

(Dollars in thousands)

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of

   US federal agencies

 

$

(54

)

 

$

4,616

 

 

$

(688

)

 

$

24,871

 

State and municipalities

 

 

(78

)

 

 

5,429

 

 

 

(329

)

 

 

6,259

 

Total

 

$

(132

)

 

$

10,045

 

 

$

(1,017

)

 

$

31,130

 

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

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

Page 22 of 97


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

The following table shows the major classification of loans, inclusive of capitalized loan origination costs, at June 30, 2018 under Bank Holding Company Accounting.2019 and December 31, 2018.

 

 

As of June 30, 2019

 

 

As of December 31, 2018

 

(Dollars in thousands)

    

 

Amount

 

 

As a Percent of

Gross Loans

 

 

Amount

 

 

As a Percent of

Gross Loans

 

Recreation

  $597,348 

 

$

668,540

 

 

 

62

%

 

$

587,038

 

 

 

58

%

Home improvement

   195,876 

 

 

209,549

 

 

 

19

 

 

 

183,155

 

 

 

18

 

Commercial

   80,105 

 

 

64,442

 

 

 

6

 

 

 

64,083

 

 

 

6

 

Medallion

   276,794 

 

 

145,944

 

 

 

13

 

 

 

183,606

 

 

 

18

 

  

 

 

Total gross loans

   1,150,123 

 

 

1,088,475

 

 

 

100

%

 

 

1,017,882

 

 

 

100

%

Allowance for loan losses

   (21,425

 

 

(40,670

)

 

 

 

 

 

 

(36,395

)

 

 

 

 

  

 

 

Total net loans

  $1,128,698 

 

$

1,047,805

 

 

 

 

 

 

$

981,487

 

 

 

 

 

  

 

 

The following table shows the activity of the gross loans for the three and six months ended June 30, 2019.

Three Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallions

 

 

Total

 

Gross loans- March 31, 2019

 

$

609,999

 

 

$

193,275

 

 

$

55,211

 

 

$

165,715

 

 

$

1,024,200

 

Loan originations

 

 

102,695

 

 

 

33,533

 

 

 

9,270

 

 

 

 

 

 

145,498

 

Principal payments

 

 

(41,641

)

 

 

(16,580

)

 

 

(70

)

 

 

(3,164

)

 

 

(61,455

)

Charge-offs, net

 

 

(2,433

)

 

 

(86

)

 

 

 

 

 

(8,844

)

 

 

(11,363

)

Transfer to loans in process of foreclosure, net

 

 

(3,491

)

 

 

 

 

 

 

 

 

(6,863

)

 

 

(10,354

)

Other

 

 

3,411

 

 

 

(593

)

 

 

31

 

 

 

(900

)

 

 

1,949

 

Gross loans- June 30, 2019

 

$

668,540

 

 

$

209,549

 

 

$

64,442

 

 

$

145,944

 

 

$

1,088,475

 

Page 19 of 76


Six Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallions

 

 

Total

 

Gross loans- December 31, 2018

 

$

587,038

 

 

$

183,155

 

 

$

64,083

 

 

$

183,606

 

 

$

1,017,882

 

Loan originations

 

 

166,327

 

 

 

60,180

 

 

 

9,770

 

 

 

 

 

 

236,277

 

Principal payments

 

 

(72,890

)

 

 

(32,779

)

 

 

(9,413

)

 

 

(6,599

)

 

 

(121,681

)

Charge-offs, net

 

 

(7,363

)

 

 

(245

)

 

 

 

 

 

(16,631

)

 

 

(24,239

)

Transfer to loans in process of foreclosure, net

 

 

(6,883

)

 

 

 

 

 

 

 

 

(12,568

)

 

 

(19,451

)

Other

 

 

2,311

 

 

 

(762

)

 

 

2

 

 

 

(1,864

)

 

 

(313

)

Gross loans- June 30, 2019

 

$

668,540

 

 

$

209,549

 

 

$

64,442

 

 

$

145,944

 

 

$

1,088,475

 

The following table sets forth the activity in the allowance for loan losses for the three and six months ended June 30, 2018 under Bank Holding Company Accounting.2019 and the three months ended June 30, 2018.

 

 

Three Months Ended

June 30,

 

 

Six Months

Ended

June 30,

 

 

(Dollars in thousands)

    

 

2019

 

 

2018

 

 

2019

 

 

Allowance for loan losses—beginning balance(1)

  $

Charge-offs:

  

Allowance for loan losses – beginning balance

 

$

36,862

 

 

$

 

(1)

$

36,395

 

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

   (4,646

 

 

(4,395

)

 

 

(4,646

)

 

 

(10,921

)

 

Home improvement

   (561

 

 

(539

)

 

 

(561

)

 

 

(1,088

)

 

Commercial

    

 

 

 

 

 

 

 

 

Medallion

   (6,280

 

 

(9,242

)

 

 

(6,280

)

 

 

(18,029

)

 

  

 

 

Total charge-offs

   (11,487

 

 

(14,176

)

 

 

(11,487

)

 

 

(30,038

)

 

  

 

 

Recoveries

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

   1,899 

 

 

1,962

 

 

 

1,899

 

 

 

3,558

 

 

Home improvement

   239 

 

 

453

 

 

 

239

 

 

 

843

 

 

Commercial

   4 

 

 

 

 

4

 

 

 

 

Medallion

   194 

 

 

398

 

 

 

194

 

 

 

1,398

 

 

  

 

 

Total recoveries

   2,336 

 

 

2,813

 

 

 

2,336

 

 

 

5,799

 

 

  

 

 

Net charge-offs

   (9,151

Provision for loan losses(2)

   30,576 
  

 

 

Allowance for loan losses—ending balance

  $21,425 
  

 

 

Net charge-offs(2)

 

 

(11,363

)

 

 

(9,151

)

 

 

(24,239

)

 

Provision for loan losses

 

 

15,171

 

 

 

30,576

 

 

 

28,514

 

 

Allowance for loan losses – ending balance

 

$

40,670

 

(3)

$

21,425

 

 

$

40,670

 

(3)

 

(1)

Beginning balance reflects the transition to Bank Holding Company Accounting by netting previously established unrealized depreciation against the gross loan balances resulting in a starting point of zero for this table.the three months ended June 30, 2018.

(2)

As of June 30, 2019, cumulative net charge-offs of loans and loans in process of foreclosure in the medallion portfolio were $237,671, representing collection opportunities for the Company.

(3)

Includes $6,663$5,247 of unallocated allowancea general reserve for the Company, for current and performing medallion loans under 90 days past due, as an additional buffer against future losses, representing 13% of the total allowance, and 3.82% of the loans under 90 days past due as of June 30, 2019. This figure excludes $17,351 of a general reserve on loans at the Bank, much of which was netted against loan balances at consolidation on April 2, 2018. Subsequent to conform our methodology to thatApril 2, 2018, the Bank recorded general reserves of Medallion Bank.$6,092.

The following table setstables set forth the composition of the allowance for loan losses by type as of June 30, 2018:2019 and December 31, 2018.

 

  Amount   Percentage
of
Allowance
 Allowance as a
Percent of Loan
Category
 

June 30, 2019

(Dollars in thousands)

 

Amount

 

 

Percentage of

Allowance

 

 

Allowance as a

Percent of Loan

Category

 

Recreation

  $1,963    9  0.33

 

$

12,672

 

 

 

31

%

 

 

1.90

%

Home Improvement

   555    3   0.28 

Home improvement

 

 

2,913

 

 

 

7

 

 

 

1.39

 

Commercial

   175    1   0.22 

 

 

455

 

 

 

1

 

 

 

0.71

 

Medallion

   18,732    87   6.77 

 

 

24,630

 

 

 

61

 

 

 

16.88

 

  

 

   

 

  

 

 

Total

  $21,425    100  1.86

 

$

40,670

 

 

 

100

%

 

 

3.74

 

  

 

   

 

  

Page 20 of 76


 

December 31, 2018

(Dollars in thousands)

 

Amount

 

 

Percentage of

Allowance

 

 

Allowance as a

Percent of Loan

Category

 

Recreation

 

$

6,856

 

 

 

19

%

 

 

1.17

%

Home Improvement

 

 

1,796

 

 

 

5

 

 

 

0.98

 

Commercial

 

 

 

 

 

 

 

 

0.00

 

Medallion

 

 

27,743

 

 

 

76

 

 

 

15.11

 

Total

 

$

36,395

 

 

 

100

%

 

 

3.58

%

Page 23 of 97


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

 

  Bank Holding
Company Accounting
 Investment Company Accounting 

(Dollars in thousands)

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

 

June 30, 2019

 

 

December 31, 2018

 

 

June 30, 2018

 

Total nonaccrual loans

  $47,904  $98,494  $122,042 

 

$

26,878

 

 

$

34,877

 

 

$

47,904

 

Interest foregone quarter to date

   770  823  2,248 

 

 

379

 

 

 

487

 

 

 

770

 

Amount of foregone interest applied to principal in the quarter

   400  52  679 

 

 

116

 

 

 

166

 

 

 

400

 

Interest foregone life to date

   8,281  12,485  14,934 

 

 

1,809

 

 

 

1,952

 

 

 

8,281

 

Amount of foregone interest applied to principal life to date

   3,748  3,495  9,711 

 

 

847

 

 

 

1,214

 

 

 

3,748

 

Percentage of nonaccrual loans to gross loan portfolio

   4 31 34

 

 

2

%

 

 

3

%

 

 

4

%

 

(1)

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

(2)

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

The following presents ourtables present the performance status of loans as of June 30, 2018 under Bank Holding Company Accounting.2019 and December 31, 2018.

 

(Dollars in thousands)

  Performing   Non- Performing   Total 

June 30, 2019

(Dollars in thousands)

 

Performing

 

 

Nonperforming

 

 

Total

 

 

Percentage of

Nonperforming

to Total

 

Recreation

  $593,177   $4,171   $597,348 

 

$

662,785

 

 

$

5,755

 

 

$

668,540

 

 

 

0.86

%

Home improvement

   195,759    117    195,876 

 

 

209,384

 

 

 

165

 

 

 

209,549

 

 

 

0.08

 

Commercial

   72,664    7,441    80,105 

 

 

55,699

 

 

 

8,743

 

 

 

64,442

 

 

 

13.57

 

Medallion

   238,965    37,829    276,794 

 

 

133,729

 

 

 

12,215

 

 

 

145,944

 

 

 

8.37

 

  

 

   

 

   

 

 

Total

  $1,100,565   $49,558   $1,150,123 

 

$

1,061,597

 

 

$

26,878

 

 

$

1,088,475

 

 

 

2.47

 

  

 

   

 

   

 

 

December 31, 2018

(Dollars in thousands)

 

Performing

 

 

Nonperforming

 

 

Total

 

 

Percentage of

Nonperforming

to Total

 

Recreation

 

$

581,250

 

 

$

5,788

 

 

$

587,038

 

 

 

0.99

%

Home improvement

 

 

183,018

 

 

 

137

 

 

 

183,155

 

 

 

0.07

 

Commercial

 

 

60,249

 

 

 

3,834

 

 

 

64,083

 

 

 

5.98

 

Medallion

 

 

158,488

 

 

 

25,118

 

 

 

183,606

 

 

 

13.68

 

Total

 

$

983,005

 

 

$

34,877

 

 

$

1,017,882

 

 

 

3.43

%

Page 21 of 76


For those loans aged31-90 days, there is a possibility that their delinquency status will continue to deteriorate and they will subsequently be placed on nonaccrual status and be reserved for, and as such, deemed nonperforming.

The following table providestables provide additional information on attributes of the nonperforming loan portfolio as of June 30, 2019 and December 31, 2018, under Bank Holding Company Accounting.all of which had an allowance recorded against the principal balance.

 

June 30, 2018Three Months Ended June 30, 2018

(Dollars in  thousands)

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

With no allowance recorded

Recreation

$—  $—  $—  $—  $—  

Home improvement

—  —  —  —  —  

Commercial

—  —  —  —  —  

Medallion

—  —  —  —  

 

 

June 30, 2019

 

 

Three Months Ended

June 30, 2019

 

 

Six Months Ended

June 30, 2019

 

(Dollars in  thousands)

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

$

5,755

 

 

$

5,755

 

 

$

211

 

 

$

5,777

 

 

$

135

 

 

$

5,951

 

 

$

246

 

Home improvement

 

 

165

 

 

 

165

 

 

 

3

 

 

 

167

 

 

 

 

 

 

167

 

 

 

 

Commercial

 

 

8,743

 

 

 

8,838

 

 

 

455

 

 

 

6,656

 

 

 

30

 

 

 

5,776

 

 

 

73

 

Medallion

 

 

12,215

 

 

 

12,967

 

 

 

19,383

 

 

 

15,932

 

 

 

20

 

 

 

15,557

 

 

 

27

 

Total nonperforming loans with an allowance

 

$

26,878

 

 

$

27,725

 

 

$

20,052

 

 

$

28,532

 

 

$

185

 

 

$

27,451

 

 

$

346

 

 

 

December 31, 2018

 

 

June 30, 2018

 

 

Three Months Ended

June 30, 2018

 

(Dollars in  thousands)

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

 

Average

Investment

Recorded

 

 

Interest

Income

Recognized

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

$

5,788

 

 

$

5,788

 

 

$

204

 

 

$

4,171

 

 

$

4,171

 

 

$

145

 

 

$

5,577

 

 

$

125

 

Home improvement

 

 

137

 

 

 

137

 

 

 

3

 

 

 

117

 

 

 

117

 

 

 

2

 

 

 

116

 

 

 

 

Commercial

 

 

3,834

 

 

 

3,929

 

 

 

 

 

 

7,441

 

 

 

7,441

 

 

 

175

 

 

 

8,256

 

 

 

70

 

Medallion

 

 

25,118

 

 

 

26,237

 

 

 

22,035

 

 

 

37,829

 

 

 

37,829

 

 

 

12,069

 

 

 

55,213

 

 

 

114

 

Total nonperforming loans with

   allowance

 

$

34,877

 

 

$

36,091

 

 

$

22,242

 

 

$

49,558

 

 

$

49,558

 

 

$

12,391

 

 

$

69,162

 

 

$

309

 

 

Total with no allowance

$—  $—  $—  $—  $—  

Page 24 of 97


   June 30, 2018   Three Months Ended June 30, 2018 

(Dollars in  thousands)

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

With an allowance recorded

 

      

Recreation

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

Home improvement

   117    117    2    116    —   

Commercial

   7,441    7,441    175    8,256    70 

Medallion

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with allowance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

(Dollars in  thousands)

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

December 31, 2017

      

Medallion(3)

  $79,871   $82,612   $128,671 

Commercial(3)

   18,623    20,491    18,792 

June 30, 2017

      

Medallion(3)

  $112,327   $114,351   $124,084 

Commercial(3)

   9,714    17,403    9,904 

(1)

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

(2)

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

(3)

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

The following tables show the aging of all loans as of June 30, 20182019 and December 31, 2017:2018:

 

 

Days Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank Holding Company Accounting

  Days Past Due           Recorded
Investment >
90 Days and

Accruing
 

June 30, 2018

(Dollars in thousands)

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

June 30, 2019

(Dollars in thousands)

 

31-60

 

 

61-90

 

 

91 +

 

 

Total

 

 

Current

 

 

Total (1)

 

 

Recorded

Investment

90 Days and

Accruing

 

Recreation

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

 

$

16,482

 

 

$

5,286

 

 

$

3,613

 

 

$

25,381

 

 

$

620,882

 

 

$

646,263

 

 

$

 

Home improvement

   391    173    115    679    200,882    201,561    —   

 

 

672

 

 

 

216

 

 

 

165

 

 

 

1,053

 

 

 

211,451

 

 

 

212,504

 

 

 

 

Commercial

   492    —      215    707    79,398    80,105    —   

 

 

 

 

 

 

 

 

731

 

 

 

731

 

 

 

63,711

 

 

 

64,442

 

 

 

 

Medallion

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

 

 

18,024

 

 

 

3,098

 

 

 

3,746

 

 

 

24,868

 

 

 

116,122

 

 

 

140,990

 

 

 

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

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

 

$

35,178

 

 

$

8,600

 

 

$

8,255

 

 

$

52,033

 

 

$

1,012,166

 

 

$

1,064,199

 

 

$

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)

Excludes loan premiums of $12,378$6,875 resulting from purchase price accounting and $14,267$17,401 of capitalized loan origination costs.

 

Investment Company Accounting

  Days Past Due               Recorded
Investment >
90 Days and

Accruing
 

December 31, 2017

(Dollars in thousands)

  31-60   61-90   91 +   Total   Current   Total 

Medallion loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial loans

              

Secured mezzanine

   —      —      —      —      88,334    88,334    —   

 

 

Days Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

(Dollars in thousands)

 

31-60

 

 

61-90

 

 

91 +

 

 

Total

 

 

Current

 

 

Total (1)

 

 

Recorded

Investment >

90 Days and

Accruing

 

Recreation

 

$

18,483

 

 

$

5,655

 

 

$

4,020

 

 

$

28,158

 

 

$

539,051

 

 

$

567,209

 

 

$

 

Home improvement

 

 

715

 

 

 

283

 

 

 

135

 

 

 

1,133

 

 

 

184,528

 

 

 

185,661

 

 

 

 

Commercial

 

 

 

 

 

454

 

 

 

279

 

 

 

733

 

 

 

63,350

 

 

 

64,083

 

 

 

 

Medallion

 

 

8,689

 

 

 

3,652

 

 

 

15,720

 

 

 

28,061

 

 

 

148,774

 

 

 

176,835

 

 

 

 

Total

 

$

27,887

 

 

$

10,044

 

 

$

20,154

 

 

$

58,085

 

 

$

935,703

 

 

$

993,788

 

 

$

 

(1)

Excludes loan premiums of $9,047 resulting from purchase price accounting and $15,047 of capitalized loan origination costs.

Page 22 of 76


The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 210%, 220%, and 211% as of June 30, 2019, December 31, 2018, and June 30, 2018.

The following table shows the troubled debt restructurings which the Company entered into during the three months ended June 30, 2019.

 

(Dollars in  thousands)

 

Number of

Loans

 

 

Pre-

Modification

Investment

 

 

Post-

Modification

Investment

 

Medallion loans

 

 

3

 

 

$

842

 

 

$

842

 

Page 25

The following table shows the troubled debt restructurings which the Company entered into during the six months ended June 30, 2019.

(Dollars in  thousands)

 

Number of

Loans

 

 

Pre-

Modification

Investment

 

 

Post-

Modification

Investment

 

Medallion loans

 

 

10

 

 

$

3,737

 

 

$

3,737

 

During the twelve months ended June 30, 2019, five loans modified as troubled debt restructurings were in default and had an investment value of 97$1,530,000 as of June 30, 2019, net of a $912,000 allowance for loan losses.


Investment Company Accounting

  Days Past Due           Recorded
Investment >
90 Days and
Accruing
 

December 31, 2017

(Dollars in thousands)

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

Other secured commercial

   —       —       749    749    1,728    2,477    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

   —      —      749    749    90,062    90,811    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

(Dollars in thousands)

  Number of Loans   Pre-
Modification
Investment
   Post-
Modification
Investment
 

 

Number of

Loans

 

 

Pre-

Modification

Investment

 

 

Post-

Modification

Investment

 

Medallion loans

   7   $2,695   $2,695 

 

 

7

 

 

$

2,695

 

 

$

2,695

 

  

 

   

 

   

 

 

During the twelve months ended June 30, 2018, five loans modified as troubled debt restructurings were in default and had an investment value of $904,000 as of June 30, 2018.2018, net of a $6,000 allowance for loan losses.

The following table shows troubled debt restructuringstables show the activity of the loans in process of foreclosure, which relate only to the Company entered into duringrecreation and medallion loans, for the quarter ended June 30, 2017.

(Dollars in  thousands)

  Number of Loans   Pre-
Modification
Investment
   Post-
Modification
Investment
 

Medallion loans

   12   $8,249   $8,175 
  

 

 

   

 

 

   

 

 

 

The following table shows troubled debt restructurings which the Company entered into during thethree and six months ended June 30, 2017.2019.

 

(Dollars in  thousands)

  Number of Loans   Pre-
Modification
Investment
   Post-
Modification
Investment
 

Medallion loans

   47   $31,911   $31,837 
  

 

 

   

 

 

   

 

 

 

Commercial loans

   2    6,547    6,547 
  

 

 

   

 

 

   

 

 

 

Total

   49   $38,458   $38,384 
  

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loans in process of foreclosure – March 31, 2019

 

$

1,180

 

 

$

48,628

 

 

$

49,808

 

Transfer from loans, net

 

 

3,491

 

 

 

6,863

 

 

 

10,354

 

Sales

 

 

(2,034

)

 

 

(175

)

 

 

(2,209

)

Cash payments received

 

 

 

 

 

(1,931

)

 

 

(1,931

)

Collateral valuation adjustments

 

 

(1,682

)

 

 

(1,972

)

 

 

(3,654

)

Loans in process of foreclosure – June 30, 2019

 

$

955

 

 

$

51,413

 

 

$

52,368

 

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

Six Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loans in process of foreclosure – December 31, 2018

 

$

1,503

 

 

$

47,992

 

 

$

49,495

 

Transfer from loans, net

 

 

6,883

 

 

 

12,568

 

 

 

19,451

 

Sales

 

 

(4,111

)

 

 

(551

)

 

 

(4,662

)

Cash payments received

 

 

 

 

 

(4,505

)

 

 

(4,505

)

Collateral valuation adjustments

 

 

(3,320

)

 

 

(4,091

)

 

 

(7,411

)

Loans in process of foreclosure – June 30, 2019

 

$

955

 

 

$

51,413

 

 

$

52,368

 

 

Page 2623 of 9776



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

The following table sets forth thepre-tax change in the Company’s unrealized appreciation (depreciation) on investments under Investment Company Accounting for the three months ended March 31, 2018 and the three and six months ended June 30, 2017.2018.

 

(Dollars in thousands)

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

 

Medallion

Loans

 

 

Commercial

Loans

 

 

Investments in

Subsidiaries

 

 

Equity

Investments

 

 

Investments

Other

Than Securities

 

 

Total

 

Balance December 31, 2017

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

 

$

(20,338

)

 

$

(513

)

 

$

158,920

 

 

$

3,121

 

 

$

(1,490

)

 

$

139,700

 

Net change in unrealized

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appreciation on investments

   —     —    38,795    (998  —    37,797 

 

 

 

 

 

 

 

 

38,795

 

 

 

(998

)

 

 

 

 

 

37,797

 

Depreciation on investments

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

 

 

(38,170

)

 

 

18

 

 

 

 

 

 

 

 

 

(1,915

)

 

 

(40,067

)

Reversal of unrealized appreciation (depreciation) related to realized

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains on investments

   —     —     —      —     —     —   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses on investments

   34,747   —     —      —     —    34,747 

 

 

34,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34,747

 

  

 

  

 

  

 

   

 

  

 

  

 

 

Balance March 31, 2018

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

 

$

(23,761

)

 

$

(495

)

 

$

197,715

 

 

$

2,123

 

 

$

(3,405

)

 

$

172,177

 

  

 

  

 

  

 

   

 

  

 

  

 

 

 

(Dollars in thousands)

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

Balance December 31, 2016

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

Net change in unrealized

          

Appreciation on investments

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

Depreciation on investments

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

Reversal of unrealized

appreciation (depreciation) related to realized

          

Gains on investments

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

Losses on investments

   825   —     —     486   —      —      1,311 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Balance March 31, 2017

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

Net change in unrealized

          

Appreciation on investments

   —     —     (771  120   —      —      (651

Depreciation on investments

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

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

   —     —     —     —     —      —      —   

Losses on investments

   337   636   —     —     —      —      973 

Other

   —     —     —     —     —      —      —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Balance June 30, 2017

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

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

(Dollars in thousands)

 

Three Months

Ended

March 31, 2018

 

Net change in unrealized appreciation (depreciation) on

   investments

 

 

 

 

Unrealized appreciation

 

$

(998

)

Unrealized depreciation

 

 

(38,152

)

Net unrealized appreciation on investments in Medallion

   Bank and other controlled subsidiaries

 

 

29,115

 

Realized gains

 

 

 

Realized losses

 

 

34,747

 

Net unrealized losses on investments other than securities and

   other assets

 

 

(1,915

)

Total

 

$

22,797

 

Net realized gains (losses) on investments

 

 

 

 

Realized gains

 

$

 

Realized losses

 

 

(34,747

)

Direct recoveries

 

 

2

 

Total

 

$

(34,745

)

 

Page 2724 of 9776


   Three Months Ended    

(Dollars in thousands)

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

Net change in unrealized appreciation (depreciation) on investments

    

Unrealized appreciation

  ($998 $235  $1,493 

Unrealized depreciation

   (38,152  (12,659  (21,661

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

   29,115   930   9,054 

Realized gains

   —     —     (2,090

Realized losses

   34,747   974   2,285 

Net unrealized losses on investments other than securities and other assets

   (1,915  —     —   
  

 

 

  

 

 

  

 

 

 

Total

  $22,797  $(10,520 $(10,919
  

 

 

  

 

 

  

 

 

 

Net realized gains (losses) on investments

    

Realized gains

  $—    $1  $2,091 

Realized losses

   (34,747  (974  (2,285

Other gains

   —     2,958   3,002 

Direct recoveries

   2   11   33 

Realized gains on investments other than securities and other assets

   —     —     —   
  

 

 

  

 

 

  

 

 

 

Total

  ($34,745 $1,996  $2,841 
  

 

 

  

 

 

  

 

 

 

 

Page 28 of 97


(6) INVESTMENTS IN MEDALLION BANK AND OTHER CONTROLLED SUBSIDIARIES (Investment Company Accounting)

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

The following table presents information derived from Medallionthe Bank’s statement of comprehensive income and other valuation adjustments on other controlled subsidiaries for the three and six months ended June 30, 2017.March 31, 2018 under Investment Company Accounting.

 

(Dollars in thousands)

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

 

Three Months

Ended

March 31, 2018

 

Statement of comprehensive income

    

 

 

 

 

Investment income

  $26,660   $52,989 

 

$

26,880

 

Interest expense

   3,186    6,293 

 

 

3,615

 

  

 

   

 

 

Net interest income

   23,474    46,696 

 

 

23,265

 

Noninterest income

   37    72 

 

 

19

 

Operating expenses

   6,650    12,700 

 

 

7,158

 

  

 

   

 

 

Net investment income before income taxes

   16,861    34,068 

 

 

16,126

 

Income tax (provision)

   (1,638   (4,095
  

 

   

 

 

Income tax benefit

 

 

3,321

 

Net investment income after income taxes

   15,223    29,973 

 

 

19,447

 

Net realized/unrealized losses of Medallion Bank

   (13,306   (23,728

 

 

(28,539

)

  

 

   

 

 

Net increase in net assets resulting from operations of Medallion Bank

   1,917    6,245 

Unrealized depreciation on Medallion Bank (1)

   (592   (620

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

   (395   3,429 
  

 

   

 

 

Net decrease in net assets resulting from operations of

Medallion Bank

 

 

(9,092

)

Unrealized appreciation on Medallion Bank(1)

 

 

39,092

 

Net realized/unrealized losses on controlled subsidiaries

other than Medallion Bank

 

 

(885

)

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

  $930   $9,054 

 

$

29,115

 

  

 

   

 

 

 

(1)

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

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

(Dollars in  thousands)

  December 31,
2017
 

Loans

  $864,819 

Investment securities, at fair value

   43,478 
  

 

 

 

Net investments

   908,297 

Cash

   110,233 

Other assets, net

   58,827 
  

 

 

 

Total assets

  $1,077,357 
  

 

 

 

Other liabilities

  $3,836 

Due to affiliates

   1,055 

Deposits and other borrowings, including accrued interest payable

   908,236 
  

 

 

 

Total liabilities

   913,127 

Medallion Bank equity(2)

   164,230 
  

 

 

 

Total liabilities and equity

  $1,077,357 
  

 

 

 

Investment in other controlled subsidiaries

  $11,449 

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

  $302,147 
  

 

 

 

(1)

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

(2)

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

Page 29 of 97


(7) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows:

 

  Payments Due for the Fiscal Year Ending June 30,   

Bank
Holding
Company
Accounting

June 30,

   Investment
Company
Accounting
December 31,
   Interest 

 

Payments Due for the Twelve Months Ending June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

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

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

 

June 30,

2019

 

 

December 31,

2018

 

 

Interest

Rate (1)

 

Deposits

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

 

$

330,902

 

 

$

183,873

 

 

$

229,929

 

 

$

97,811

 

 

$

85,143

 

 

$

 

 

$

927,658

 

 

$

848,040

 

 

 

2.36

%

DZ loan

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

SBA debentures and borrowings

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

 

 

24,452

 

 

 

8,500

 

 

 

 

 

5,000

 

 

 

2,500

 

 

 

35,000

 

 

 

75,452

 

 

 

80,099

 

 

 

3.41

%

Retail and privately placed

notes

 

 

 

 

33,625

 

 

 

 

 

 

 

 

30,000

 

 

 

 

 

63,625

 

 

 

33,625

 

 

 

8.65

%

Notes payable to banks

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

 

 

14,523

 

 

 

32,665

 

 

 

280

 

 

 

280

 

 

 

140

 

 

 

 

 

47,888

 

 

 

59,615

 

 

 

4.78

%

Retail notes

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

Preferred securities

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

 

 

 

 

 

 

 

 

 

 

 

 

33,000

 

 

 

33,000

 

 

 

33,000

 

 

 

4.60

%

Other borrowings

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

 

 

7,713

 

 

 

 

 

 

 

 

 

 

 

 

 

7,713

 

 

 

7,649

 

 

 

2.00

%

  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

Total

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

 

$

377,590

 

 

$

258,663

 

 

$

230,209

 

 

$

103,091

 

 

$

117,783

 

 

$

68,000

 

 

$

1,155,336

 

 

$

1,062,028

 

 

 

2.94

%

  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

(1)

Weighted average contractual rate as of June 30, 2018.2019.

Page 25 of 76


(A) DEPOSITS

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

 

(Dollars in thousands)

  June 30, 2018 

 

June 30, 2019

 

Three months or less

  $109,148 

 

$

116,138

 

Over three months to six months

   65,750 

Over three months through six months

 

 

59,460

 

Over six months through one year

   155,392 

 

 

155,304

 

Over one year

   566,112 

 

 

596,756

 

  

 

 

Total deposits

  $896,402 

 

$

927,658

 

  

 

 

(B) DZ LOAN

In December 2008, Trust III entered into athe DZ loan agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC (DZ loan), which was extended in December 2013 until December 2016 through an amended and restated credit agreement, which has been further extended several times and currently terminates in December 2018.September 2019. The line was reduced to $150,000,000, and was further reduced in stages to $125,000,000 on July 1, 2016, and remainsremained as an amortizing facility with $96,925,000 outstanding at June 30,and was restructured during the fourth quarter of 2018. During 2017 and 2018, the DZ loan was amended several times, for the most part to improve Trust III’s flexibility under the credit facility. Also, see Note 7(H) below.

Borrowings under Trust III’s DZ loan are collateralized by Trust III’s assets. MFC is the servicer of the loans owned by Trust III. The DZ loan includes a borrowing base covenant and rapid amortization in certain circumstances. In addition, if certain financial tests are not met, MFC can be replaced as the servicer. The interest rate withSee Note 19 for more information about Trust III and the 2013 extension is a pooled short-term commercial paper rate which approximates LIBOR (30 day LIBOR was 2.09% at June 30, 2018) plus 1.65%.

DZ loan.

Page 30 of 97


(C) SBA DEBENTURES AND BORROWINGS

Over the years, the SBA has approved commitments for MCI and FSVC, typically for a four and half year term and a 1% fee, which was paid. During 2017, the SBA restructured FSVC’s debentures with SBA totaling $33,485,000 in principal into a new loan by the SBA to FSVC in the principal amount of $34,024,756 (the SBA Loan). In connection with the SBA Loan, FSVC executed a Note (the SBA Note), with an effective date of March 1, 2017, in favor of SBA, in the principal amount of $34,024,756. The SBA Loan bears interest at a rate of 3.25% per annum, required a minimum of $5,000,000 of principal and interest to be paid on or before February 1, 2018 (which was paid), and requires a minimum of $10,000,000$7,600,000 of principal and interest to be paid on or before February 1,March 27, 2019 (which was paid), and all remaining unpaid principal and interest on or before February 1, 2020, the final maturity date. The SBA Loan agreement contains covenants and events of defaults, including, without limitation, payment defaults, breaches of representations and warranties and covenants defaults. As of June 30, 2018, $169,985,0002019, $172,485,000 of commitments had been fully utilized, there were $5,500,000$3,000,000 of commitments available, and $78,097,000$75,452,000 was outstanding, including $29,597,000$24,452,000 under the SBA Note.

(D) NOTES PAYABLE TO BANKS

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

Page 26 of 76


The table below summarizes the key attributes of the Company’s various borrowing arrangements with these lenders as of June 30, 2018.2019.

 

(Dollars in thousands)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower

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

 

# of

Lenders/

Notes

 

Note

Dates

 

Maturity

Dates

 

Type

 

Note

Amounts

 

 

 

Balance

Outstanding

at June 30,

2019

 

 

Monthly

Payment

 

Average

Interest

Rate at

June 30,

2019

 

 

Interest

Rate

Index(1)

The Company

 6/6  4/11 - 8/14  7/18 - 8/19   





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

 

6/6

 

4/11 - 8/14

 

7/19 - 3/21

 

Term loans

and demand

notes secured

by pledged

loans (2)

 

$

35,096

 

(2)

 

$

35,096

 

 

Interest

only(3)

 

 

5.23

%

 

Various(3)

Medallion Chicago

 3/28  11/11 - 12/11  10/16 - 6/19   




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

 
 3.34%  N/A 

 

2/23

 

11/11 - 12/11

 

2/21

 

Term loans

secured by

owned

Chicago

medallions(4)

 

 

18,449

 

 

 

 

11,532

 

 

$134 of

principal &

interest

 

 

3.50

%

 

N/A

Medallion Funding

 

1/1

 

11/18

 

12/23

 

 

 

 

1,260

 

 

 

 

1,260

 

 

$70

principal &

interest

paid

quarterly

 

 

4.00

%

 

N/A

     

 

  

 

    

 

 

 

 

 

 

 

 

 

$

54,805

 

 

 

$

47,888

 

 

 

 

 

 

 

 

 

     $76,925  $72,715    
     

 

  

 

    

 

(1)

At June 30, 2018,2019, 30 day LIBOR was 2.09%2.40%, 360 day LIBOR was 2.76%2.18%, and the prime rate was 5.00%5.50%.

(2)

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

(3)

Various agreements call for remittance of all principal received on pledged loans subject to minimum monthly payments ranging from $0$12 to $75.$81.

(4)

$12,708 guaranteedGuaranteed by the Company.

In March 2019, the Company used some of the proceeds of the privately placed notes to pay off one of the notes payable to banks at a 50% discount, resulting in a gain on debt extinguishment of $4,145,000 in the 2019 first quarter.

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. See Note 19 for more information.

(E) RETAIL AND PRIVATELY PLACED NOTES

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 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.

Page 27 of 76


(F) PREFERRED SECURITIES

In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bear a variable rate of interest of 90 day LIBOR (2.34%(2.32% at June 30, 2018)2019) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor. At June 30, 2018,2019, $33,000,000 was outstanding on the preferred securities.

Page 31 of 97


(G) OTHER BORROWINGS

In November and December 2017, RPAC amended the terms of various promissory notes with affiliate Richard Petty (refer to Note 1315 for more details). At December 31, 2017,2018, the total outstanding on these notes was $7,007,894$7,149,000 at a 2.00% annual interest rate compounded monthly and due March 31, 2020. As of June 30, 2018, $7,078,0002019, $7,213,000 was outstanding on these notes. Additionally, RPAC has a short term promissory note to Travis Burt, an unrelated party for $500,000 due on December 31, 2018.2019.

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

(H) COVENANT COMPLIANCE

Certain of the Company’sour debt agreements contain restrictions that require the Company and its subsidiaries to maintain certain financial ratios, including debt to equity and minimum net worth. worth, which in the event of noncompliance could preclude their ability to pay dividends to the Company.

(8) LEASES

The Company was nothas leased premises that expire at various dates through April 30, 2027 that are operating leases. The Company has implemented ASC Topic 842 under a modified retrospective approach in compliance with a financial covenant inwhich no adjustments have been made to the DZ loan agreementprior year balances.

The following table presents the operating lease costs and additional information for the three and six months ended June 30, 2019.

(Dollars in thousands)

 

Three Months

Ended

June 30, 2019

 

 

Six Months

Ended

June 30, 2019

 

Operating lease costs

 

$

531

 

 

$

1,062

 

Other information

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease

   liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

537

 

 

 

1,124

 

Right-of-use asset obtained in exchange for lease liability

 

 

(14

)

 

 

(30

)

The following table presents the breakout of the operating leases as of June 30, 2018. The Company is currently in the process2019.

(Dollars in thousands)

 

June 30, 2019

 

Operating lease right-of-use assets

 

$

11,767

 

Other current liabilities

 

 

1,872

 

Operating lease liabilities

 

 

11,273

 

Total operating lease liabilities

 

 

13,145

 

Weighted average remaining lease term

 

4 years

 

Weighted average discount rate

 

 

4.26

 

Page 28 of working with DZ Bank to amend such covenant in the DZ loan agreement. Historically the Company has received approvals for similar amendments. While there can be no assurance that it will be received, the Company has received preliminary indication from DZ Bank that it will obtain approval for such an amendment. Except as previously set forth, the Company is in compliance with such restrictions as of76


At June 30, 2018.2019, maturities of the lease liabilities were as follows.

(8)

(Dollars in thousands)

 

 

 

 

Remainder of 2019

 

$

1,180

 

2020

 

 

2,380

 

2021

 

 

2,278

 

2022

 

 

2,216

 

2023

 

 

2,136

 

Thereafter

 

 

6,049

 

Total lease payments

 

$

16,239

 

Less imputed interest

 

 

3,094

 

Total operating lease liabilities

 

$

13,145

 

(9) INCOME TAXES

The Company is subject to federal and applicable state corporate income taxes on its taxable ordinary income and capital gains. As a corporation taxed under Subchapter C of the Internal Revenue Code, the Company is able, and intends, to file a consolidated federal income tax return with corporate subsidiaries, in which it holds 80 percent80% or more of the outstanding equity interest measured by both vote and fair value.

The following table sets forth the significant components of our deferred and other tax assets and liabilities as of June 30, 20182019 and December 31, 2017.2018.

 

(Dollars in  thousands)

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

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

  ($46,089  ($35,297

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

   31,152    10,071 

Net operating loss carryforwards(1)

   2,133    615 

Unrealized gains on investments in other controlled subsidiaries

   —      (3,617

Unrealized gains on investments other than securities

   —      (1,395

Accrued expenses, compensation, and other

   1,218    782 

Unrealized gains on investments and other assets

   (3,958   (542
  

 

 

   

 

 

 

Total deferred tax liability

   (15,544   (29,383

Valuation allowance

   (108   (39
  

 

 

   

 

 

 

Deferred tax liability, net

   (15,652   (29,422

Taxes receivable

   19,112    16,886 
  

 

 

   

 

 

 

Net deferred and other tax assets (liabilities)

  $3,460   ($12,536
  

 

 

   

 

 

 

(Dollars in thousands)

 

June 30,

2019

 

 

December 31,

2018

 

Goodwill and other intangibles

 

$

(44,574

)

 

$

(45,272

)

Provision for loan losses

 

 

20,743

 

 

 

25,790

 

Net operating loss carryforwards(1)

 

 

19,464

 

 

 

11,132

 

Accrued expenses, compensation, and other assets

 

 

1,374

 

 

 

1,844

 

Unrealized gains on other investments

 

 

(3,399

)

 

 

(2,024

)

Total deferred tax liability

 

 

(6,392

)

 

 

(8,530

)

Valuation allowance

 

 

(223

)

 

 

(255

)

Deferred tax liability, net

 

 

(6,615

)

 

 

(8,785

)

Taxes receivable

 

 

1,203

 

 

 

1,812

 

Net deferred and other tax liabilities

 

$

(5,412

)

 

$

(6,973

)

 

(1)

As of June 30, 2018,2019, the Company and its subsidiaries had $11,148an estimated $77,535 of net operating loss carryforwards, that$1,712 of which expire at various dates between December 31, 2026 and December 31, 2035.2035, which had a net asset value of $19,241 as of June 30, 2019.

The components of our tax benefit for the three and six months ended June 30, 20182019 and 20172018 were as follows.

 

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

(Dollars in thousands)

  2018   2017   2018   2017 

Current

        

Federal

  $418   $780   $6,313   $1,549 

State

   58    185    1,240    363 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

 

 

$

418

 

 

$

(869

)

 

$

6,313

 

State

 

 

(136

)

 

 

58

 

 

 

(959

)

 

 

1,240

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

1,588

 

 

 

2,919

 

 

 

2,198

 

 

 

(972

)

State

 

 

383

 

 

 

626

 

 

 

1,721

 

 

 

(1,920

)

Net benefit for income taxes

 

$

1,835

 

 

$

4,021

 

 

$

2,091

 

 

$

4,661

 

 

Page 3229 of 9776



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

(Dollars in thousands)

  2018   2017   2018   2017 

Deferred

        

Federal

   2,919    4,785    (972   5,666 

State

   626    1,268    (1,920   1,412 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit for income taxes

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

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents a reconciliation of statutory federal income tax benefit to consolidated actual income tax benefit reported in net income/loss/net increasedecrease in net assets for the three and six months ended June 30, 20182019 and 2017.2018.

 

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

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in thousands)

  2018   2017   2018   2017 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

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

  $3,971   $4,135   $7,229   $4,437 

Statutory Federal Income tax benefit at 21%

 

$

1,663

 

 

$

3,971

 

 

$

1,284

 

 

$

7,229

 

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

   598    652    1,101    699 

 

 

194

 

 

 

598

 

 

 

87

 

 

 

1,101

 

Appreciation of Medallion Bank

   —      537    (1,974   2,061 

 

 

 

 

 

 

 

 

 

 

 

(1,974

)

Utilization of carry forwards

   (663   1,338    (663   2,256 

 

 

 

 

 

(663

)

 

 

 

 

 

(663

)

Change in state income tax accruals

 

 

 

 

 

 

 

 

686

 

 

 

 

Change in effective state income tax rate

   —      —      (1,358   —   

 

 

 

 

 

 

 

 

 

 

 

(1,358

)

Other

   115    356    326    (463

 

 

(22

)

 

 

115

 

 

 

34

 

 

 

326

 

  

 

   

 

   

 

   

 

 

Total income tax benefit

  $4,021   $7,018   $4,661   $8,990 

 

$

1,835

 

 

$

4,021

 

 

$

2,091

 

 

$

4,661

 

  

 

   

 

   

 

   

 

 

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

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible pursuant to ASC 740. The Company considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company’s evaluation of the realizability of deferred tax assets must consider both positive and negative evidence. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. Based upon these considerations, the Company has determined the necessary valuation allowance as of June 30, 2018.2019.

The Company has filed tax returns in many states. Federal, New York State, New York City, and Utah tax filings of the Company for the tax years 20142015 through the present are the more significant filings that are open for examination. Currently the Company and the Bank are undergoing various state exams covering the years 2009 to 2011 and 2013 to 2016.

(9)(10) STOCK OPTIONS AND RESTRICTED STOCK

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

The Company’s Board of Directors approved the 2018 Equity Incentive Plan (2018 Plan), which was approved by the Company’s shareholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to the Company’s employees and non-employee directors, including options, restricted stock, stock appreciation rights, etc. A total of 1,494,5581,500,253 shares of the Company’s common stock are issuable under the 2018 Plan, and 1,470,558917,173 remained issuable as of June 30, 2018.2019. Awards under the 2018 Plan are subject to certain limitations as set forth in the 2018 Plan, which will terminate when all shares of common stock authorized for delivery have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2018 Plan, whichever first occurs.

The Company’s Board of Directors approved the 2015 Employee Restricted Stock Plan (2015 Restricted Stock Plan) on February 13, 2015, which was approved by the Company’s shareholders on June 5, 2015. The 2015 Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC on March 1, 2016. The terms of 2015 Restricted Stock Plan 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

Page 33 of 97


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 236,224241,919 remained issuable as of June 15, 2018. Effective June 15, 2018, the 2018 Plan was approved, and these remaining shares were rolled into the 2018 Plan. Awards under the 2015 Restricted Stock Plan are subject to certain limitations as set forth in the 2015 Restricted Stock Plan. The 2015 Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the 2015 Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2015 Restricted Stock Plan, whichever first occurs.

Page 30 of 76


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

The Company’s Board of Directors approved the 2015Non-Employee Director Stock Option Plan (2015 Director Plan) on March 12, 2015, which was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on February 29, 2016. A total of 300,000 shares of the Company’s common stock arewere issuable under the 2015 Director Plan, and 258,334 remained issuable as of 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.

The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan (the Amended Director Plan) on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock were issuable under the Amended Director Plan. No additional shares are available for issuance under the Amended Director Plan. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company 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.

Additional shares are only available for future issuance under the 2018 Plan. At June 30, 2018, 129,6662019, 498,714 options on the Company’s common stock were outstanding under the 2006 Stock Option Plan, and 2015 Director Plan,Company’s plans, of which 76,00077,889 options were exercisable, and there were 208,008237,878 unvested shares of the Company’s common stock outstanding under the 2015 Restricted Stock Plan.Company’s restricted stock plans.

The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of options granted was $2.98 per share for the six months ended June 30, 2019, and there were no options granted during the six months ended June 30, 2018. The following assumption categories are used to determine the value of any option grants.

 

  Six Months Ended June 30, 

 

Six Months Ended June 30,

 

  2018 2017 

 

2019

 

 

2018

 

Risk free interest rate

   2.82 1.84

 

 

2.39

%

 

 

2.82

%

Expected dividend yield

   4.86  7.39 

 

 

0.79

 

 

 

4.86

 

Expected life of option in years(1)

   6.00  6.00 

 

 

6.25

 

 

 

6.00

 

Expected volatility(2)

   30.00  30.00 

 

 

48.45

 

 

 

30.00

 

 

(1)

Expected life is calculated using the simplified method.

(2)

We determine our expected volatility based on our historical volatility.

Page 31 of 76


The following table presents the activity for the stock option programs for the 20182019 quarters and the 20172018 full year.

 

   Number of Options   Exercise
Price Per
Share
   Weighted
Average
Exercise Price
 

Outstanding at December 31, 2016

   345,518   $7.10-13.84   $9.67 

Granted

   29,666    2.14-2.61   2.35 

Cancelled

   (54,558   10.76-11.21    10.94 

Exercised (1)

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Outstanding at December 31, 2017

   320,626    2.14-13.84    8.78 

 

 

Number of

Options

 

 

 

Exercise

Price Per

Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2017

 

 

320,626

 

 

$

2.14-13.84

 

 

$

8.78

 

Granted

 

 

39,000

 

 

 

5.27-5.58

 

 

 

5.46

 

Cancelled

 

 

(214,960

)

 

 

9.22-9.24

 

 

 

9.22

 

Exercised(1)

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2018

 

 

144,666

 

 

 

2.06-13.84

 

 

 

7.23

 

Granted

 

 

374,377

 

 

 

5.21-6.55

 

 

 

6.48

 

Cancelled

 

 

(18,000

)

 

 

7.49-9.38

 

 

 

8.44

 

Exercised(1)

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

 

501,043

 

 

 

2.14-13.84

 

 

 

6.63

 

Granted

 

 

1,104

 

 

 

 

6.55

 

 

 

6.55

 

Cancelled

 

 

(3,433

)

 

 

6.55-7.49

 

 

 

7.10

 

Exercised(1)

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2019(2)

 

 

498,714

 

 

$

2.14-13.84

 

 

$

6.62

 

Options exercisable at June 30, 2019(2)

 

 

77,889

 

 

$

2.14-13.84

 

 

$

8.63

 

 

Page 34 of 97


   Number of Options   Exercise
Price Per
Share
   Weighted
Average
Exercise Price
 

Granted

   —      —      —   

Cancelled

   —      —      —   

Exercised(1)

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Outstanding at March 31, 2018

   320,626    2.14-13.84    8.78 

Granted

   24,000    5.58    5.58 

Cancelled

   (214,960   9.22-9.24    9.22 

Exercised(1)

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Outstanding at June 30, 2018(2)

   129,666   $2.14-13.84   $7.45 

Options exercisable at June 30, 2018(2)

   76,000   $2.22-13.84   $9.78 
  

 

 

   

 

 

   

 

 

 

(1)

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at the exercise date and the related exercise price of the underlying options, was $0 for each of the 2019 and $0 for the 2018 and 2017 second quarter and six months.

(2)

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at June 30, 20182019 and the related exercise price of the underlying options, was $93,000$277,000 for outstanding options and $13,000$71,000 for exercisable options as of June 30, 2018.2019. The remaining contractual life was 7.179.06 years for outstanding options and 5.596.11 years for exercisable options at June 30, 2018.2019.

The following table presents the activity for the restricted stock programs for the 20182019 quarters and the 20172018 full year.

 

  Number of Shares   Exercise
Price Per
Share
   Weighted
Average
Exercise Price
 

Outstanding at December 31, 2016

   167,703   $3.95-13.46   $8.88 

Granted

   327,251    2.06-3.93    2.48 

Cancelled

   (8,988   2.14-10.08    3.07 

Vested(1)

   (77,384   9.08-13.46    11.09 
  

 

   

 

   

 

 

 

Number of

Shares

 

 

 

Exercise

Price Per

Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2017

   408,582    2.06-10.38    3.45 

 

 

408,582

 

 

$

2.06-10.38

 

 

$

3.45

 

Granted

   97,952    4.39    4.39 

 

 

101,010

 

 

3.93-5.27

 

 

 

4.41

 

Cancelled

   (2,226   3.93-9.08    5.86 

 

 

(9,737

)

 

3.93-9.08

 

 

 

4.66

 

Vested(1)

   (296,313   2.06-10.38    3.24 

 

 

(308,940

)

 

 

2.06-10.38

 

 

 

3.35

 

  

 

   

 

   

 

 

Outstanding at March 31, 2018

   207,995    2.06-7.98    4.16 

Outstanding at December 31, 2018

 

 

190,915

 

 

 

2.14-5.27

 

 

 

4.06

 

Granted

   212    3.93    3.93 

 

 

163,098

 

 

 

6.55

 

 

 

6.55

 

Cancelled

   (199   3.93    3.93 

 

 

(1,699

)

 

3.93-3.95

 

 

 

3.94

 

Vested(1)

   —      —      —   

 

 

(101,832

)

 

 

3.93-4.39

 

 

 

4.07

 

  

 

   

 

   

 

 

Outstanding at June 30, 2018(2)

   208,008   $2.06-13.84   $7.45 
  

 

   

 

   

 

 

Outstanding at March 31, 2019

 

 

250,482

 

 

 

2.14-6.55

 

 

 

5.68

 

Granted

 

 

4,751

 

��

 

6.55-7.03

 

 

 

6.98

 

Cancelled

 

 

(949

)

 

3.95-6.55

 

 

 

6.40

 

Vested(1)

 

 

(16,406

)

 

 

2.06-7.03

 

 

 

3.35

 

Outstanding at June 30, 2019(2)

 

 

237,878

 

 

$

3.95-6.55

 

 

$

5.86

 

 

(1)

The aggregate fair value of the restricted stock vested was $0$113,000 and $1,209,000$736,000 for the three and six months ended June 30, 2018,2019, and was $15,000$0 and $151,000$1,209,000 for the comparable 20172018 periods.

(2)

The aggregate fair value of the restricted stock was $1,140,000$1,603,000 as of June 30, 2018.2019. The remaining vesting period was 1.752.67 years at June 30, 2018.2019.

Page 32 of 76


The following table presents the activity for the unvested options outstanding under the plans for the quarter ended June 30, 2018.2019 quarters.

 

   Number of
Options
   Exercise Price
Per Share
   Weighted Average Exercise
Price
 

Outstanding at December 31, 2017 and March 31, 2018

   46,666   $2.14-9.38   $4.52 

Granted

   24,000    5.58    5.58

Cancelled

   —      —      —   

Vested

   (17,000   2.22-9.38    7.16
  

 

 

   

 

 

   

 

 

 

Outstanding at June 30, 2018

   53,666   $2.14-7.10   $4.16 
  

 

 

   

 

 

   

 

 

 

 

 

Number of

Options

 

 

 

Exercise Price

Per Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2018

 

 

62,777

 

 

$

2.14-7.10

 

 

$

4.59

 

Granted

 

 

374,377

 

 

 

5.21-6.55

 

 

 

6.48

 

Cancelled

 

 

 

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

 

437,154

 

 

 

2.14-7.10

 

 

 

6.21

 

Granted

 

 

1,104

 

 

 

 

6.55

 

 

 

6.55

 

Cancelled

 

 

(1,433

)

 

 

 

6.55

 

 

 

6.55

 

Vested

 

 

(16,000

)

 

 

2.22-7.10

 

 

 

5.12

 

Outstanding at June 30, 2019

 

 

420,825

 

 

$

2.14-6.55

 

 

$

6.25

 

 

Page 35 of 97


The intrinsic value of the options vested was $14,000$26,000 for each of the three and six months ended June 30, 2018.2019.

(10)(11) SEGMENT REPORTING (Bank Holding Company Accounting)

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

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

The four lending segments reflect the main types of lending performed at the Company, which are recreation, home improvement, commercial, and medallion. The recreation and home improvement lending segments are conducted by the Bank in all fifty states, with the highest concentrations in Texas, California, and Florida at 17%16%, 11%10%, and 11%10% of loans outstanding and with no other states over 10%. as of June 30, 2019. 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.equipment, of which RVs, boats, and trailers make up 62%, 19%, and 11% of the segment portfolio as of June 30, 2019. The home improvement lending segment works with contractors and financial service providers to finance residential home improvements concentrated in swimming pools, roofs, solar panels, and roofing,windows, at 38%26%, 15%18%, 11%14%, and 12% of total home improvement loans outstanding, and with no other product lines over 10%. as of June 30, 2019. The commercial lending segment focuses on enterprise wide industries, including manufacturing retail trade, information, recreationservices, and various other industries, in which 47%59% of these loans are made in the Midwest. The medallion lending segment arose in connection with the financing of the taxicab medallions, taxicabs, and related assets, of which 88% were in New York City as of June 30, 2018.2019.

In addition, ournon-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 part of the 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 for the three and six months ended June 30, 2019. In addition, in the current quarter the commercial segment exclusively represents the mezzanine lending business, and the legacy commercial loan business (immaterial to total) has been re-allocated to corporate and other investments for all periods presented.

Page 33 of 76


The following table presentstables present segment data atas of June 30, 2019 and for the three and six months then ended, and as of June 30, 2018, and for the three months then ended.

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

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

Three Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

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

 

$

24,370

 

 

$

4,678

 

 

$

1,641

 

 

$

666

 

 

$

 

 

$

660

 

 

$

32,015

 

Total interest expense

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

 

 

3,189

 

 

 

1,037

 

 

 

666

 

 

 

1,591

 

 

 

36

 

 

 

2,302

 

 

 

8,821

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net interest income (loss)

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

 

 

21,181

 

 

 

3,641

 

 

 

975

 

 

 

(925

)

 

 

(36

)

 

 

(1,642

)

 

 

23,194

 

Provision for loan losses

   4,710  877  175  24,814        30,576 

 

 

6,176

 

 

 

813

 

 

 

 

 

 

8,182

 

 

 

 

 

 

 

 

 

15,171

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net interest income after loss provision

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

Sponsorship and race winning

   —     —     —     —    5,228   —    5,228 

Net interest income (loss)

after loss provision

 

 

15,005

 

 

 

2,828

 

 

 

975

 

 

 

(9,107

)

 

 

(36

)

 

 

(1,642

)

 

 

8,023

 

Sponsorship and race winnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,889

 

 

 

 

 

 

4,889

 

Race team related expenses

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,550

)

 

 

 

 

 

(2,550

)

Other income (expense)

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

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net income before taxes

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

Other (expense)

 

 

(5,938

)

 

 

(1,719

)

 

 

(780

)

 

 

(6,558

)

 

 

(1,717

)

 

 

(2,128

)

 

 

(18,840

)

Net income (loss) before taxes

 

 

9,067

 

 

 

1,109

 

 

 

195

 

 

 

(15,665

)

 

 

586

 

 

 

(3,770

)

 

 

(8,478

)

Income tax benefit (provision)

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

 

 

(2,349

)

 

 

(288

)

 

 

(48

)

 

 

3,779

 

 

 

(141

)

 

 

882

 

 

 

1,835

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net Income (loss) after tax

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

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net income (loss) after tax

 

$

6,718

 

 

$

821

 

 

$

147

 

 

$

(11,886

)

 

$

445

 

 

$

(2,888

)

 

$

(6,643

)

Balance Sheet Data

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans net

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

 

$

655,868

 

 

$

206,636

 

 

$

60,395

 

 

$

121,314

 

 

$

 

 

$

3,592

 

 

$

1,047,805

 

Total assets

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

 

 

667,600

 

 

 

217,757

 

 

 

86,725

 

 

 

235,948

 

 

 

33,526

 

 

 

240,397

 

 

 

1,481,953

 

Total funds borrowed

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

 

 

531,708

 

 

 

173,226

 

 

 

68,654

 

 

 

187,575

 

 

 

7,713

 

 

 

186,460

 

 

 

1,155,336

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on assets

 

 

4.21

%

 

 

1.94

%

 

 

0.66

%

 

 

(19.43

)%

 

 

5.54

%

 

 

(4.82

)%

 

 

(2.06

)%

Return on equity

 

 

16.16

 

 

 

7.88

 

 

 

3.31

 

 

 

(97.16

)

 

 

(47.72

)

 

 

(20.68

)

 

 

(10.34

)

Interest yield

 

 

15.53

 

 

 

9.46

 

 

 

11.02

 

 

 

1.99

 

 

N/A

 

 

N/A

 

 

 

11.67

 

Net interest margin

 

 

13.50

 

 

 

7.36

 

 

 

6.55

 

 

 

(2.77

)

 

N/A

 

 

N/A

 

 

 

8.46

 

Reserve coverage

 

 

1.90

 

 

 

1.39

 

 

 

0.71

 

(1)

 

16.88

 

 

N/A

 

 

N/A

 

 

 

3.74

 

Delinquency ratio

 

 

0.56

 

 

 

0.08

 

 

 

1.13

 

(1)

 

2.66

 

 

N/A

 

 

N/A

 

 

 

0.78

 

Charge-off ratio

 

 

1.55

 

 

 

0.17

 

 

 

0.00

 

(1)

 

26.47

 

 

N/A

 

 

N/A

 

 

 

4.46

 

(1)

Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.

Page 34 of 76


 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Six Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

46,849

 

 

$

9,003

 

 

$

3,517

 

 

$

1,507

 

 

$

 

 

$

1,182

 

 

$

62,058

 

Total interest expense

 

 

5,963

 

 

 

1,943

 

 

 

1,367

 

 

 

3,500

 

 

 

72

 

 

 

3,698

 

 

 

16,543

 

Net interest income (loss)

 

 

40,886

 

 

 

7,060

 

 

 

2,150

 

 

 

(1,993

)

 

 

(72

)

 

 

(2,516

)

 

 

45,515

 

Provision for loan losses

 

 

13,181

 

 

 

1,362

 

 

 

 

 

 

13,516

 

 

 

 

 

 

455

 

 

 

28,514

 

Net interest income (loss)

   after loss provision

 

 

27,705

 

 

 

5,698

 

 

 

2,150

 

 

 

(15,509

)

 

 

(72

)

 

 

(2,971

)

 

 

17,001

 

Sponsorship and race winnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,068

 

 

 

 

 

 

8,068

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,548

)

 

 

 

 

 

(4,548

)

Other (expense)

 

 

(11,320

)

 

 

(3,356

)

 

 

(1,095

)

 

 

(5,344

)

 

 

(3,514

)

 

 

(3,231

)

 

 

(27,860

)

Net income (loss) before taxes

 

 

16,385

 

 

 

2,342

 

 

 

1,055

 

 

 

(20,853

)

 

 

(66

)

 

 

(6,202

)

 

 

(7,339

)

Income tax benefit (provision)

 

 

(4,244

)

 

 

(607

)

 

 

(254

)

 

 

5,030

 

 

 

16

 

 

 

2,150

 

 

 

2,091

 

Net income (loss) after tax

 

$

12,141

 

 

$

1,735

 

 

$

801

 

 

$

(15,823

)

 

$

(50

)

 

$

(4,052

)

 

$

(5,248

)

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans net

 

$

655,868

 

 

$

206,636

 

 

$

60,395

 

 

$

121,314

 

 

$

 

 

$

3,592

 

 

$

1,047,805

 

Total assets

 

 

667,600

 

 

 

217,757

 

 

 

86,725

 

 

 

235,948

 

 

 

33,526

 

 

 

240,397

 

 

 

1,481,953

 

Total funds borrowed

 

 

531,708

 

 

 

173,226

 

 

 

68,654

 

 

 

187,575

 

 

 

7,713

 

 

 

186,460

 

 

 

1,155,336

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on assets

 

 

3.93

%

 

 

1.98

%

 

 

1.81

%

 

 

(12.53

)%

 

 

(0.32

)%

 

 

(3.16

)%

 

 

(0.89

)%

Return on equity

 

 

16.26

 

 

 

8.65

 

 

 

9.03

 

 

 

(62.63

)

 

 

(3.13

)

 

 

(12.54

)

 

 

(4.36

)

Interest yield

 

 

15.49

 

 

 

9.44

 

 

 

11.85

 

 

 

2.17

 

 

N/A

 

 

N/A

 

 

 

11.58

 

Net interest margin

 

 

13.52

 

 

 

7.40

 

 

 

7.24

 

 

 

(2.87

)

 

N/A

 

 

N/A

 

 

 

8.49

 

Reserve coverage

 

 

1.90

 

 

 

1.39

 

 

 

0.71

 

(1)

 

16.88

 

 

N/A

 

 

N/A

 

 

 

3.74

 

Delinquency ratio

 

 

0.56

 

 

 

0.08

 

 

 

1.13

 

(1)

 

2.66

 

 

N/A

 

 

N/A

 

 

 

0.78

 

Charge-off ratio

 

 

2.43

 

 

 

0.26

 

 

 

0.00

 

(1)

 

23.94

 

 

N/A

 

 

N/A

 

 

 

4.88

 

(1)

Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.

Page 3635 of 9776



Selected Financial Ratios

        

Return on assets

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

Return on equity

   23.33   9.74   2.53   NM   22.38   (8.15  (22.00

Interest yield

   15.62   10.02   10.54   4.43   N/A   N/A   11.23 

Net interest margin

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

Reserve coverage

   0.33   0.28   0.22   6.77   N/A   N/A   1.86 

Delinquency ratio

   0.40   0.06   0.27   4.49   N/A   N/A   1.32 

Charge off ratio

   0.82   0.30   0.00   2.18   N/A   N/A   3.19 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Three Months Ended June 30, 2018

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

22,132

 

 

$

4,637

 

 

$

2,217

 

 

$

3,189

 

 

$

 

 

$

469

 

 

$

32,644

 

Total interest expense

 

 

2,136

 

 

 

739

 

 

 

485

 

 

 

3,373

 

 

 

41

 

 

 

1,151

 

 

 

7,925

 

Net interest income (loss)

 

 

19,996

 

 

 

3,898

 

 

 

1,732

 

 

 

(184

)

 

 

(41

)

 

 

(682

)

 

 

24,719

 

Provision for loan losses

 

 

4,710

 

 

 

877

 

 

 

175

 

 

 

24,814

 

 

 

 

 

 

 

 

 

30,576

 

Net interest income (loss) after loss

   provision

 

 

15,286

 

 

 

3,021

 

 

 

1,557

 

 

 

(24,998

)

 

 

(41

)

 

 

(682

)

 

 

(5,857

)

Sponsorship and race winning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,228

 

 

 

 

 

 

5,228

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,540

)

 

 

 

 

 

(2,540

)

Other (expense)

 

 

(5,520

)

 

 

(1,685

)

 

 

(942

)

 

 

(2,811

)

 

 

(2,237

)

 

 

(1,541

)

 

 

(14,736

)

Net income (loss) before taxes

 

 

9,766

 

 

 

1,336

 

 

 

615

 

 

 

(27,809

)

 

 

410

 

 

 

(2,223

)

 

 

(17,905

)

Income tax benefit (provision)

 

 

(2,162

)

 

 

(296

)

 

 

(136

)

 

 

6,157

 

 

 

(43

)

 

 

501

 

 

 

4,021

 

Net income (loss) after tax

 

$

7,604

 

 

$

1,040

 

 

$

479

 

 

$

(21,652

)

 

$

367

 

 

$

(1,722

)

 

$

(13,884

)

Balance Sheet Data as of

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans net

 

$

595,385

 

 

$

195,321

 

 

$

74,610

 

 

$

258,062

 

 

$

 

 

$

5,320

 

 

$

1,128,698

 

Total assets

 

 

599,960

 

 

 

206,298

 

 

 

86,107

 

 

 

386,225

 

 

 

37,861

 

 

 

218,078

 

 

 

1,534,529

 

Total funds borrowed

 

 

456,955

 

 

 

159,913

 

 

 

50,872

 

 

 

402,955

 

 

 

7,578

 

 

 

148,069

 

 

 

1,226,342

 

Balance Sheet Data as of

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans net

 

$

580,182

 

 

$

181,359

 

 

$

59,973

 

 

$

155,863

 

 

$

 

 

$

4,110

 

 

$

981,487

 

Total assets

 

 

590,746

 

 

 

188,892

 

 

 

90,264

 

 

 

273,501

 

 

 

29,925

 

 

 

208,518

 

 

 

1,381,846

 

Total funds borrowed

 

 

434,527

 

 

 

143,815

 

 

 

51,266

 

 

 

294,465

 

 

 

7,649

 

 

 

130,306

 

 

 

1,062,028

 

Selected Financial Ratios as of

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on assets

 

 

5.32

%

 

 

2.13

%

 

 

2.17

%

 

 

(21.69

%)

 

 

3.89

%

 

 

(3.01

%)

 

 

(4.53

%)

Return on equity

 

 

23.33

 

 

 

9.74

 

 

 

4.64

 

 

NM

 

 

 

22.38

 

 

 

(8.32

)

 

 

(22.00

)

Interest yield

 

 

15.62

 

 

 

10.02

 

 

 

11.10

 

 

 

4.43

 

 

N/A

 

 

N/A

 

 

 

11.23

 

Net interest margin

 

 

14.12

 

 

 

8.43

 

 

 

8.67

 

 

 

(0.26

)

 

N/A

 

 

N/A

 

 

 

8.57

 

Reserve coverage

 

 

0.33

 

 

 

0.28

 

 

 

0.23

 

 

 

6.77

 

 

N/A

 

 

N/A

 

 

 

1.86

 

Delinquency ratio

 

 

0.40

 

 

 

0.06

 

 

 

0.27

 

(1)

 

4.49

 

 

N/A

 

 

N/A

 

 

 

1.32

 

Charge off ratio

 

 

0.82

 

 

 

0.30

 

 

 

0.00

 

(1)

 

2.18

 

 

N/A

 

 

N/A

 

 

 

3.19

 

(11)

(1)

Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.

(12) OTHER OPERATING EXPENSES (Investment Company Accounting)

The major components of other operating expenses were as follows:

 

(dollars in thousands)

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

(Dollars in thousands)

 

For the Three

Months Ended

March 31, 2018

 

Directors’ fees

  $89   $114   $129 

 

$

89

 

Miscellaneous taxes

   120    69    87 

 

 

120

 

Computer expenses

   74    65    125 

 

 

74

 

Depreciation and amortization

   23    24    49 

 

 

23

 

Other expenses

   281    215    406 

 

 

161

 

  

 

   

 

   

 

 

Total other operating expenses

  $587   $487   $796 

 

$

467

 

  

 

   

 

   

 

 

(12)

Page 36 of 76


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

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

 

   Three Months Ended,   Six Months Ended, 

(Dollars in thousands, except per share data)

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

Net share data

      

Net asset value at the beginning of the period

  $11.80   $11.91   $11.91 

Net investment loss

   (0.15   (0.14   (0.19

Income tax benefit

   0.03    0.29    0.37 

Net realized gains (losses) on investments

   (1.44   0.08    0.12 

Net change in unrealized appreciation (depreciation) on investments

   0.94    (0.43   (0.45
  

 

 

   

 

 

   

 

 

 

Net decrease in net assets resulting from operations

   (0.62   (0.20   (0.15

Issuance of common stock

   (0.03   (0.06   (0.11

Repurchase of common stock

   —      —      —   

Net investment income

   —      —      —   

Return of capital

   —      —      —   

Net realized gains on investments

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Total distributions

   —      —      —   

Other

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Total decrease in net asset value

   (0.65   (0.26   (0.26
  

 

 

   

 

 

   

 

 

 

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

  $11.15   $11.65   $11.65 
  

 

 

   

 

 

   

 

 

 

Per share market value at beginning of period

  $3.53   $1.98   $3.02 

(Dollars in thousands, except per share data)

 

Three Months

Ended

March 31, 2018

 

Net share data

 

 

 

 

Net asset value at the beginning of the period

 

$

11.80

 

Net investment loss

 

 

(0.15

)

Income tax benefit

 

 

0.03

 

Net realized losses on investments

 

 

(1.44

)

Net change in unrealized appreciation on investments

 

 

0.94

 

Net decrease in net assets resulting from operations

 

 

(0.62

)

Issuance of common stock

 

 

(0.03

)

Repurchase of common stock

 

 

 

Net investment income

 

 

 

Return of capital

 

 

 

Net realized gains on investments

 

 

 

Total distributions

 

 

 

Total decrease in net asset value

 

 

(0.65

)

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

 

$

11.15

 

Per share market value at beginning of period

 

$

3.53

 

Per share market value at end of period

 

 

4.65

 

Total return(2)

 

 

(129

)%

Ratios/supplemental data

 

 

 

 

Total shareholders’ equity (net assets)

 

$

272,437

 

Average net assets

 

$

284,021

 

Total expense ratio(3) (4)

 

 

10.02

%

Operating expenses to average net assets(4)

 

 

5.87

 

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

 

 

(4.61

)%

 

Page 37 of 97


   Three Months Ended,  Six Months Ended, 

(Dollars in thousands, except per share data)

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

Per share market value at end of period

   4.65   2.39   2.39 

Total return(2)

   129  83  (42%) 
  

 

 

  

 

 

  

 

 

 

Ratios/supplemental data

    

Total shareholders’ equity (net assets)

  $272,437  $282,739  $282,739 

Average net assets

  $284,021  $287,153  $286,123 

Total expense ratio(3) (4)

   10.02  0.10  2.58

Operating expenses to average net assets(4)

   5.87   5.14   4.16 

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

   (4.61%)   (1.81%)   (1.22%) 

(1)

Includes $0 and $0 of undistributed net investment income per share and $0 and $0 of undistributed net realized gains per share as of March 31, 2018 and June 30, 2017.2018.

(2)

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

(3)

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

(4)

MSC has assumed certain of the Company’s servicing obligations, and as a result, servicing fee income of $1,290, and $1,295, and operating expenses of $1,150, and $925, which formerly were the Company’s, were now MSC’s for the three months ended March 31, 2018 and June 30, 2017 and were $2,608 of servicing fee income, and $2,092 of operating expenses for the six months ended June 30, 2017.2018. Excluding the impact of the MSC amounts, the total expense ratio, operating expense ratio, and net investment income ratio would have been 11.75%, 6.88%7.51%, and 7.51%(4.49%) in the March 31, 2018 quarter, 1.66%, 6.44%, and (1.56%) in the June 30, 2017 quarter, and 4.25%, 5.64%, and (1.22%) in the six months ended June 30, 2017.quarter.

(13)(14) COMMITMENTS AND CONTINGENCIES

(A) EMPLOYMENT AGREEMENTS

The Company has employment agreements with certain key officers for either a two- or five-year term. Annually, the contracts with a five-year term will renew for new five-year terms unless prior to the end of the first year, either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current five-year term. Annually, the contracts with a two-year term will renew for new 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-year term. In the event of a change in control, as defined, during the employment period, the agreements provide for severance compensation to the executive in an amount equal to the balance of the salary, bonus, and value of fringe benefits which the executive would be entitled to receive for the remainder of the employment period.

Page 37 of 76


Employment agreements expire at various dates through 2023, with no material changes since December 31, 2018. Accordingly, the future minimum payments under these agreements were approximately $4,916,000.

(B) OTHER COMMITMENTS

Except as described in the following paragraph, the Company had no commitments to extend credit or make investments outstanding at June 30, 2019. 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.

The Company has commitments for leased premises that expire at various dates through April 30, 2027. At June 30, 2019, minimal rental commitments for non-cancelable leases were $16,218,000.

(C) LITIGATION

The Company and its subsidiaries become defendants to various legal proceedings arising from the normal course of business. In the opinion of management, based on the advice of legal counsel, there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse impact on the financial condition or results of operations of the Company.

(D) REGULATORY

In the ordinary course of business, the Company and its subsidiaries are subject to inquiries from certain regulators. During 2014, FSVC was examined by the SBA. The foregoing regulatory examination was resolved in January 2017 as a result of FSVC’s transfer to liquidation status and the restructure of the FSVC loan described in Note 7.

(15) RELATED PARTY TRANSACTIONS

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

Jeffrey Rudnick, the son of one of the Company’s directors, is an officer of LAX Group, LLC (LAX), one of the Company’s equity investments. Mr. Rudnick receives a salary from LAX of $172,000$171,000 per year, and certain equity from LAX consisting of 10% ownership in LAX Class B stock, vesting at 3.34% per year; 5% of any new equity raised from outside investors at a valuation of $1,500,000 or higher; and 10% of LAX’s profits as a year endyear-end bonus. In addition, Mr. Rudnick provides consulting services to the Company directly for a monthly retainer of $4,200.

The Company’s consolidated subsidiary RPAC, has an agreement with minority shareholder Richard Petty, in which they makeit makes an annual payment of $700,000 per year for services provided to the entity. In addition, RPAC has a note payable to a trust controlled by Mr. Petty of $7,078,000$7,213,000 that earns interest at an annual rate of 2% as of June 30, 2018.2019.

In the 2019 second quarter, RPAC entered into a sponsorship agreement with Victory Junction, a 501(c)(3) public charity for which Richard Petty is a Board member, for $7,000,000 for sponsorship during the remaining 2019 race car season.

The Company and MSC serviced $311,988,000 and $318,961,000$308,346,000 of loans for Medallionthe Bank at DecemberMarch 31, 2017 and June 30, 2017.2018. Under Investment Company Accounting, included in net investment income were amounts as described in the table below that were received from Medallionthe Bank for services rendered in originating and servicing loans, and also for reimbursement of certain expenses incurred on their behalf.

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

Page 38 of 9776



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

 

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

(Dollars in thousands)

  March 31, 2018   June 30, 2017 

 

Three Months

Ended

March 31, 2018

 

Reimbursement of operating expenses

  $250   $227   $454 

 

$

250

 

Loan origination and servicing fees

   6    3    3 

 

 

6

 

  

 

   

 

   

 

 

Total other income

  $256   $230   $457 

 

$

256

 

  

 

   

 

   

 

 

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

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

(14)(16) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

(a)Cash—Book value equals marketfair value.

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

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

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

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

(f)Commitmentstoextendcredit—The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At June 30, 20182019 and December 31, 2017,2018, the estimated fair value of theseoff-balance-sheet instruments was not material.

Page 39 of 97


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

 

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

 

June 30, 2019

 

 

December 31, 2018

 

(Dollars in thousands)

  Carrying Amount   Fair Value   Carrying Amount   Fair Value 

 

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

Financial assets

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and federal funds sold(1)

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

 

$

72,148

 

 

$

72,148

 

 

$

57,713

 

 

$

57,713

 

Equity investments

   10,773    10,773    —      —   

 

 

9,797

 

 

 

9,797

 

 

 

9,197

 

 

 

9,197

 

Investment securities

   44,717    44,717    —      —   

 

 

44,820

 

 

 

44,820

 

 

 

45,324

 

 

 

45,324

 

Loans receivable

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

 

 

1,047,805

 

 

 

1,047,805

 

 

 

981,487

 

 

 

981,487

 

Investments

   —      —      610,135    610,135 

Accrued interest receivable (2)

   7,360    7,360    547    547 

 

 

7,742

 

 

 

7,742

 

 

 

7,413

 

 

 

7,413

 

Financial liabilities

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds borrowed(3)

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

 

 

1,155,336

 

 

 

1,157,206

 

 

 

1,062,028

 

 

 

1,062,297

 

Accrued interest payable

   4,246    4,246    3,831    3,831 

Accrued interest payable(2)

 

 

4,205

 

 

 

4,205

 

 

 

3,852

 

 

 

3,852

 

 

(1)

Categorized as level 1 within the fair value hierarchy. See Note 17.

(2)

Categorized as level 3 within the fair value hierarchy. See Note 17.

(3)

As of June 30, 20182019 and December 31, 2017,2018, publicly traded retail notes traded at a premium to par of $352$1,870 and $2,461.$269.

(15)Page 39 of 76


(17) FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

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

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

 

A)

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

 

B)

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

 

C)

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

Page 40 of 97


D)

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

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

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

Bank Holding Company Accounting

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

Page 40 of 76


The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018.

 

Bank Holding Company Accounting

(Dollars in thousands)

  Level 1   Level 2   Level 3   Total 

June 30, 2019

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

  $—    $—    $10,773   $10,773 

 

$

 

 

$

 

 

$

9,797

 

 

$

9,797

 

Available for sale investment securities(1)

   —      44,717    —      44,717 

 

 

 

 

 

44,820

 

 

 

 

 

 

44,820

 

  

 

   

 

   

 

   

 

 

Total

  $—    $44,717   $10,773   $55,490 

 

$

 

 

$

44,820

 

 

$

9,797

 

 

$

54,617

 

  

 

   

 

   

 

   

 

 

 

(1)

Total unrealized lossesincome of $255,$1,227, net of tax, was included in accumulated other comprehensive income (loss) for the threesix months ended June 30, 2019 related to these assets.

December 31, 2018

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

$

 

 

$

 

 

$

9,197

 

 

$

9,197

 

Available for sale investment securities(1)

 

 

 

 

 

45,324

 

 

 

 

 

 

45,324

 

Total

 

$

 

 

$

45,324

 

 

$

9,197

 

 

$

54,521

 

(1)

Total unrealized losses of $82, net of tax, was included in accumulated other comprehensive income (loss) for the nine months ended December 31, 2018 related to these assets.

Investment Company Accounting

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

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

Page 41 of 97


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

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

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

Investment Company Accounting

(Dollars in  thousands)

  Level 1   Level 2   Level 3   Total 

Assets

        

Medallion loans

  $—    $—    $208,279   $208,279 

Commercial loans

   —      —      90,188    90,188 

Investments in Medallion Bank and other controlled subsidiaries

   —      —      302,147    302,147 

Equity investments

   —      —      9,521    9,521 

Investments other than securities

   —      —      7,450    7,450 

Other assets

   —      —      339    339 
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Page 42 of 97


The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilities for the quarterthree and six months ended June 30, 2019 and the three months ended June 30, 2018, under Bank Holding Company Accounting, and for the quartersthree months ended March 31, 2018 and June 30, 2017 and the six months ended June 30, 2017 under Investment Company Accounting.

 

(Dollars in  thousands)

  Equity
Investments
 

March 31, 2018

  $9,458 

Gains (losses) included in earnings

   (374

Purchases, investments, and issuances

   529 

Sales, maturities, settlements, and distributions

   (217

Transfers in(1)

   1,377 
  

 

 

 

June 30, 2018

  $10,773 
  

 

 

 

Amounts related to held assets(2)

  ($374
  

 

 

 

(Dollars in thousands)

 

Equity

Investments

 

March 31, 2019

 

$

8,699

 

Losses included in earnings

 

 

(502

)

Purchases, investments, and issuances

 

 

1,600

 

Sales, maturities, settlements, and distributions

 

 

 

June 30, 2019

 

$

9,797

 

Amounts related to held assets(1)

 

$

(502

)

 

(1)

Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2019.

(Dollars in thousands)

 

Equity

Investments

 

December 31, 2018

 

$

9,197

 

Gains included in earnings

 

 

96

 

Purchases, investments, and issuances

 

 

1,650

 

Sales, maturities, settlements, and distributions

 

 

(1,146

)

June 30, 2019

 

$

9,797

 

Amounts related to held assets(1)

 

$

(306

)

(1)

Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2019.

Page 41 of 76


(Dollars in thousands)

 

Equity

Investments

 

March 31, 2018

 

$

9,458

 

Losses included in earnings

 

 

(374

)

Purchases, investments, and issuances

 

 

529

 

Sales, maturities, settlements, and distributions

 

 

(217

)

Transfers in(1)

 

 

1,377

 

June 30, 2018

 

$

10,773

 

Amounts related to held assets(2)

 

$

(374

)

(1)

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

(2)

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

 

(Dollars in thousands)

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

 

Medallion

Loans

 

 

Commercial

Loans

 

 

Investments

in Medallion

Bank &

Other

Controlled

Subsidiaries

 

 

Equity

Investments

 

 

Investments

Other Than

Securities

 

 

Other

Assets

 

December 31, 2017

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

 

$

208,279

 

 

$

90,188

 

 

$

302,147

 

 

$

9,521

 

 

$

7,450

 

 

$

339

 

Gains (losses) included in earnings

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

 

 

(38,190

)

 

 

(8

)

 

 

29,143

 

 

 

(993

)

 

 

(1,915

)

 

 

 

Purchases, investments, and issuances

   7  7,252  462  935   —     —   

 

 

7

 

 

 

7,252

 

 

 

462

 

 

 

935

 

 

 

 

 

 

 

Sales, maturities, settlements, and distributions

   (8,941 (3,812 (583 (5  —     —   

 

 

(8,941

)

 

 

(3,812

)

 

 

(583

)

 

 

(5

)

 

 

 

 

 

 

Transfers in (out)

   —     —     —     —     —     —   
  

 

  

 

  

 

  

 

  

 

  

 

 

March 31, 2018

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

 

$

161,155

 

 

$

93,620

 

 

$

331,169

 

 

$

9,458

 

 

$

5,535

 

 

$

339

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Amounts related to held assets(1)

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

 

$

(38,190

)

 

$

(10

)

 

$

29,143

 

 

$

(993

)

 

$

(1,915

)

 

$

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)

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

(Dollars in  thousands)

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

March 31, 2017

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

Gains (losses) included in earnings

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

Purchases, investments, and issuances

   320   7,720   402   856   —      —   

Sales, maturities, settlements, and distributions

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

June 30, 2017

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Amounts related to held assets(1)

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

(1)

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

Page 43 of 97


(Dollars in  thousands)

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

December 31, 2016

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

Gains (losses) included in earnings

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

Purchases, investments, and issuances

   320   7,816   402   856   —      —   

Sales, maturities, settlements, and distributions

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

June 30, 2017

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Amounts related to held assets(1)

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

(1)

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

The following table presentstables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on anon-recurring basis as of June 30, 2018.2019 and December 31, 2018 under Bank Holding Company Accounting.

 

2018(Dollars in thousands)

  Level 1   Level 2   Level 3   Total 

June 30, 2019

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

  $—     $—     $49,558   $49,558 

 

$

 

 

$

 

 

$

26,878

 

 

$

26,878

 

Loan collateral in process of foreclosure

       60,052    60,052 

 

 

 

 

 

 

 

 

52,368

 

 

 

52,368

 

Other receivables

       5,500    5,500 
  

 

   

 

   

 

   

 

 

Total

  $—     $—     $115,110   $115,110 

 

$

 

 

$

 

 

$

79,246

 

 

$

79,246

 

  

 

   

 

   

 

   

 

 

December 31, 2018

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

34,877

 

 

$

34,877

 

Loan collateral in process of foreclosure

 

 

 

 

 

 

 

 

49,495

 

 

 

49,495

 

Total

 

$

 

 

$

 

 

$

84,372

 

 

$

84,372

 

Significant Unobservable Inputs

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

Page 42 of 76


The valuation techniques and significant unobservable inputs used in recurring Levellevel 3 fair value measurements of assets and liabilities as of June 30, 2019 and December 31, 2018 were as follows under Bank Holding Company Accounting.

 

(Dollars in  thousands)

Fair Value
at 6/30/18

Valuation Techniques

Unobservable Inputs

Range
(Weighted Average)
Equity Investments6,306Investee financial analysisFinancial condition and operating performance of the borrowerN/A
Collateral supportN/A
2,556Investee book value adjusted for market appreciationFinancial condition and operating performance of the investeeN/A
Precedent arm’s length offerBusiness enterprise value$6,018 – $7,218
Business enterprise value/revenue multiples0.94x – 4.42x
1,455Precedent market transactionOffering price$8.73 / share
456Investee book valueValuation indicated by investee filingsN/A

(Dollars in thousands) 

 

Fair Value

at 6/30/19

 

Valuation Techniques 

 

Unobservable Inputs 

 

Range

(Weighted Average)

Equity Investments

$

6,314

 

Investee financial analysis

 

Financial condition and operating performance of the borrower

 

N/A

 

 

 

 

 

 

Collateral support

 

N/A

 

 

2,028

 

Investee book value adjusted for market appreciation

 

Financial condition and operating performance of the investee

 

N/A

 

 

 

 

Precedent arm’s length offer

 

Business enterprise value

 

$6,014 – $7,214

 

 

 

 

 

 

Business enterprise value/revenue multiples

 

0.96x – 4.44x

 

 

1,455

 

Precedent market transaction

 

Offering price

 

$8.73 / share

(Dollars in thousands) 

 

Fair Value

at 12/31/18

 

Valuation Techniques

 

Unobservable Inputs 

 

Range

(Weighted Average)

Equity investments

 

$

5,683

 

Investee financial analysis

 

Financial condition and operating performance of the borrower

 

N/A

 

 

 

 

 

 

Collateral support

 

N/A

 

 

1,850

 

Investee book value adjusted for market appreciation

 

Financial condition and operating performance of the investee

 

N/A

 

 

 

 

Precedent arm’s length offer

 

Business enterprise value

 

$6,014 – $7,214

 

 

 

 

 

 

Business enterprise value/revenue multiples

 

0.96x – 4.54x

 

 

1,455

 

Precedent market transaction

 

Offering price

 

$8.73 / share

 

 

209

 

Investee book value

 

Valuation indicated by investee filings

 

N/A

 

Page 44 of 97


The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of December 31, 2017 were as follows under Investment Company Accounting.

(Dollars in  thousands)

  Fair Value
at 12/31/17
   

Valuation Techniques

  

Unobservable Inputs

  Range
(Weighted Average)
 
Medallion Loans   $208,279   Precedent market transactions  Adequacy of collateral (loan to value)   1% - 420% (131%) 

Commercial Loans – Mezzanine and Other

   90,188   Borrower financial analysis  Financial condition and operating performance of   N/A 
      

the borrower

Portfolio yields

   2% -19.00% (12.02%) 

Investment in Medallion Bank

   290,548   Precedent M&A transactions  Price / book value multiples   2.1x to 2.5x 
      Price / earnings multiples   8.7x to 10.6x 
    Discounted cash flow  Discount rate   17.50% 
      Terminal value  $470,964 to $623,007 

Investment in Other Controlled Subsidiaries

   4,623   Investee financial analysis  Financial condition and operating performance   N/A 
      Enterprise value  $37,500 - $41,500 
      Equity value  $2,000 - $5,000 
   3,878   Investee book value adjusted for asset appreciation  Financial condition and operating performance of the investee   N/A 
      Third party valuation/ offer to purchase asset   N/A 
   3,001   Investee book value adjusted for market appreciation  Financial condition and operating performance of the investee   N/A 
      Third party offer to purchase investment   N/A 
   97   Investee book value and equity pickup  

Financial condition and

operating performance of the investee

   N/A 

Equity Investments

   5,417   Investee financial analysis  Financial condition and operating performance of the borrower   N/A 
      Collateral support   N/A 
   2,193   Investee financial analysis  Equity value  $2,000 - $5,000 
      Preferred equity yield   12% 
   1,455   Precedent market transaction  Offering price  $8.73/share 
   456   Investee book value  Valuation indicated by investee filings   N/A 
        

Investments Other Than Securities

   7,450   Precedent market transaction  Transfer prices of Chicago medallions   N/A 
    Cash flow analysis  Discount rate in cash flow analysis   6% 

Other Assets

   339   Borrower collateral analysis  Adequacy of collateral (loan to value)   0% 

(16) INVESTMENTS OTHER THAN SECURITIES (Investment Company Accounting)

The following table presents the Company’s investments other than securities as of December 31, 2017 under Investment Company Accounting.

Investment Type(Dollars in thousands)

  Number of
Investments
  Investment
Cost
   Value as of
12/31/17
 

City of Chicago Taxicab Medallions

   154(1)   $8,411   $7,238(2)  

City of Chicago Taxicab Medallions (handicap accessible)

   5(1)    278    212(3)  
   

 

 

   

 

 

 

Total Investments Other Than Securities

   $8,689   $7,450 
   

 

 

   

 

 

 

Page 45 of 97


(1)

Investment is not readily marketable, is considered income producing, is not subject to option, and is anon-qualifying asset under Investment Company Accounting.

(2)

Gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation for Federal income tax purposes was $5,846, $0, and $5,846 as of December 31, 2017. The aggregate cost for Federal income tax purposes was $1,392 at December 31, 2017.

(3)

Gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation for Federal income tax purposes was $172, $0, and $172 as of December 31, 2017. The aggregate cost for Federal income tax purposes was $40 at December 31, 2017.

(17)(18) SMALL BUSINESS LENDING FUND PROGRAM (SBLF) AND TROUBLED ASSETS RELIEF PROGRAM (TARP)

On February 27, 2009 and December 22, 2009, Medallionthe Bank issued, and the US Treasury purchased under the TARP Capital Purchase Program (the CPP) Medallionthe Bank’s fixedrate non-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, Medallionthe Bank issued, and the US Treasury purchased 26,303 shares ofSenior Non-Cumulative Perpetual Preferred Stock, Series E (Series E) for an aggregate purchase price of $26,303,000 under the SBLF. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. In connection with the issuance of the Series E, the Bank exited the CPP by redeeming the Series A, B, C, and D; and received approximately $4,000,000, net of dividends due on the repaid securities. Thethe Bank previously paidpays a dividend rate of 1%9% on the Series E,E.

(19) VARIABLE INTEREST ENTITIES

During the 2018 third quarter, the Company determined that Trust III was a VIE. Trust III had been consolidated as a subsidiary of MFC historically, although it should have been consolidated under the variable interest model, since MFC was its primary beneficiary until October 31, 2018. Trust III is a VIE since the key decision-making authority rests in the servicing agreement (where MFC is the servicer for Trust III) rather than in the voting rights of the equity interests and as a result the decision-making rights are considered a variable interest. This conclusion is supported by a qualitative assessment that Trust III does not have sufficient equity at risk. Since the inception of Trust III, MFC had also been party to a limited guaranty which increasedwas considered a variable interest because, pursuant to 9%the guaranty, MFC absorbed variability as a result of the on-going performance of the loans in first quarterTrust III. As of 2016.October 31, 2018, the Company determined that MFC was no longer the primary beneficiary of Trust III and accordingly deconsolidated the VIE, leading to a net gain of $25,325,000 recorded as well as a new promissory note payable by MFC of $1,400,000 issued in settlement of the limited guaranty (see Note 7 for more details). In addition, the Company remains the servicer of the assets of Trust III for a fee.

(18)Page 43 of 76


(20) SUBSEQUENT EVENTS

On AugustJuly 3, 2018,2019, a credit facility with a maturity date of July 31, 20182019 was extended until November 30, 2018.February 28, 2021.

On July 16, 2019, the Company paid $10,819,000 at maturity in satisfaction of all its outstanding obligations under one of its credit facilities. In connection with this payment, the Company obtained a waiver from one of its other lenders, with a term note of $3,096,000, of certain resulting repayment and other obligations, which waiver expires on August 16, 2019. While there can be no assurance, the Company is working with the lender to extend such waiver.

 

Page 4644 of 9776


Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2017

Investment Company Accounting

(Dollars in

thousands)

 

Obligor

Name/Interest Rate
Range

  Security
Type (all
restricted
unless
otherwise
noted)
   Acquisition
Date
   Maturity
Date
   No. of
Invest.
   % of
Net
Assets
  Interest
Rate (1)
  Original
Cost of 2017
Acquisitions (5)
   Principal
Outstanding
   Cost(4)   Fair
Value
 

Medallion Loans

                   

New York

          350    53  4.23 $10,898   $168,710   $167,226   $151,309 
 Sean Cab Corp ##   Term Loan    12/09/11    11/23/18    1    1  4.63   $3,159   $3,159   $3,159 
 Real Cab Corp ##   Term Loan    07/20/07    12/20/17    1    1  2.81   $2,545   $2,545   $2,545 
 Real Cab Corp ##   Term Loan    07/20/07    12/20/17    1    *   2.81   $350   $350   $350 
 Slo Cab Corp ##   Term Loan    07/20/07    12/20/17    1    1  2.81   $1,527   $1,527   $1,527 
 Slo Cab Corp ##   Term Loan    07/20/07    12/20/17    1    *   2.81   $210   $210   $210 
 Junaid Trans Corp ## & {Annually-Prime plus 1.00%}   Term Loan    04/30/13    04/29/19    1    *   5.00   $1,379   $1,379   $1,379 
 Avi Taxi Corporation ##   Term Loan    04/11/14    12/10/17    1    *   3.25   $1,329   $1,329   $1,329 
 Hj Taxi Corp ##   Term Loan    04/11/14    12/10/17    1    *   3.25   $1,329   $1,329   $1,329 
 Anniversary Taxi Corp ##   Term Loan    04/11/14    12/10/17    1    *   3.25   $1,329   $1,329   $1,329 
 Kby Taxi Inc ##   Term Loan    04/11/14    12/10/17    1    *   3.25   $1,329   $1,329   $1,329 
 Apple Cab Corp ##   Term Loan    04/11/14    12/10/17    1    *   3.25   $1,329   $1,329   $1,329 
 Penegali Taxi LLC ##   Term Loan    12/11/14    12/10/17    1    *   3.75   $1,294   $1,294   $1,294 
 Uddin Taxi Corp ## &   Term Loan    11/05/15    11/05/18    1    *   4.75   $1,284   $1,284   $1,284 
 Waylon Transit LLC ##   Term Loan    09/27/17    09/27/22    1    *   0.00 $1,275   $1,275   $1,275   $1,277 
 Sonu-Seema Corp ## (interest rate includes deferred interest of 2.50%)   Term Loan    12/07/12    12/20/18    1    *   5.00   $1,275   $1,275   $1,275 
 (deferred interest of $34 per footnote 2)                  
 Bunty & Jyoti Inc ## (interest rate includes deferred interest of 2.50%)   Term Loan    03/13/13    12/13/18    1    *   5.00   $1,259   $1,259   $1,259 
 (deferred interest of $35 per footnote 2)                  
 Perem Hacking Corp ## & {Annually-Prime plus .25%}   Term Loan    05/01/16    05/01/21    1    *   4.25   $1,223   $1,223   $1,225 
 S600 Service Co Inc ## & {Annually-Prime plus .25%}   Term Loan    05/01/16    05/01/21    1    *   4.25   $1,223   $1,223   $1,225 
 Ela Papou LLC ##   Term Loan    06/27/14    12/15/17    1    *   4.00   $1,213   $1,213   $1,213 
 Earie Hacking LLC ##   Term Loan    12/28/15    12/28/20    1    *   3.60   $1,173   $1,173   $1,174 
 Amme Taxi Inc ##   Term Loan    10/21/13    10/21/18    1    *   3.70   $1,162   $1,162   $1,162 
 Yosi Transit Inc ##   Term Loan    07/20/07    12/20/17    1    *   2.81   $1,018   $1,018   $1,018 
 Yosi Transit Inc ##   Term Loan    07/20/07    12/20/17    1    *   2.81   $140   $140   $140 

Various New York && ##

 0.00% to 18.38% (interest rate includes deferred interest 1.00% to 9.19%)   
Term
Loan
 
 
   

03/23/01
to
12/22/17
 
 
 
   

05/28/16
to
12/21/26
 
 
 
   327    42  4.36 $9,623   $139,356   $137,872   $121,948 
 (deferred interest of $1,281 per footnote 2)                  

Chicago

          107    5  4.74 $0   $20,172   $19,436   $15,602 
 Sweetgrass Peach &Chadwick Cap ## (interest rate includes deferred interest of 1.00%)   Term Loan    08/28/12    02/24/18    1    *   6.00   $1,374   $1,374   $1,374 
 (deferred interest of $20 per footnote 2)                  

Various Chicago && ##

 0.00% to 7.00% (interest rate includes deferred interest .75% to 2.75%)   Term Loan    

01/22/10
to
08/08/16
 
 
 
   

03/12/16
to
12/22/20
 
 
 
   106    5  4.65 $0   $18,798   $18,062   $14,228 
 (deferred interest of $207 per footnote 2)                  

Newark && ##

          110    8  5.34 $1,047   $21,999   $21,935   $21,684 
 Viergella Inc ##   Term Loan    02/20/14    02/20/18    1    *   4.75   $1,278   $1,278   $1,278 

Various Newark && ##

 4.50% to 7.00% (interest rate includes deferred interest 1.50%)   Term Loan    

04/09/10
to
10/12/17
 
 
 
   

10/17/17
to
05/14/25
 
 
 
   109    7  5.38 $1,047   $20,721   $20,657   $20,406 
 (deferred interest of $2 per footnote 2)                  

Boston && ##

 2.75% to 6.15%   Term Loan    

06/12/07
to
10/04/17
 
 
 
   

12/07/15
to
11/06/25
 
 
 
   59    6  4.51 $633   $18,907   $18,564   $18,504 

Cambridge && ##

 3.75% to 5.50%   Term Loan    

05/06/11
to
12/15/15
 
 
 
   

03/29/16
to
01/26/20
 
 
 
   13    0  4.55 $0   $824   $773   $693 

Various Other && ##

 4.75% to 9.00%   Term Loan    

04/28/08
to
07/30/15
 
 
 
   

01/03/17
to
09/01/23
 
 
 
   9    0  7.95 $0   $500   $482   $487 
         

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total medallion loans ($183,529 pledged as collateral under borrowing arrangements)

 

       648    73  4.41 $12,578   $231,112   $228,416   $208,279 
         

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Loans

                  

Secured mezzanine (22% North Carolina, 16% Minnesota, 7% Ohio, 6% Texas, 6% Delaware 6% California, 5% Oklahoma, 5% Oregon, 4% Kansas, 4% North Dakota, 4% Pennsylvania, and 15% all other states)(2)

 

Manufacturing (37% of the total)

 Innovative Metal, Inc. dba Southwest Data Products (interest rate includes PIK interest of 2.00%)   Term Loan    04/06/17    04/06/24    1    2  14.00 $5,000   $5,000   $5,000   $4,980 
 Stride Tool Holdings, LLC (interest rate includes PIK interest of 3.00%)   Term Loan    04/05/16    04/05/21    1    1  15.00   $4,217   $4,217   $4,179 
 (capitalized interest of $217 per footnote 2)                  

 

Page 47 of 97


Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2017

Investment Company Accounting

(Dollars in

thousands)

   

Obligor

Name/Interest Rate

Range

  Security
Type (all
restricted
unless
otherwise
noted)
   Acquisition
Date
   Maturity
Date
   No. of
Invest.
   % of
Net
Assets
  Interest
Rate (1)
  Original
Cost of 2017
Acquisitions (5)
   Principal
Outstanding
   Cost (4)   Fair
Value
 
  AA Plush Holdings, LLC (interest rate includes PIK interest of 6.00%)   Term Loan    08/15/14    08/15/19    1    1  14.00   $3,397   $3,397   $3,393 
  (capitalized interest of $397 per footnote 2)                  
  Pinnacle Products International, Inc. (interest rate includes PIK interest of 3.00%)   Term Loan    10/09/15    10/09/20    1    1  15.00   $3,249   $3,249   $3,249 
  (capitalized interest of $449 per footnote 2)           ��      
  Liberty Paper Products Acquisition, LLC (interest rate includes PIK interest of 2.00%)   Term Loan    06/09/16    06/09/21    1    1  14.00   $3,096   $3,096   $3,096 
  (capitalized interest of $101 per footnote 2)                  
  EMI Porta Opco, LLC (interest rate includes PIK interest of 1.00%)   Term Loan    12/11/17    03/11/23    1    1  13.00 $3,000   $3,002   $3,002   $3,002 
  (capitalized interest of $2 per footnote 2)                  
  BB Opco, LLC d/b/a BreathableBaby, LLC (interest rate includes PIK interest of 3.00%)   Term Loan    08/01/14    08/01/19    1    1  15.00   $2,718   $2,718   $2,718 
  (capitalized interest of $218 per footnote 2)                  
  EGC Operating Company, LLC (interest rate includes PIK interest of 1.00%)   Term Loan    09/30/14    09/30/19    1    1  13.00   $1,959   $1,959   $1,959 
  (capitalized interest of $49 per footnote 2)                  
  American Cylinder, Inc. d/b/a All Safe (interest rate includes PIK interest of 7.00%)   Term Loan    07/03/13    09/30/18    1    1  19.00   $1,782   $1,782   $1,782 
  (capitalized interest of $282 per footnote 2)                  
  Tri-Tech Forensics, Inc. (interest rate includes PIK interest of 2.00%)   Term Loan    06/15/17    06/15/22    1    1  14.00 $1,500   $1,500   $1,500   $1,500 
  Orchard Holdings, Inc. &   Term Loan    03/10/99    03/31/10    1    *   13.00   $1,390   $1,390   $1,390 
  Filter Holdings, Inc. (interest rate includes PIK interest of 2.00%)   Term Loan    05/05/17    05/05/22    1    *   14.00 $1,250   $1,250   $1,250   $1,250 
  Various Other 10.00%   Term Loan    03/28/17    03/28/22    1    *   10.00 $200   $200   $200   $200 

Arts, Entertainment, and Recreation (19% of the total)

  RPAC Racing LLC & (interest rate includes PIK interest of 2.00%)   Term Loan    11/27/17    03/31/20    1    3  2.00 $7,827   $7,827   $7,827   $7,827 
  (capitalized interest of $15 per footnote 2)                  
  RPAC Racing LLC & (interest rate includes PIK interest of 2.00%)   Term Loan    06/22/16    03/31/20    1    1  2.00   $2,034   $2,034   $2,034 
  (capitalized interest of $278 per footnote 2)                  
  RPAC Racing LLC & (interest rate includes PIK interest of 2.00%)   Term Loan    09/14/16    03/31/20    1    *   2.00   $1,000   $1,000   $1,000 
  (capitalized interest of $120 per footnote 2)                  
  RPAC Racing LLC & (interest rate includes PIK interest of 2.00%)   Term Loan    11/19/10    03/30/20    1    2  2.00   $5,611   $5,611   $5,611 
  (capitalized interest of $2,572 per footnote 2)                  

Professional, Scientific, and Technical Services (18% of the total)

  Weather Decision Technologies, Inc. (interest rate includes PIK interest of 9.00%)   Term Loan    12/11/15    12/11/20    1    1  18.00   $4,221   $4,221   $4,214 
  (capitalized interest of $721 per footnote 2)                  
  Weather Decision Technologies, Inc. (interest rate includes PIK interest of 7.00%)   Term Loan    11/08/17    06/30/18    1    *   14.00 $325   $327   $327   $327 
  (capitalized interest of $2 per footnote 2)                  
  ADSCO Opco, LLC (interest rate includes PIK interest of 2.00%)   Term Loan    10/25/16    10/25/21    1    1  13.00   $3,687   $3,687   $3,677 
  (capitalized interest of $87 per footnote 2)                  
  Northern Technologies, LLC (interest rate includes PIK interest of 1.00%)   Term Loan    01/29/16    01/29/23    1    1  13.00   $3,670   $3,670   $3,670 
  (capitalized interest of $70 per footnote 2)                  
 

+

 DPIS Engineering, LLC   Term Loan    12/01/14    06/30/20    1    1  12.00   $2,000   $2,000   $1,998 
 

+

 Portu-Sunberg Marketing LLC   Term Loan    10/21/16    02/21/22    1    *   12.00   $1,250   $1,250   $1,245 
  Various Other 14.00%   Term Loan    05/21/15    05/21/22    1    *   14.00   $1,156   $1,156   $1,156 
  (capitalized interest of $11 per footnote 2)                  

Information (9% of the total)

  US Internet Corp.   Term Loan    03/14/17    03/14/22    1    1  14.50 $5,650   $4,075   $4,075   $4,062 
  US Internet Corp. (interest rate includes PIK interest of 17.00%)   Term Loan    03/14/17    03/14/22    1    *   19.00 $1,000   $1,147   $1,147   $1,147 
  (capitalized interest of $147 per footnote 2)                  
  Centare Holdings, Inc. (interest rate includes PIK interest of 2.00%)   Term Loan    08/30/13    08/30/18    1    1  14.00   $2,500   $2,500   $2,497 

Wholesale Trade (6% of the total)

 + Classic Brands, LLC   Term Loan    01/08/16    04/30/23    1    1  12.00   $2,880   $2,880   $2,880 

Page 48 of 97


Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2017

Investment Company Accounting

(Dollars in

thousands)

   

Obligor

Name/Interest Rate

Range

 Security
Type (all
restricted
unless
otherwise
noted)
  Acquisition
Date
  Maturity
Date
  No. of
Invest.
  % of
Net
Assets
  Interest
Rate (1)
  Original
Cost of 2017
Acquisitions (5)
  Principal
Outstanding
  Cost (4)  Fair
Value
 
  Harrell’s Car Wash Systems, Inc. (interest rate includes PIK interest of 3.00%)  Term Loan   07/03/17   09/03/22   1   1  15.00 $2,000  $2,532  $2,532  $2,529 
  (capitalized interest of $32 per footnote 2)          

Mining, Quarrying, and Oil and Gas Extraction (5% of the total)

  Green Diamond Performance Materials, Inc. (interest rate includes PIK interest of 4.50%)  Term Loan   09/08/17   09/08/24   1   1  16.50 $4,000  $4,057  $4,057  $4,057 
  (capitalized interest of $57 per footnote 2)          

Transportation and Warehousing (4% of the total)

  LLL Transport, Inc. (interest rate includes PIK interest of 3.00%)  Term Loan   10/23/15   04/23/21   1   1  15.00  $3,914  $3,914  $3,912 
  (capitalized interest of $410 per footnote 2)          

Construction (2% of the total)

  HighlandCrossing-M, LLC (interest rate includes PIK interest of 11.50%)  Term Loan   01/07/15   02/01/25   1   1  11.50  $1,445  $1,445  $1,444 

Accommodation and Food Services (0% of the total)

  Various Other 9.25%  Term Loan   11/05/10   11/05/20   1   *   9.25  $241  $241  $241 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total secured mezzanine(2)

     33   31  12.09 $31,752  $88,334  $88,334  $88,226 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other secured commercial (51% New York, 42% New Jersey and 7% all other states)

 

       

Retail Trade (81% of the total)

  Medallion Fine Art Inc (interest rate includes PIK interest of 12%)  Term Loan   12/17/12   03/17/18   1   *   12.00  $999  $999  $999 
  Various Other && 4.75% to 10.50%  Term Loan   

10/28/08
to
12/23/15
 
 
 
  

05/09/18
to
03/03/20
 
 
 
  5   *   7.74  $835  $795  $604 

Accommodation and Food Services (12% of the total)

  Various Other && 6.75% to 9.00%  Term Loan   

11/29/05
to
06/06/14
 
 
 
  

04/18/17
to
09/06/19
 
 
 
  3   *   8.26  $644  $544  $228 

Transportation and Warehousing (4% of the total)

  Various Other && 4.25%  Term Loan   03/17/15   09/10/18   1   *   4.25  $75  $74  $75 

Real Estate and Rental and Leasing (3% of the total)

  Various Other && 5.00%  Term Loan   03/31/15   03/31/20   1   *   5.00  $69  $65  $56 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Other Commercial Loans(2)

     11   1  9.39  $2,622  $2,477  $1,962 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total commercial loans (2)

 

  44   31  12.02 $31,752  $90,956  $90,811  $90,188 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

 

        

Commercial Banking

  Medallion Bank **  100% of common stock   05/16/02   None   1   101  0.00   $138,282  $290,548 

NASCAR Race Team

  Medallion MotorSports, LLC  75% of LLC units   11/24/10   None   1   2  42.40   $2,820  $4,623 

Art Dealer

  Medallion Fine Art, Inc.  100% of common stock   12/03/12   None   1   1  0.00   $1,777  $3,878 

Loan Servicing

  Medallion Servicing Corp.  100% of common stock   11/05/10   None   1   *   0.00   $97  $97 

Professional Sports Team

  LAX Group LLC  44.97% of membership interests   05/23/12   None   1   1  0.00   $251  $3,001 

Media

  Medallion Taxi Media, Inc.  100% of common stock   01/01/17   None   1   *   0.00   $0  $0 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

   6   105  0.83 $0  $0  $143,227  $302,147 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity investments

            

Commercial Finance

  Convergent Capital, Ltd **  
7% of limited
partnership interest
 
 
  07/20/07   None   1   *   0.00   $733  $456 

NASCAR Race Team

  Rpac Racing LLC  
1,000 shares of
Series D
 
 
  08/25/15   None   1   1  0.00   $0  $2,193 

Loan Servicing

  Upgrade, Inc.  666,668 shares of Series A-1 preferred stock   09/30/16   None   1   1  0.00   $250  $1,455 

Stuffed Toy Manufacturer

  AA Plush Holdings, LLC d/b/a Animal Adventures  1.6% Common Units   08/15/14   None   1   *   0.00   $300  $300 

Advertising Services

  ADSCO Opco, LLC  7.9% Class A Series A-2 Units   10/25/16   None   1   *   0.00   $400  $400 

Page 49 of 97


Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2017

Investment Company Accounting

(Dollars in

thousands)

   

Obligor

Name/Interest Rate

Range

 

Security

Type (all

restricted

unless

otherwise

noted)

 Acquisition
Date
  Maturity
Date
  No. of
Invest.
  % of
Net
Assets
  Interest
Rate (1)
  Original
Cost of 2017
Acquisitions (5)
  Principal
Outstanding
  Cost (4)  Fair
Value
 

Baby Sleep Products

  BB Opco, LLC d/b/a BreathableBaby, LLC 3.6% Units  08/01/14   None   1   *   0.00   $250  $250 

IT Services

  Centare Holdings, Inc. 7.23% of common stock, 3.88% of preferred stock  08/30/13   None   1   *   0.00   $103  $103 

Wholesale Hobbyists’ Supplies

  Classic Brands, LLC Warrant for 300,000 Class A units  01/08/16   01/08/26   1   *   0.00   $0  $0 

Engineering Design Services

  DPIS Engineering LLC Warrant for 180,000 Class C units  12/01/14   


5th
anniversary
of note paid
in full
 
 
 
 
  1   *   0.00   $0  $0 

Elevator Parts Manufacturer

  EMI Porta HoldCo, LLC 3.56% of SeriesA-2 Preferred Units  12/11/17   None   1   *   0.00 $500   $500  $500 

Industrial Filters Manufacturer

  Filter Holdings, Inc. 7.14% of Common Stock, 7.14% of Preferred Stock  05/05/17   None   2   *   0.00 $207   $207  $207 

Specialty Sand Products

  Green Diamond Performance Materials, Inc. 4.26% of Series A Preferred Stock  09/08/17   None   1   *   0.00 $200   $200  $200 

Car Wash Equipment Manufacturer

  Harrell’s Car Wash Systems, Inc. 0.89% of Common Stock  07/03/17   None   1   *   0.00 $104   $104  $104 

Sheet Metal Manufacturer

  SWDP Acquisition Co., LLC 9.9875% of LLC Units  04/06/17   None   1   *   0.00 $400   $400  $400 

Paper Tapes Manufacturer

  Liberty Paper Products Acquisition, LLC 100% of Series A Preferred Units—12% TOTAL  06/09/16   None   1   *   0.00   $350  $350 

Environmental Consulting Services

  Northern Technologies, LLC 8.27% of LLC units  

01/29/2016,
12/5/16 &
6/12/17
 
 
 
  None   3   *   0.00 $58   $408  $408 

Space Heater Manufacturer

  Pinnacle Products International, Inc. 0.5% common stock  10/09/15   None   1   *   0.00   $135  $135 

Marketing Services

  Portu-Sunberg Marketing LLC 0.86% LLC units  10/19/16   None   1   *   0.00   $50  $50 
  Portu-Sunberg Marketing LLC Warrant for 2.85% of the outstanding stock  12/31/12   07/24/20   1   *   0.00   $0  $0 

Hand Tool Manufacturer

  Stride Tool Holdings, LLC 7.14% of LLC units  04/05/16   None   1   *   0.00   $500  $500 

Forensic Supplies

  Tri-Tech Forensics, Inc. 4.91% of Common Stock; 4.61% of Preferred Stock  06/15/17   None   3   *   0.00 $192   $192  $192 

Weather Forecasting Services

  Weather Decision Technologies, Inc. 2.2% preferred stock  12/11/15   None   1   *   0.00   $500  $500 

Various Other #

 + ** * Various  
08/04/08 to
12/12/14
 
 
  
None to
2/5/23
 
 
  5   *   0.00   $818  $818 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity investments, net

       32   3  0.00 $1,661  $0  $6,400  $9,521 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investment securities

            
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investment securities, net

       0   0  0.00 $0  $0  $0  $0 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net Investments ($183,529 pledged as collateral under borrowing arrangements) (3)

 

       
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
       730   212  4.73 $45,991  $322,068  $468,854  $610,135 
      

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Represents the actual or weighted average interest or dividend rate of the respective security or portfolio as of the date indicated. Investments without an interest rate or with a rate of 0.00% are considerednon-income producing.

(2)

Included in secured mezzanine commercial loans and other commercial loans was $6,237 of interest income capitalized into the outstanding investment balances, and $1,579 of deferred interest income, in accordance with the terms of the investment contract.

(3)

The ratio of restricted securities fair value to net assets is 212%.

(4)

Gross unrealized appreciation, gross unrealized depreciation, and net appreciation for federal income tax purposes totaled $220,597, $21,306 and $199,291, respectively. The tax cost of investments was $410,844.

(5)

For revolving lines of credit the amount shown is the cost at December 31, 2017.

*

Less than 1.0%

**

Not an eligible portfolio company as such term is defined in Section 2(a)(46) of the 1940 Act. The percentage value of allnon-eligible portfolio companies to total assets of Medallion Financial on an unconsolidated basis was up to 59% and up to 48% on a consolidated basis. Under the 1940 Act, we were not allowed to acquire anynon-qualifying assets, unless at the time such acquisition is made, qualifying assets, which include securities of eligible portfolio companies, represent at least 70% of our total assets. The status of these assets under the 1940 Act are subject to change. We monitor the status of these assets on an ongoing basis.

&

Loan is on nonaccrual status, or past due on contractual payments, and is therefore considerednon-income producing.

&&

Some or all of the securities arenon-income producing as per & above.

#

Publicly traded but sales subject to applicable Rule 144 limitations.

Page 50 of 97


##   Pledged as collateral under borrowing arrangements.

+   Includes various warrants, all of which have a cost and fair value of zero at December 31, 2017.

The Summary Schedule of Investments does not reflect the Company’s complete portfolio holdings. It includes the Company’s 50 largest holdings and each investment of any issuer that exceeds 1% of the Company’s net assets. “Various Other” represents all issues not required to be disclosed under the rules adopted by the U.S. Securities and Exchange Commission (“SEC”). Footnotes above may apply to securities that are included in “Various Other”. For further detail, the complete schedule of portfolio holdings is available (i) without charge, upon request, by calling (877) MEDALLION; and (ii) on the SEC’s website at http://www.sec.gov. Filed as Exhibit 99.1 to the Annual Report on Form10-K for the fiscal year ended December 31, 2017, filed on March 14, 2018 (FileNo. 814-00188).

Page 51 of 97


Medallion Financial Corp.

CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFIILIATES

As of and for the year ended December 31, 2017 under Investment Company Accounting

Name of issuer and title of issue

(Dollarsin thousands)

  

Number of shares (all restricted unless

otherwise noted)

  Equity in
net profit
and (loss)
  Amount of
dividends
or interest (1)
   Value as of
12/31/17
 

Medallion Bank – common stock

  1,000,000 shares—100% of common stock  $10,193  $0   $290,548 

Medallion Motorsports, LLC – membership interest (2)

  75% of membership interest   (2,357  1,201    4,623 

Medallion Fine Art, Inc. – common
stock (3)

  1,000 shares—100% of common stock   231   0    3,878 

LAX Group LLC – membership interest

  45% of membership interest   870   0    3,001 

Medallion Servicing Corp. – common stock

  1,000 shares—100% of common stock   546   0    97 

Medallion Taxi Media, Inc. – common stock

  1,000 shares—100% of common stock   0   77    0 
    

 

 

  

 

 

   

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries

     9,483   1,278    302,147 
    

 

 

  

 

 

   

 

 

 

RPAC Racing LLC (2)

  100% of Series D units   0   0    2,193 

Stride Tool Holdings LLC (4) – membership interest

  7.14% of membership interest   0   0    500 

Northern Technologies LLC – membership interest (5)

  8.3% of membership interest   0   0    408 

ADSCO Holdco LLC – membership interest (6)

  7.7% of Class A SeriesA-2 LLC units   0   0    400 

SWDP Acquisition Co LLC(7)

  10% of membership interest   0   0    400 

Appliance Recycling Centers of America Inc. – common stock

  0% of common stock   0   0    0 

Filter Holdings INC.(8)

  7.14% of common & preferred stock   0   0    207 

Third Century JRT, Inc.(9)

  13% of common stock   0   0    200 
    

 

 

  

 

 

   

 

 

 

Total equity investments in affiliates

    $0  $0   $4,308 
    

 

 

  

 

 

   

 

 

 

(1)

Investments with an amount of $0 are considerednon-income producing.

(2)

The Company and a controlled subsidiary of the Company have 4 loans due from RPAC Racing LLC, an affiliate of Medallion Motorsports, LLC, in the amount of $16,472 as of December 31, 2017, and on which $56 of interest income was earned during the year ended December 31, 2017 as the loans are onnon-accrual status.

(3)

The Company has a loan due from Medallion Fine Art, Inc. in the amount of $999 as of December 31, 2017, and on which $165 of interest income was earned during the year ended December 31, 2017.

(4)

The Company has a loan due from Stride Tool Holding LLC in the amount of $4,217 as of December 31, 2017, and on which $631 of interest income was earned during the year ended December 31, 2017.

(5)

The Company has a loan due from Northern Technologies LLC in the amount of $3,670 as of December 31, 2017, on which $477 of interest income was earned during the year ended December 31, 2017.

(6)

The Company has a loan due from ADSCO Holdco LLC in the amount of $ 3,687 as of December 31, 2017, and on which $475 of interest income was earned during the year ended December 31, 2017.

(7)

The Company has a loan due from Innovative Metal Inc., an affiliate of SWDP Acquisition Co LLC in the amount of $5,000 as of December 31, 2017, on which $523 of interest income was earned during the year ended December 31, 2017.

(8)

The Company has a loan due from Filter Holdings Inc. in the amount of $1,250 as of December 31, 2017, on which $117 of interest income was earned during the year ended December 31, 2017.

(9)

The Company has a loan due from JR Thompson Company LLC, an affiliate of Third Century JRT, Inc., in the amount of $1,156 as of December 31, 2017, on which $204 of interest income was earned during the year ended December 31, 2017.

Page 52 of 97


The table below provides a summary of the changes in the investment in the respective issuers for the year ended December 31, 2017.

Name of Issuer

  Medallion
Bank
  Medallion
Fine Art,
Inc. (1)
   Medallion
Motorsports,
LLC (2)
  Appliance
Recycling
Centers
of
America,
Inc.
  Medallion
Servicing
Corp.
  LAX
Group, LLC
   Medallion
Taxi Media,
Inc.
  Third
Century
JRT,
Inc. (3)
   Northern
Technologies,
LLC (4)
   Stride Tool
Holding
LLC (5)
   ADSCO Holdco
LLC (6)
   RPAC Racing
LLC (2)
   Filter
Holdings
Inc.(7)
   SWDP
ACQUISITION
Co LLC(8)
 

Title of Issue

  Common
Stock
  Common
Stock
   Membership
Interest
  Common
Stock
  Common
Stock
  Membership
Interest
   Common
Stock
  Common
Stock
   Membership
Interest
   Membership
Interest
   Membership
Interest
   Membership
Interest
   Common &
Preferred
Stock
   Membership
Interest
 
(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

   —     —      —     —     —     441    —     —      57    —      —      —      207    400 

Gross reductions / distributions

   (234  —      (1,201  (351  (903  —      (77  —      —      —      —      —      —      —   

Net equity in profit and loss, and unrealized appreciation and (depreciation)

   10,193   231    (1,156  (124  546   870    77   —      —      —      —      842    —      —   
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Value as of 12/31/17

  $290,548  $3,878   $4,623  $—    $97  $3,001   $—    $200   $408   $500   $400   $2,193   $207   $400 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)

The Company has a loan due from Medallion Fine Art, Inc. in the amount of $999 as of December 31, 2017, $0 of which was advanced during 2017, and for which $2,325 was repaid.

(2)

In addition to the equity ownership, the Company and a controlled subsidiary of the Company have four loans due from RPAC Racing LLC, an affiliate of Medallion Motorsports, LLC, in the amount of $16,472, $7,883 of which was advanced during 2017.

(3)

The Company has a loan due from J. R. Thompson Company, LLC, an affiliate of Third Century JRT, Inc. in the amount of $1,156 as of December 31, 2017, $469 of which was repaid during 2017.

(4)

The Company has a loan due from Northern Technologies LLC in the amount of $3,670 as of December 31, 2017, $137 of which was advanced during 2017.

(5)

The Company has a loan due from Stride Tool Holdings LLC in the amount of $4,217 as of December 31, 2017, $126 of which was advanced during 2017.

(6)

The Company has a loan due from ADSCO Holdco LLC in the amount of $3,687 as of December 31, 2017, $74 of which was advanced during 2017.

(7)

The Company has a loan due from Filter Holdings Inc. in the amount of $1,250 as of December 31, 2017, all of which was advanced during 2017.

(8)

The Company has a loan due from Innovative Metals, Inc., an affiliate of SWDP Acquisition Co LLC in the amount of $5,000 as of December 31, 2017, all of which was advanced during 2017.

Page 53 of 97


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

GENERAL

We are a specialty finance company that has historically has had a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. Recently, our strategic growth has been through aMedallion Bank (a wholly-owned subsidiary of ours, Medallion Bank,subsidiary), which originates consumer loans for the purchase of recreational vehicles (RVs), boats, motorcycles, and trailers, and to finance small-scale home improvements.

Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17% (20%16% (19% if there had been no loan sales during 2016, 2017, and 2017)2018). We are transitioning away from medallion lending and placing our strategic focus on our growing consumer finance business. As a result of our change in strategy, as of June 30, 2018,2019, our consumer loans represented 70%82% of our net loan portfolio, with medallion loans representing 23%12% and commercial loans representing 7%6%. Total assets under management and management of our unconsolidated wholly-owned subsidiaries (prior to April 2, 2018), which includes our managed net investment portfolio, as well as assets serviced for third party investors and unconsolidated subsidiaries, were $1,561,000,000$1,620,000,000 as of June 30, 2018,2019, and were $1,593,000,000$1,522,000,000 and $1,606,000,000$1,561,000,000 as of December 31, 20172018 and June 30, 2017,2018, 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 interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as bank certificates of deposit issued to customers, revolving bank facilities, debentures issued to and guaranteed by the SBA, privately placed notes, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities.

We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Our investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.

On March 7, 2018, a majority of the Company’s shareholders authorized the Company’s Board of Directors to withdraw the Company’s election to be regulated as a BDCbusiness development company (BDC) under the Investment Company Act of 1940, Act,as amended (1940 Act), and we withdrew such election effective April 2, 2018. At that point, we were no longer a BDC or subject to the provisions of the 1940 Act applicable to BDCs. Historically, the composition of the Company’s assets caused it to meet the definition of an “investment company,” and the Company made a corresponding election to be treated as a BDC. Now that the Company hasde-elected BDC status, it operates so as to fall outside the definition of an “investment company” or within an applicable exception.

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

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

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

As we are makingmade this change to our financial reporting prospectively, in this report we refer to both accounting in accordance with US generally accepted accounting principles (GAAP) applicable to bank holding companies (Bank Holding Company Accounting), which applies commencing April 2, 2018, and to that applicable to investment companies under the 1940 Act (Investment Company Accounting), which applies to prior periods.

We are subject to taxation as a corporation under Subchapter C of the Internal Revenue Code, and therefore file a consolidated tax return for federal and state purposes with all of our operating entities. See Note 8 for more information.

Our wholly-owned subsidiary, Medallion Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions whichthat originates consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we have referred a portion of our taxicab medallion and commercial loans to Medallion Bank, which originated these loans, that wereand have been serviced by MSC.Medallion Servicing Corp. (MSC). However, at this time Medallion Bank is not originating any new taxi medallion loans and is working with MSC to service its existing portfolio. The FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, although it is less than one times Tier 1 capital as of June 30, 2018.2019. MSC earns referral and servicing fees for these activities.

Page 45 of 76


 

Page 54The assets of 97


As of June 30, 2018,Taxi Medallion Loan Trust III had(Trust III) were not available to pay obligations of its affiliates or any other party. Trust III’s loans are serviced by Medallion Funding LLC (MFC). On November 8, 2018, a deficitlimited guaranty in favor of $26,590,000, asDZ Bank was terminated in exchange for a $1.4 million note, payable in quarterly installments over five years. As a result of the unrealized depreciation and losses taken on the medallion loans in Trust III. This amount exceeded our maximum exposure tosuch restructuring, effective as of such date, Trust III which is solely due to a limited guarantee by MFC of $6,065,000, by $20,525,000. Due to technical consolidation accounting rules, we are required to record these losses, even though we are under no obligation to cover them financially. We are exploring alternative approaches to this investment to allow for a full or partial recovery of these amounts as well as to not incur additional losseslonger consolidated in this entity going forward. There can be no assurance that we will be able to do so.our financial statements.

Average Balances and Rates (Bank Holding Company Accounting)

The following table showstables show the Company’s consolidated average balance sheets and thesheet, interest income and expense and the relevant average interest earnings/costsearning/bearing assets and liabilities, and which reflectsreflect the average yield on assets and average costs on liabilities for three months ended June 30, 2018.2019 and 2018, and for the six months ended June 30, 2019.

 

 

Three Months Ended June 30,

 

  Three Months Ended June 30, 2018 

 

2019

 

 

2018

 

(dollars in thousands)

  Average Balance   Interest   Average Rate 

Interest-earning assets:

      

(Dollars in thousands)

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Cost

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Cost

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning cash and cash equivalents

  $26,211   $95    1.47

 

$

34,001

 

 

$

153

 

 

 

1.80

%

 

$

26,211

 

 

$

95

 

 

 

1.47

%

Investment securities

   43,257    284    2.67 

 

 

44,560

 

 

 

404

 

 

 

3.64

 

 

 

43,257

 

 

 

284

 

 

 

2.67

 

Loans:

      

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

   562,735    22,214    16.01 

 

 

629,383

 

 

 

24,370

 

 

 

15.53

 

 

 

562,735

 

 

 

22,214

 

 

 

16.01

 

Home improvement

   189,562    4,542    9.72 

 

 

198,352

 

 

 

4,678

 

 

 

9.46

 

 

 

189,562

 

 

 

4,542

 

 

 

9.72

 

Commercial loans

   80,130    2,778    14.06 

Medallion loans

   277,515    2,731    3.99 
  

 

   

 

   

Commercial

 

 

59,721

 

 

 

1,744

 

 

 

11.71

 

 

 

80,130

 

 

 

2,778

 

 

 

14.06

 

Medallion

 

 

134,007

 

 

 

666

 

 

 

1.99

 

 

 

277,515

 

 

 

2,731

 

 

 

3.99

 

Total loans

   1,109,942    32,265    11.79 

 

 

1,021,463

 

 

 

31,458

 

 

 

12.35

 

 

 

1,109,942

 

 

 

32,265

 

 

 

11.79

 

  

 

   

 

   

Total interest-earning assets

  $1,179,410   $32,644    11.23

 

 

1,100,024

 

 

 

32,015

 

 

 

11.67

 

 

 

1,179,410

 

 

 

32,644

 

 

 

11.23

 

  

 

   

 

   

 

 

Non-interest-earning assets

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

  $10,374     

 

 

45,364

 

 

 

 

 

 

 

 

 

 

 

10,374

 

 

 

 

 

 

 

 

 

Equity investments

   10,940     

 

 

9,361

 

 

 

 

 

 

 

 

 

 

 

10,940

 

 

 

 

 

 

 

 

 

Loan collateral in process of foreclosure

   60,614     

Loan collateral in process of foreclosure(1)

 

 

50,048

 

 

 

 

 

 

 

 

 

 

 

60,614

 

 

 

 

 

 

 

 

 

Goodwill and intangible assets

   211,394     

 

 

204,243

 

 

 

 

 

 

 

 

 

 

 

211,394

 

 

 

 

 

 

 

 

 

Deferred tax asset

   2,900     

 

 

 

 

 

 

 

 

 

 

 

 

 

2,900

 

 

 

 

 

 

 

 

 

Other assets

   35,249     

 

 

48,588

 

 

 

 

 

 

 

 

 

 

 

35,249

 

 

 

 

 

 

 

 

 

  

 

     

Totalnon-interest-earning assets

   331,471     

 

 

357,604

 

 

 

 

 

 

 

 

 

 

 

331,471

 

 

 

 

 

 

 

 

 

  

 

     

Total assets

  $1,510,881     

 

$

1,457,628

 

 

 

 

 

 

 

 

 

 

$

1,510,881

 

 

 

 

 

 

 

 

 

  

 

     

Interest-bearing liabilities

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

  $871,483   $4,200    1.93

 

$

895,215

 

 

$

5,484

 

 

 

2.46

%

 

$

871,483

 

 

$

4,200

 

 

 

1.93

%

DZ loan

   97,660    884    3.63 

 

 

 

 

 

 

 

 

0.00

 

 

 

97,660

 

 

 

884

 

 

 

3.63

 

SBA debentures and borrowings

   78,136    752    3.86 

 

 

78,036

 

 

 

756

 

 

 

3.89

 

 

 

78,136

 

 

 

752

 

 

 

3.86

 

Notes payable to banks

   73,985    821    4.45 

 

 

49,932

 

 

 

601

 

 

 

4.83

 

 

 

73,985

 

 

 

821

 

 

 

4.45

 

Retail notes

   33,625    875    10.44 

Retail and privately placed notes

 

 

63,625

 

 

 

1,552

 

 

 

9.78

 

 

 

33,625

 

 

 

875

 

 

 

10.44

 

Preferred securities

   33,000    353    4.29 

 

 

33,000

 

 

 

392

 

 

 

4.76

 

 

 

33,000

 

 

 

353

 

 

 

4.29

 

Other borrowings

   9,561    40    1.68 

 

 

7,701

 

 

 

36

 

 

 

1.88

 

 

 

9,561

 

 

 

40

 

 

 

1.68

 

  

 

   

 

   

Total interest-bearing liabilities

  $1,197,450   $7,925    2.65

 

 

1,127,509

 

 

 

8,821

 

 

 

3.14

 

 

 

1,197,450

 

 

 

7,925

 

 

 

2.65

 

  

 

   

 

   

 

 

Non-interest-bearing liabilities

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

6,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

  $19,124     

 

 

32,328

 

 

 

 

 

 

 

 

 

 

 

19,124

 

 

 

 

 

 

 

 

 

Totalnon-interest-bearing liabilities

   19,124     

 

 

39,286

 

 

 

 

 

 

 

 

 

 

 

19,124

 

 

 

 

 

 

 

 

 

  

 

     

Total liabilities

  $1,216,574     

 

 

1,166,795

 

 

 

 

 

 

 

 

 

 

 

1,216,574

 

 

 

 

 

 

 

 

 

  

 

     

Non controlling interest

   27,211     

 

 

27,238

 

 

 

 

 

 

 

 

 

 

 

27,211

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

   267,096     

 

 

263,595

 

 

 

 

 

 

 

 

 

 

 

267,096

 

 

 

 

 

 

 

 

 

  

 

     

Total liabilities and stockholders equity

  $1,510,881     
  

 

     

Total liabilities and stockholders' equity

 

$

1,457,628

 

 

 

 

 

 

 

 

 

 

$

1,510,881

 

 

 

 

 

 

 

 

 

Net interest income

    $24,719   

 

 

 

 

 

$

23,194

 

 

 

 

 

 

 

 

 

 

$

24,719

 

 

 

 

 

    

 

   

Net interest margin

       8.57

 

 

 

 

 

 

 

 

 

 

8.46

%

 

 

 

 

 

 

 

 

 

 

8.57

%

      

 

 

(1)

Includes financed sales of this collateral to third parties reported separately from the loan portfolio, and that are conducted by Medallion Bank of $4,290 as of June 30, 2019.

Page 46 of 76


 

Page 55 of 97


During the quarter, our net loans receivable had a yield of 12.35% (compared to 11.79% in the prior year quarter), mainly driven by the increase in the average yield on recreation and home improvement loans even as yields have declined overall. The debt, mainly certificates of deposit, helps fund the growing consumer loan business and as the market rates have increased, there has been an overall increase in the average borrowing rate.

 

 

Six Months Ended June 30, 2019

 

(Dollars in thousands)

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Cost

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning cash and cash equivalents

 

$

33,910

 

 

$

298

 

 

 

1.77

%

Investment securities

 

 

44,505

 

 

 

690

 

 

 

3.13

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

 

609,930

 

 

 

46,849

 

 

 

15.49

 

Home improvement

 

 

192,405

 

 

 

9,003

 

 

 

9.44

 

Commercial

 

 

59,862

 

 

 

3,711

 

 

 

12.50

 

Medallion

 

 

140,095

 

 

 

1,507

 

 

 

2.17

 

Total loans

 

 

1,002,292

 

 

 

61,070

 

 

 

12.29

 

Total interest-earning assets

 

 

1,080,707

 

 

 

62,058

 

 

 

11.58

 

Non-interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

37,192

 

 

 

 

 

 

 

 

 

Equity investments

 

 

9,223

 

 

 

 

 

 

 

 

 

Loan collateral in process of foreclosure(1)

 

 

50,913

 

 

 

 

 

 

 

 

 

Goodwill and intangible assets

 

 

204,424

 

 

 

 

 

 

 

 

 

Other assets

 

 

44,296

 

 

 

 

 

 

 

 

 

Total non-interest-earning assets

 

 

346,048

 

 

 

 

 

 

 

 

 

Total assets

 

 

1,426,755

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

884,164

 

 

$

10,406

 

 

 

2.37

%

SBA debentures and borrowings

 

 

78,956

 

 

 

1,520

 

 

 

3.88

 

Notes payable to banks

 

 

54,459

 

 

 

1,266

 

 

 

4.69

 

Retail and privately placed notes

 

 

50,249

 

 

 

2,489

 

 

 

9.99

 

Preferred securities

 

 

33,000

 

 

 

790

 

 

 

4.83

 

Other borrowings

 

 

7,684

 

 

 

72

 

 

 

1.89

 

Total interest-bearing liabilities

 

 

1,108,512

 

 

 

16,543

 

 

 

3.01

 

Non-interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

6,896

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

21,313

 

 

 

 

 

 

 

 

 

Total non-interest-bearing liabilities

 

 

28,209

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,136,721

 

 

 

 

 

 

 

 

 

Non controlling interest

 

 

27,392

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

262,642

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

1,426,755

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

45,515

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

 

 

8.49

%

(1)

Includes financed sales of this collateral to third parties reported separately from the loan portfolio, and that are conducted by Medallion Bank of $4,290 as of June 30, 2019.

For the six months ended June 30, 2019, our net loans receivable had a yield of 12.29%, which was mainly driven by the recreation and commercial loans with average yields of 16.01% and 14.06%.15.49% along with the growing portfolio. The recreation loans are mainly driven by the RV and marineboat business and led to a majority of our interest income. The debt, mainly the certificates of deposits, helpdeposit that assist in funding the growing consumer business, mainly on the consumer loans.has an average rate of borrowing of 3.01%.

Page 47 of 76


Rate/Volume Analysis (Bank Holding Company Accounting)

The following table presentstables present the change in interest income and expense due to changes in the average balances (volume) and average rates, by calculatingcalculated for the periodperiods indicated.

 

 

Three Months Ended June 30,

 

  Three Months Ended June 30, 2018 

 

2019

 

 

2018

 

(dollars in thousands)

  Increase (Decrease) In
Volume
   Increase
(Decrease) In Rate
   Net Change 

(Dollars in thousands)

 

Increase

(Decrease)

In Volume

 

 

Increase

(Decrease)

in Rate

 

 

Net

Change

 

 

Increase

(Decrease)

In Volume

 

 

Increase

(Decrease)

in Rate

 

 

Net

Change

 

Interest-earning assets

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning cash and cash equivalents

  ($8  ($33  ($41

 

$

32

 

 

$

26

 

 

$

58

 

 

$

(8

)

 

$

(33

)

 

$

(41

)

Investment securities

   9    28    37 

 

 

9

 

 

 

111

 

 

 

120

 

 

 

9

 

 

 

28

 

 

 

37

 

Loans

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

   929    (902   27 

 

 

2,760

 

 

 

(604

)

 

 

2,156

 

 

 

929

 

 

 

(902

)

 

 

27

 

Home improvement

   205    237    442 

 

 

259

 

 

 

(123

)

 

 

136

 

 

 

205

 

 

 

237

 

 

 

442

 

Commercial

   (5   429    424 

 

 

(640

)

 

 

(394

)

 

 

(1,034

)

 

 

(5

)

 

 

429

 

 

 

424

 

Medallion

   (151   (308   (459

 

 

(1,078

)

 

 

(987

)

 

 

(2,065

)

 

 

(151

)

 

 

(308

)

 

 

(459

)

  

 

   

 

   

 

 

Total loans receivable

   $978   ($544   $434 
  

 

   

 

   

 

 

Total loans

 

 

1,301

 

 

 

(2,108

)

 

 

(807

)

 

 

978

 

 

 

(544

)

 

 

434

 

Total interest-earning assets

   $979   ($549   $430 

 

 

1,342

 

 

 

(1,971

)

 

 

(629

)

 

 

979

 

 

 

(549

)

 

 

430

 

  

 

   

 

   

 

 

Interest-bearing liabilities

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

   $79    $457    $536 

Deposits

 

 

139

 

 

 

1,145

 

 

$

1,284

 

 

$

79

 

 

$

457

 

 

$

536

 

DZ loan

   (11   84    73 

 

 

(484

)

 

 

(400

)

 

 

(884

)

 

 

(11

)

 

 

84

 

 

 

73

 

SBA debentures and other borrowings

   (5   —      (5

SBA debentures and borrowings

 

 

(1

)

 

 

5

 

 

 

4

 

 

 

(5

)

 

 

 

 

 

(5

)

Notes payable to banks

   (62   66    4 

 

 

(290

)

 

 

70

 

 

 

(220

)

 

 

(62

)

 

 

66

 

 

 

4

 

Retail notes

   —      (9   (9

Retail and privately placed notes

 

 

732

 

 

 

(55

)

 

 

677

 

 

 

 

 

 

(9

)

 

 

(9

)

Preferred securities

   —      38    38 

 

 

 

 

39

 

 

 

39

 

 

 

 

 

 

38

 

 

 

38

 

Other borrowings

   9   (6   3 

 

 

(9

)

 

 

5

 

 

 

(4

)

 

 

9

 

 

 

(6

)

 

 

3

 

  

 

   

 

   

 

 

Total interest-bearing liabilities

   $10    $630    $640 

 

 

87

 

 

 

809

 

 

 

896

 

 

 

10

 

 

 

630

 

 

 

640

 

  

 

   

 

   

 

 

Net

   $969   ($1,179  ($210

 

$

1,255

 

 

$

(2,780

)

 

$

(1,525

)

 

$

969

 

 

$

(1,179

)

 

$

(210

)

  

 

   

 

   

 

 

 

 

Six Months Ended June 30, 2019

 

(Dollars in thousands)

 

Increase

(Decrease)

In Volume

 

 

Increase

(Decrease)

In Rate

 

 

Net

Change

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning cash and cash equivalents

 

$

(146

)

 

$

64

 

 

$

(82

)

Investment securities

 

 

(4

)

 

 

121

 

 

 

117

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

 

3,163

 

 

 

(1,265

)

 

 

1,898

 

Home improvement

 

 

516

 

 

 

(248

)

 

 

268

 

Commercial

 

 

(1,249

)

 

 

(318

)

 

 

(1,567

)

Medallion

 

 

(1,322

)

 

 

(905

)

 

 

(2,227

)

Total loans

 

 

1,108

 

 

 

(2,736

)

 

 

(1,628

)

Total interest-earning assets

 

 

958

 

 

 

(2,551

)

 

 

(1,593

)

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

(170

)

 

 

1,409

 

 

 

1,239

 

DZ loan

 

 

(605

)

 

 

(520

)

 

 

(1,125

)

SBA debentures and borrowings

 

 

(23

)

 

 

10

 

 

 

(13

)

Notes payable to banks

 

 

(338

)

 

 

67

 

 

 

(271

)

Retail and privately placed notes

 

 

792

 

 

 

(53

)

 

 

739

 

Preferred securities

 

 

 

 

 

52

 

 

 

52

 

Other borrowings

 

 

(10

)

 

 

3

 

 

 

(7

)

Total interest-bearing liabilities

 

 

(354

)

 

 

968

 

 

 

614

 

Net

 

$

1,312

 

 

$

(3,519

)

 

$

(2,207

)

 

Page 5648 of 9776



Our interest expense is driven by the interest rates payable on our bank certificates of deposit, short-term credit facilities with banks, fixed-rate, long-term debentures issued to the SBA, and other short-term notes payable. Medallion Bank began issuingissues brokered bank certificates of deposit, during 2004, which were atare our lowest borrowing costs. Medallion Bank is able to bid on these deposits at a wide variety of maturity levels, which allows for improved interest rate management strategies. In addition, we established a medallion lending relationship with DZ Bank in December 2008 that provided for growth in the portfolio at generally lower rates than under prior facilities.

Our cost of funds is primarily driven by the rates paid on our various debt instruments and their relative mix, and changes in the levels of average borrowings outstanding. See Note 7 to the consolidated financial statements 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 following tables show the average borrowings and related borrowing costs for the three and six months ended June 30, 20182019 and 2017.2018. Our average balances decreaseddeclined during the current quarter and six months ended June 30, 2019, reflecting the contraction in the investmentmedallion loan portfolio, mainly due to the deconsolidation of Trust III in the 2018 fourth quarter, but partly offset with increased average balances dueby the increase of certificates of deposits as the consumer business continues to new consumer loans in the period.grow. The increase in borrowing costs primarily reflectedreflects the repricing of term borrowings based upon the current market conditions, and increasedthe increase in deposit balances reflecting areflect the lengthening of their maturity profile.

 

 

Bank Holding Company Accounting

 

 

Three Months Ended

 

 

Six Months Ended

 

(Dollars in thousands)

  Bank Holding Company Accounting Combined 

 

Interest

Expense

 

 

Average

Balance

 

 

Average

Borrowing

Costs

 

 

Interest

Expense

 

 

Average

Balance

 

 

Average

Borrowing

Costs

 

Three Months Ended Six Months Ended 
Interest
Expense
   Average
Balance
   Average
Borrowing
Costs
 Interest
Expense
   Average
Balance
   Average
Borrowing
Costs
 

June 30, 2018

           

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

  $4,200   $871,483    1.93 $4,200   $871,483    1.93

 

$

5,484

 

 

$

895,215

 

 

 

2.46

%

 

$

10,406

 

 

$

884,164

 

 

 

2.37

%

DZ loan

   884    97,660    3.63   1,686    98,318    3.46 

SBA debentures and other borrowings

   752    78,136    3.86   1,501    78,420    3.86 

SBA debentures and borrowings

 

 

756

 

 

 

78,036

 

 

 

3.89

 

 

 

1,520

 

 

 

78,956

 

 

 

3.88

 

Notes payable to banks

   821    73,985    4.45   1,634    76,979    4.28 

 

 

601

 

 

 

49,932

 

 

 

4.83

 

 

 

1,266

 

 

 

54,459

 

 

 

4.69

 

Retail notes

   875    33,625    10.44   1,750    33,625    10.50 

Retail and privately placed notes

 

 

1,552

 

 

 

63,625

 

 

 

9.78

 

 

 

2,489

 

 

 

50,249

 

 

 

9.99

 

Preferred securities

   353    33,000    4.29   665    33,000    4.06 

 

 

392

 

 

 

33,000

 

 

 

4.76

 

 

 

790

 

 

 

33,000

 

 

 

4.83

 

Other borrowings

   40    9,561    1.68   40    9,561    1.68 

 

 

36

 

 

 

7,701

 

 

 

1.88

 

 

 

72

 

 

 

7,684

 

 

 

1.89

 

  

 

   

 

    

 

   

 

   

Total borrowings

  $7,925   $1,197,450    2.65  $11,476   $1,201,386    1.93 

 

$

8,821

 

 

$

1,127,509

 

 

 

3.14

 

 

$

16,543

 

 

$

1,108,512

 

 

 

3.01

 

  

 

   

 

    

 

   

 

   

 

  Investment Company Accounting 

 

Bank Holding Company Accounting

 

 

Combined (1)

 

  Three Months Ended Six Months Ended 

 

Three Months Ended

 

 

Six Months Ended

 

(Dollars in thousands)

  Interest
Expense
   Average
Balance
   Average
Borrowing
Costs
 Interest
Expense
   Average
Balance
   Average
Borrowing
Costs
 

 

Interest

Expense

 

 

Average

Balance

 

 

Average

Borrowing

Costs

 

 

Interest

Expense

 

 

Average

Balance

 

 

Average

Borrowing

Costs

 

June 30, 2017

           

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

4,200

 

 

$

871,483

 

 

 

1.93

%

 

$

4,200

 

 

$

871,483

 

 

 

1.93

%

DZ loan

  $723   $103,602    2.80 $1,374   $104,474    2.65

 

 

884

 

 

 

97,660

 

 

 

3.63

 

 

 

1,686

 

 

 

98,318

 

 

 

3.46

 

SBA debentures and borrowings

 

 

752

 

 

 

78,136

 

 

 

3.86

 

 

 

1,501

 

 

 

78,420

 

 

 

3.86

 

Notes payable to banks

   769    84,709    3.64  1,529    86,506    3.56 

 

 

821

 

 

 

73,985

 

 

 

4.45

 

 

 

1,634

 

 

 

76,979

 

 

 

4.28

 

SBA debentures and other borrowings

   767    80,074    3.84  1,556    80,854    3.88 

Retail notes

   876    33,625    10.45  1,753    33,625    10.51 

 

 

875

 

 

 

33,625

 

 

 

10.44

 

 

 

1,750

 

 

 

33,625

 

 

 

10.50

 

Preferred securities

   273    33,000    3.32  530    33,000    3.24 

 

 

353

 

 

 

33,000

 

 

 

4.29

 

 

 

665

 

 

 

33,000

 

 

 

4.06

 

  

 

   

 

    

 

   

 

   

Total

  $3,408   $335,010    4.08  $6,742   $338,459    4.02 
  

 

   

 

    

 

   

 

   

Medallion Bank borrowings

  $3,186   $868,325    1.47  $6,292   $891,452    1.42 
  

 

   

 

    

 

   

 

   

Total managed borrowings

  $6,594   $1,203,335    2.20  $13,034   $1,229,911    2.14 
  

 

   

 

    

 

   

 

   

Other borrowings

 

 

40

 

 

 

9,561

 

 

 

1.68

 

 

 

40

 

 

 

9,561

 

 

 

1.68

 

Total borrowings

 

$

7,925

 

 

$

1,197,450

 

 

 

2.65

 

 

$

11,476

 

 

$

1,201,386

 

 

 

1.93

 

(1)

Results include the three months ended June 30, 2018 under Bank Holding Company Accounting and the three months ended March 31, 2018 under Investment Company Accounting.

 

Page 57 of 97


We willexpect to continue to seek SBA funding through Medallion Capital, Inc. (Medallion Capital) to the extent it offers attractive rates. SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the SBIA and SBA regulations. We believe that financing operations primarily with short-term floating rate secured bank debt has generally decreased our interest expense, but has also increased our exposure to the risk of increases in market interest rates, which we mitigate with certain interest rate strategies. At June 30, 20182019 and 2017,2018, short-term adjustable rate debt constituted 14%6% and 59% (16% on a managed basis including borrowings of Medallion Bank)14% of total debt.

Page 49 of 76


Loans

The gross loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan. During the three and six months ended June 30, 2019, there was continued growth in the consumer lending segments, which was partially offset by the various commercial loans settled during the period and payments received from borrowers.

Three Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallions

 

 

Total

 

Gross loans- March 31, 2019

 

$

609,999

 

 

$

193,275

 

 

$

55,211

 

 

$

165,715

 

 

$

1,024,200

 

Loan originations

 

 

102,695

 

 

 

33,533

 

 

 

9,270

 

 

 

 

 

 

145,498

 

Principal payments

 

 

(41,641

)

 

 

(16,580

)

 

 

(70

)

 

 

(3,164

)

 

 

(61,455

)

Charge-offs, net

 

 

(2,433

)

 

 

(86

)

 

 

 

 

 

(8,844

)

 

 

(11,363

)

Transfer to loans in process of foreclosure, net

 

 

(3,491

)

 

 

 

 

 

 

 

 

(6,863

)

 

 

(10,354

)

Other

 

 

3,411

 

 

 

(593

)

 

 

31

 

 

 

(900

)

 

 

1,949

 

Gross loans- June 30, 2019

 

$

668,540

 

 

$

209,549

 

 

$

64,442

 

 

$

145,944

 

 

$

1,088,475

 

Six Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallion

 

 

Total

 

Gross loans- December 31, 2018

 

$

587,038

 

 

$

183,155

 

 

$

64,083

 

 

$

183,606

 

 

$

1,017,882

 

Loan originations

 

 

166,327

 

 

 

60,180

 

 

 

9,770

 

 

 

 

 

 

236,277

 

Principal payments

 

 

(72,890

)

 

 

(32,779

)

 

 

(9,413

)

 

 

(6,599

)

 

 

(121,681

)

Charge-offs, net

 

 

(7,363

)

 

 

(245

)

 

 

 

 

 

(16,631

)

 

 

(24,239

)

Transfer to loans in process of foreclosure, net

 

 

(6,883

)

 

 

 

 

 

 

 

 

(12,568

)

 

 

(19,451

)

Other

 

 

2,311

 

 

 

(762

)

 

 

2

 

 

 

(1,864

)

 

 

(313

)

Gross loans- June 30, 2019

 

$

668,540

 

 

$

209,549

 

 

$

64,442

 

 

$

145,944

 

 

$

1,088,475

 

Provision and Allowance for Loan Loss (Bank Holding Company Accounting)

The below is based upon activity beginning on April 2, 2018. During the quarterthree months ended June 30, 2019, New York medallion values (representing approximately 88% of the medallion loan portfolio) remained constant at $169,500, while Chicago medallion values dropped from $29,500 to $19,500, whereas for the three months ended June 30, 2018, the New York medallion value slightly decreased to a net realizable value of $181,000,values declined from $183,500 at March 31, 2018.to $181,000 and the Chicago medallion value remained consistent. In addition, loans continued to age over 90 or 120 days, and were reserved and charged-off down to their collateral value. The provision and allowance also included $6,663,000the general reserve of unallocated allowance$5,247,000 for the Company, for current and performing medallion loans under 90 days past due, as an additional buffer against future losses as of June 30, 2019, whereas for the three months ended June 30, 2018 it included the initial general reserve of $6,663,000. This figure as of June 30, 2019, excludes the general reserve of $17,351,000 at Medallion Bank, much of which was netted against loan balances at consolidation on April 2, 2018. Subsequent to April 2, 2018, the Bank recorded general reserves of $6,092,000.

Page 50 of 76


During the six months ended June 30, 2019, the New York medallion values declined to a net realizable value of $169,500 from $181,000 at December 31, 2018. Overall loans continued to age over 90 and to conform our methodology to that of Medallion Bank.120 days which they are then reserved and subsequently charged-off.

 

 

Three Months Ended June 30,

 

 

Six Months

Ended

June 30,

 

 

(Dollars in thousands)

    

 

2019

 

 

2018

 

 

2019

 

 

Allowance for loan losses – beginning balance

  $—  

 

$

36,862

 

 

$

 

(1)

$

36,395

 

 

Charge-offs:

  

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

   (4,646

 

 

(4,395

)

 

 

(4,646

)

 

 

(10,921

)

 

Home improvement

   (561

 

 

(539

)

 

 

(561

)

 

 

(1,088

)

 

Commercial

   —   

 

 

 

 

 

 

 

 

Medallion

   (6,280

 

 

(9,242

)

 

 

(6,280

)

 

 

(18,029

)

 

  

 

 

Total charge-offs

   (11,487

 

 

(14,176

)

 

 

(11,487

)

 

 

(30,038

)

 

  

 

 

Recoveries

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

   1,899 

 

 

1,962

 

 

 

1,899

 

 

 

3,558

 

 

Home improvement

   239 

 

 

453

 

 

 

239

 

 

 

843

 

 

Commercial

   4 

 

 

 

 

4

 

 

 

 

Medallion

   194 

 

 

398

 

 

 

194

 

 

 

1,398

 

 

  

 

 

Total recoveries

   2,336 

 

 

2,813

 

 

 

2,336

 

 

 

5,799

 

 

  

 

 

Net charge-offs

   (9,151
  

 

 

Net charge-offs(2)

 

 

(11,363

)

 

 

(9,151

)

 

 

(24,239

)

 

Provision for loan losses

   30,576 

 

 

15,171

 

 

 

30,576

 

 

 

28,514

 

 

  

 

 

Allowance for loan losses – ending balance

  $21,425 

 

$

40,670

 

(3)

$

21,425

 

 

$

40,670

 

(3)

  

 

 

(1)

Beginning balance reflects the transition to Bank Holding Company Accounting by netting previously established unrealized depreciation against the gross loan balances, resulting in a starting point of zero for the three months ended June 30, 2018.

(2)

As of June 30, 2019, cumulative net charge-offs of loans and loans in process of foreclosure in the medallion portfolio were $237,671, representing collection opportunities for the Company.

(3)

Includes $5,247 of a general reserve for the Company, for current and performing medallion loans under 90 days past due, as an additional buffer against future losses, representing 13% of the total allowance, and 3.82% of the loans in question. As of June 30, 2019, this figure excludes $17,351 of a general reserve on loans at Medallion Bank, much of which was netted against loan balances at consolidation on April 2, 2018. Subsequent to April 2, 2018, the Bank recorded general reserves of $6,092.

The following table presentstables present the allowance by segment as a percentpercentage of loans as of June 30, 2019 and December 31, 2018 under Bank Holding Company Accounting.

 

(Dollars in thousands)

  Amount   Percentage
of
Allowance
 Allowance as a
Percent of Loan
Category
 

June 30, 2019

(Dollars in thousands)

 

Amount

 

 

Percentage

of Allowance

 

 

Allowance as

a Percent of

Loan Category

 

Recreation

  $1,963    9.16  0.33

 

$

12,672

 

 

 

31

%

 

 

1.90

%

Home Improvement

   555    2.59   0.28 

 

 

2,913

 

 

 

7

 

 

 

1.39

 

Commercial

   175    0.82   0.22 

 

 

455

 

 

 

1

 

 

 

0.71

 

Medallion

   18,732    87.43   6.77 

 

 

24,630

 

 

 

61

 

 

 

16.88

 

  

 

   

 

  

 

 

Total

  $21,425    100  1.86

 

$

40,670

 

 

 

100

%

 

 

3.74

 

  

 

   

 

  

 

 

December 31, 2018

(Dollars in thousands)

 

Amount

 

 

Percentage

of Allowance

 

 

Allowance as

a Percent of

Loan Category

 

Recreation

 

$

6,856

 

 

 

19

%

 

 

1.17

%

Home Improvement

 

 

1,796

 

 

 

5

 

 

 

0.98

 

Commercial

 

 

 

 

 

 

 

 

0.00

 

Medallion

 

 

27,743

 

 

 

76

 

 

 

15.11

 

Total

 

$

36,395

 

 

 

100

%

 

 

3.58

%

Page 51 of 76


The following tables settable sets forth thepre-tax changes in our unrealized appreciation (depreciation) on investments for the three months ended March 31, 2018 and June 30, 2017, and the six months ended June 30, 2017 under Investment Company Accounting.

 

(Dollars in  thousands)

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

Balance December 31, 2017

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

Net change in unrealized

        

Appreciation on investments

   —     —     38,795    (998  —     37,797 

Depreciation on investments

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

(Dollars in thousands)

 

Medallion

Loans

 

 

Commercial

Loans

 

 

Investments in

Subsidiaries

 

 

Equity

Investments

 

 

Investments

Other Than

Securities

 

 

Total

 

Balance December 31, 2017

 

$

(20,338

)

 

$

(513

)

 

$

158,920

 

 

$

3,121

 

 

$

(1,490

)

 

$

139,700

 

Net change in unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appreciation on investments

 

 

 

 

 

 

 

 

38,795

 

 

 

(998

)

 

 

 

 

 

37,797

 

Depreciation on investments

 

 

(38,170

)

 

 

18

 

 

 

 

 

 

 

 

 

(1,915

)

 

 

(40,067

)

Reversal of unrealized appreciation

   (depreciation) related to realized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses on investments

 

 

34,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34,747

 

Balance March 31, 2018

 

$

(23,761

)

 

$

(495

)

 

$

197,715

 

 

$

2,123

 

 

$

(3,405

)

 

$

172,177

 

 

Page 58 of 97


(Dollars in  thousands)

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

Reversal of unrealized appreciation (depreciation) related to realized

         

Gains on investments

   —      —     —      —      —     —   

Losses on investments

   34,747   —     —      —      —     34,747 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Balance March 31, 2018

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

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

(Dollars in thousands)

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

Balance December 31, 2016

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

Net change in unrealized

        

Appreciation on investments

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

Depreciation on investments

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

Reversal of unrealized
appreciation (depreciation) related to realized

        

Gains on investments

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

Losses on investments

   825   —     —     486   —      1,311 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Balance March 31, 2017

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

Net change in unrealized

        

Appreciation on investments

   —     —     (771  120   —      (651

Depreciation on investments

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

Reversal of unrealized appreciation (depreciation) related to realized

        

Gains on investments

   —     —     —     —     —      —   

Losses on investments

   337   636   —     —     —      973 

Other

   —     —     —     —     —      —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Balance June 30, 2017

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Under both Bank Holding Company Accounting and Investment Company Accounting, we generally followedfollow a practice of discontinuing the accrual of interest income on our loans that are in arrears as to payments for a period of 90 days or more. We deliver a default notice and begin foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the most appropriate course of action under the circumstances. A loan is considered to be delinquent if the borrower fails to make a payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment terms of the loan with a borrower that cannot make payments in accordance with the original loan agreement. For loan modifications, the loan will only be returned to accrual status if all past due interest and principal payments are brought fully current. For credit that is collateral based, we evaluate the anticipated net residual value we would receive upon foreclosure of such loans, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequate in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install a new operator to run the business and reduce the debt.

For the consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged offcharged-off to realized losses. If the collateral is repossessed, a realized loss is recorded to write the collateral down to its net realizable value, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off as a realized loss, and any excess proceeds are recorded as a realized gain. Proceeds collected on charged off accounts are recorded as realized gains. All collection, repossession, and recovery efforts are handled on behalf of Medallion Bank by the servicer.

Page 59 of 97


The following table shows the trend in loans 90 days or more past due as of the dates indicated.

 

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

(Dollars in  thousands)

  Amount   %(1)  Amount   %(1)  Amount   %(1)  Amount   %(1) 

Recreation

  $2,402    0.2  N/A   N/A   N/A   N/A   N/A   N/A 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Home improvement

   115    0.0  N/A   N/A   N/A   N/A   N/A   N/A 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Secured mezzanine

   —      0.0  $—     0.0 $—     0.0 $2,117    0.6

Other secured commercial

   —      0.0   730    0.3   749    0.2   618    0.2 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total commercial

   215    0.0   730    0.3   749    0.2   2,735    0.8 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Medallion

   12,429    1.1   38,354    13.7  59,701    18.7  89,830    24.9
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total loans 90 days or more past due

  $15,161    1.3 $39,084    14.0 $60,450    18.9 $92,565    25.6
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total Medallion Bank loans(2)

  $—      0.0  $17,710    1.9 $16,115    1.8 $24,841    2.5
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total managed loans 90 days or more past due

  $—      0.0  $56,794    4.7 $76,565    6.2 $117,406    8.7
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

 

June 30, 2019

 

 

March 31, 2019

 

 

December 31, 2018

 

 

June 30, 2018

 

(Dollars in thousands)

 

Amount

 

 

%(1)

 

 

Amount

 

 

%(1)

 

 

Amount

 

 

%(1)

 

 

Amount

 

 

%(1)

 

Recreation

 

$

3,613

 

 

 

0.3

%

 

$

3,282

 

 

 

0.3

%

 

$

4,020

 

 

 

0.4

%

 

$

2,402

 

 

 

0.2

%

Home improvement

 

 

165

 

 

 

0.0

 

 

 

156

 

 

 

0.0

 

 

 

135

 

 

 

0.0

 

 

 

115

 

 

 

0.0

 

Commercial

 

 

731

 

 

 

0.1

 

 

 

710

 

 

 

0.1

 

 

 

279

 

 

 

0.0

 

 

 

215

 

 

 

0.0

 

Medallion

 

 

3,746

 

 

 

0.4

 

 

 

3,954

 

 

 

0.4

 

 

 

15,720

 

 

 

1.6

 

 

 

12,429

 

 

 

1.1

 

Total loans 90 days or more past

   due

 

$

8,255

 

 

 

0.8

%

 

$

8,102

 

 

 

0.8

%

 

$

20,154

 

 

 

2.0

%

 

$

15,161

 

 

 

1.3

%

 

(1)

Percentages are calculated against the total or managed loan portfolio, as appropriate.portfolio.

(2)

Includes medallion and consumer loans held at Medallion Bank.

We estimate that the weighted average loan-to-value ratio of our medallion loans was approximately 210%, 220%, and 211% as of June 30, 2019, December 31, 2018, and June 30, 2018.

Page 52 of 76


Recreation and medallion loans that reach 120 days past due are charged down to collateral value and reclassified to loans in process of foreclosure. The following tables show the activity of loans in process of foreclosure for the three and six months ended June 30, 2019.

Three Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loans in process of foreclosure – March 31, 2019

 

$

1,180

 

 

$

48,628

 

 

$

49,808

 

Transfer from loans, net

 

 

3,491

 

 

 

6,863

 

 

 

10,354

 

Sales

 

 

(2,034

)

 

 

(175

)

 

 

(2,209

)

Cash payments received

 

 

 

 

 

(1,931

)

 

 

(1,931

)

Collateral valuation adjustments

 

 

(1,682

)

 

 

(1,972

)

 

 

(3,654

)

Loans in process of foreclosure – June 30, 2019

 

$

955

 

 

$

51,413

 

 

$

52,368

 

Six Months Ended June 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loans in process of foreclosure – December 31, 2018

 

$

1,503

 

 

$

47,992

 

 

$

49,495

 

Transfer from loans, net

 

 

6,883

 

 

 

12,568

 

 

 

19,451

 

Sales

 

 

(4,111

)

 

 

(551

)

 

 

(4,662

)

Cash payments received

 

 

 

 

 

(4,505

)

 

 

(4,505

)

Collateral valuation adjustments

 

 

(3,320

)

 

 

(4,091

)

 

 

(7,411

)

Loans in process of foreclosure – June 30, 2019

 

$

955

 

 

$

51,413

 

 

$

52,368

 

Page 53 of 76


The following table presents the credit-related information for the investment portfolios as of the datesMarch 31, 2018 shown under Investment Company Accounting.

 

(Dollars in thousands)

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

Total loans

      

Medallion loans

  $161,155   $208,279   $233,415 

Commercial loans

   93,620    90,188    78,092 
  

 

 

   

 

 

   

 

 

 

Total loans

   254,775    298,467    311,507 

Investments in Medallion Bank and other controlled subsidiaries

   331,169    302,147    301,819 

Equity investments(1)

   9,458    9,521    10,316 

Investment securities

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Net investments

  $595,402   $610,135   $623,642 
  

 

 

   

 

 

   

 

 

 

Net investments in Medallion Bank and other controlled subsidiaries

  $918,904   $908,297   $990,673 

Managed net investments

  $1,384,449   $1,380,054   $1,473,084 
  

 

 

   

 

 

   

 

 

 

Unrealized appreciation (depreciation) on investments

      

Medallion loans

  ($23,761  ($20,338  ($48,456

Commercial loans

   (495   (513   (1,192
  

 

 

   

 

 

   

 

 

 

Total loans

   (24,256   (20,851   (49,648

Investments in Medallion Bank and other controlled subsidiaries

   197,715    158,920    155,730 

Equity investments

   2,123    3,121    3,708 

Investment securities

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Total unrealized appreciation on investments

  $175,582   $141,190   $109,790 
  

 

 

   

 

 

   

 

 

 

Net unrealized depreciation on investments at Medallion Bank and other controlled subsidiaries

  ($69,561  ($63,785  ($54,789

Managed total unrealized appreciation (depreciation) on investments

  $106,021   $77,405   $55,001 
  

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

March 31,

2018

Total loans

Medallion loans

$

161,155

Commercial loans

93,620

Total loans

254,775

Investments in Medallion Bank and other controlled

   subsidiaries

331,169

Equity investments(1)

9,458

Investment securities

Net investments

$

595,402

Net investments in Medallion Bank and other controlled

   subsidiaries

$

918,904

Managed net investments

$

1,384,449

Unrealized appreciation (depreciation) on investments

Medallion loans

$

(23,761

)

Commercial loans

(495

)

Total loans

(24,256

)

Investments in Medallion Bank and other controlled

   subsidiaries

197,715

Equity investments

2,123

Investment securities

Total unrealized appreciation on investments

$

175,582

Net unrealized depreciation on investments at Medallion

   Bank and other controlled subsidiaries

$

(69,561

)

Managed total unrealized appreciation on investments

$

106,021

Unrealized appreciation (depreciation) as a % of balances

   outstanding(2)

Medallion loans

(12.86

)%

Commercial loans

(0.53

)

Total loans

(8.70

)

Investments in Medallion Bank and other controlled

   subsidiaries

148.15

Equity investments

28.95

Investment securities

Net investments

41.83

Net investments at Medallion Bank and other controlled

   subsidiaries

(7.12

)%

Managed net investments

8.36

%

 

Page 60 of 97


(Dollars in  thousands)

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

Unrealized appreciation (depreciation) as a % of balances outstanding(2)

    

Medallion loans

   (12.86%)   (8.90%)   (17.20%) 

Commercial loans

   (0.53  (0.57  (1.50

Total loans

   (8.70  (6.53  (13.75

Investments in Medallion Bank and other controlled subsidiaries

   148.15   110.96   106.60 

Equity investments

   28.95   48.77   59.10 

Investment securities

   —     —     —   

Net investments

   41.83   30.11   21.37 
  

 

 

  

 

 

  

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

   (7.12%)   (6.64%)   (5.31%) 

Managed net investments

   8.36  5.99  3.91
  

 

 

  

 

 

  

 

 

 

(1)

Represents common stock, warrants, preferred stock, and limited partnership interests held as investments.

(2)

Unlike other lending institutions, under Investment Company Accounting we arewere not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio iswas adjusted quarterly to reflect estimates of the current realizable value of the investment portfolio. These percentages represent the discount or premium that investments arewere carried on the books at, relative to their par or gross value.

Page 54 of 76


The following table sets forthpresents the gain/loss experience on the investment portfolio for the three months ended March 31, 2018 and the three and six months ended June 30, 2017 under Investment Company Accounting.

 

   Three Months Ended,  Six Months Ended, 

(Dollars in  thousands)

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

Realized gains (losses) on loans and equity investments

    

Medallion loans

  ($34,747 ($333 ($1,136

Commercial loans

   2   (629  (629
  

 

 

  

 

 

  

 

 

 

Total loans

   (34,745  (962  (1,765

Investments in Medallion Bank and other controlled subsidiaries

   —     —     —   

Equity investments

   —     2,958   4,606 

Investment securities

   —     —     —   
  

 

 

  

 

 

  

 

 

 

Total realized gains (losses) on loans and equity investments

  ($34,745 $1,996  $2,841 
  

 

 

  

 

 

  

 

 

 

Net realized losses on investments at Medallion Bank and other controlled subsidiaries

  ($23,073 ($5,821 ($24,138
  

 

 

  

 

 

  

 

 

 

Total managed realized losses on loans and equity investments

  ($57,818 ($3,825 ($21,297
  

 

 

  

 

 

  

 

 

 

Realized gains (losses) as a % of average balances outstanding

    

Medallion loans

   (65.74%)   (0.47%)   (0.88%) 

Commercial loans

   0.01   (3.25  (1.58

Total loans

   (45.96  (1.07  (0.97

Investments in Medallion Bank and other controlled subsidiaries

   —     —     —   

Equity investments

   —     188.54   165.78 

Investment securities

   —     —     —   

Net investments

   (30.89  1.56   1.11 
  

 

 

  

 

 

  

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

   (9.66%)   (2.36%)   (4.80%) 

Managed net investments

   (18.22%)   (1.13%)   (3.09%) 
  

 

 

  

 

 

  

 

 

 

(Dollars in thousands)

 

Three Months

Ended

March 31, 2018

 

Realized gains (losses) on loans and equity investments

 

 

 

 

Medallion loans

 

$

(34,747

)

Commercial loans

 

 

2

 

Total loans

 

 

(34,745

)

Investments in Medallion Bank and other controlled

   subsidiaries

 

 

 

Equity investments

 

 

 

Investment securities

 

 

 

Total realized losses on loans and equity investments

 

$

(34,745

)

Net realized losses on investments at Medallion Bank and other

   controlled subsidiaries

 

$

(23,073

)

Total managed realized losses on loans and equity

   investments

 

$

(57,818

)

Realized gains (losses) as a % of average balances

   outstanding

 

 

 

 

Medallion loans

 

 

(65.74

)%

Commercial loans

 

 

0.01

 

Total loans

 

 

(45.96

)

Investments in Medallion Bank and other controlled

   subsidiaries

 

 

 

Equity investments

 

 

 

Investment securities

 

 

 

Net investments

 

 

(30.89

)

Net investments at Medallion Bank and other controlled

   subsidiaries

 

 

(9.66

)%

Managed net investments

 

 

(18.22

)%

 

Page 6155 of 9776



The following table sets forth thepre-tax changes in our unrealized and realized gains and losses in the investment portfolio for the three months ended March 31, 2018 and the three and six months ended June 30, 2017 under Investment Company Accounting.

 

  Three Months Ended     

(Dollars in thousands)

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

 

Three Months

Ended

March 31, 2018

 

Net change in unrealized appreciation (depreciation) on investments

      

 

 

 

 

Unrealized appreciation

  ($998  $235   $1,493 

 

$

(998

)

Unrealized depreciation

   (38,152   (12,659   (21,661

 

 

(38,152

)

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

   29,115    930    9,054 

Net unrealized appreciation on investments in Medallion Bank

and other controlled subsidiaries

 

 

29,115

 

Realized gains

   —      —      (2,090

 

 

 

Realized losses

   34,747    974    2,285 

 

 

34,747

 

Net unrealized gains (losses) on investments other than securities and other assets

   (1,915   —      —   
  

 

   

 

   

 

 

Net unrealized losses on investments other than securities

and other assets

 

 

(1,915

)

Total

  $22,797   $(10,520  $(10,919

 

$

22,797

 

  

 

   

 

   

 

 

Net realized gains (losses) on investments

      

 

 

 

 

Realized gains

�� $—    $1   $2,091 

 

$

 

Realized losses

   (34,747   (974   (2,285

 

 

(34,747

)

Other gains

   —      2,958    3,002 

 

 

 

Direct recoveries

   2    11    33 

 

 

2

 

Realized gains on investments other than securities and other assets

   —      —      —   

 

 

 

  

 

   

 

   

 

 

Total

  ($34,745  $1,996   $2,841 

 

$

(34,745

)

  

 

   

 

   

 

 

SEGMENT RESULTS

We manage our financial results under four operating segments and report like a bank holding company:company. The operating segments are recreation lending, home improvement lending, commercial lending, and medallion lending, as well aslending. We also show results for twonon-operating segments: segments; RPAC and corporate and other investments. Prior to April 2, 2018, we operated as one segment. All results are for the three months ended June 30, 2019 and 2018, and atfor the six months ended June 30, 2018.2019.

Recreation Lending

The recreation lending segment is a high-growth prime andnon-prime consumer finance business which is a significant source of income for us, accounting for 67.8%76% and 75% of our interest income for the quarterthree and six months ended June 30, 2018.2019. The loans are secured primarily by RVs, boats, and trailers. The lending is mainly focused ontrailers, with RV and marine lending which madeloans making up 58% and62% of the portfolio, boat loans making up 19% of total lending.the portfolio, and trailer loans 11%. Recreation lending is conductedloans are made to borrowers residing in all fifty states, with the highest concentrations in Texas, California, and Florida, at 17%18%, 11%, and 11%10% of loans outstanding, and with no other states over 10%.

Page 56 of 76

(dollars in thousands)

    
Selected Earnings Data  Recreation 

Total interest income

  $22,132 

Total interest expense

   2,136 
  

 

 

 

Net investment income

   19,996 

Provision for loan losses

   4,710 
  

 

 

 

Net interest income after loss provision

   15,286 

The following table presents certain financial data and ratios as of and for the three months ended June 30, 2019 and 2018, and the six months ended June 30, 2019.

 

Page 62 of 97


 

Three Months Ended

June 30,

 

 

Six Months

Ended

June 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

Selected Earnings Data

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

24,370

 

 

$

22,132

 

 

$

46,849

 

Total interest expense

 

 

3,189

 

 

 

2,136

 

 

 

5,963

 

Net interest income

 

 

21,181

 

 

 

19,996

 

 

 

40,886

 

Provision for loan losses

 

 

6,176

 

 

 

4,710

 

 

 

13,181

 

Net interest income after loss provision

 

 

15,005

 

 

 

15,286

 

 

 

27,705

 

Totalnon-interest income (expense)

   (5,520

 

 

(5,938

)

 

 

(5,520

)

 

 

(11,320

)

  

 

 

Net income before taxes

   9,766 

 

 

9,067

 

 

 

9,766

 

 

 

16,385

 

Income tax (provision)

   (2,162
  

 

 

Income tax provision

 

 

(2,349

)

 

 

(2,162

)

 

 

(4,244

)

Net income

  $7,604 

 

$

6,718

 

 

$

7,604

 

 

$

12,141

 

  

 

 

Balance Sheet Data

  

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, gross

  $597,348 

 

 

 

 

 

$

597,348

 

 

$

668,540

 

Total loan allowance

   1,963 

 

 

 

 

 

 

1,963

 

 

 

12,672

 

  

 

 

Total loans, net

   595,385 

 

 

 

 

 

 

595,385

 

 

 

655,868

 

Total assets

   599,960 

 

 

 

 

 

 

599,960

 

 

 

667,600

 

Total borrowings

   456,955 

 

 

 

 

 

 

456,955

 

 

 

531,708

 

Selected Financial Ratios

  

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

   5.32

 

 

4.21

%

 

 

5.32

%

 

 

3.93

%

Return on average equity

   23.33 

 

 

16.16

 

 

 

23.33

 

 

 

16.26

 

Interest yield

   15.62 

 

 

15.53

 

 

 

15.62

 

 

 

15.49

 

Net interest margin

   14.12 

 

 

13.50

 

 

 

14.12

 

 

 

13.52

 

Reserve coverage

   0.33 

 

 

1.90

 

 

 

0.33

 

 

 

1.90

 

Delinquency ratio(1)

   0.40 

Charge off ratio

   0.82 

Delinquency status(1)

 

 

0.56

 

 

 

0.40

 

 

 

0.56

 

Charge-off %

 

 

1.55

 

 

 

0.82

 

 

 

2.43

 

 

(1)

Loans 90 days or more past due.

Home Improvement Lending

The home improvement lending segment originates loans secured primarily by windows, siding and roof replacements, swimming pool installations, and solar photo-voltaic system installations. The home improvement lending segment works with contractors and financial service providers to finance residential home improvements and is concentrated in swimming pools, roofs, solar panels, and roofing,windows at 38%26%, 15%18%, 11%14%, and 12% of total loans outstanding, with no other product lines arecollateral types over 10%. Home improvement lending is conductedloans are made to borrowers residing in all fifty states, with the highest concentrations in Texas, Florida, California, and Ohio at 22%13%, 15%, 14%10%, and 11%10% of loans outstanding, and with no other states over 10%.

Page 57 of 76

(dollars in thousands)

    
Selected Earnings Data  Home Improvement 

Total interest income

  $4,637 

Total interest expense

   739 
  

 

 

 

Net investment income

   3,898 

Provision for loan losses

   877 
  

 

 

 

Net interest income after loss provision

   3,021 

Total non interest income (expense)

   (1,685
  

 

 

 

Net income before taxes

   1,336 

Income tax (provision)

   (296
  

 

 

 

Net income

  $1,040 
  

 

 

 

Balance Sheet Data

  

Total loans, gross

  $195,876 

The following table presents certain financial data and ratios as of and for the three months ended June 30, 2019 and 2018, and the six months ended June 30, 2019.

 

 

 

Three Months Ended

June 30,

 

 

Six Months

Ended

June 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

Selected Earnings Data

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

4,678

 

 

$

4,637

 

 

$

9,003

 

Total interest expense

 

 

1,037

 

 

 

739

 

 

 

1,943

 

Net interest income

 

 

3,641

 

 

 

3,898

 

 

 

7,060

 

Provision for loan losses

 

 

813

 

 

 

877

 

 

 

1,362

 

Net interest income after loss provision

 

 

2,828

 

 

 

3,021

 

 

 

5,698

 

Total non-interest income (expense)

 

 

(1,719

)

 

 

(1,685

)

 

 

(3,356

)

Net income before taxes

 

 

1,109

 

 

 

1,336

 

 

 

2,342

 

Income tax provision

 

 

(288

)

 

 

(296

)

 

 

(607

)

Net income

 

$

821

 

 

$

1,040

 

 

$

1,735

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, gross

 

 

 

 

 

$

195,876

 

 

$

209,549

 

Total loan allowance

 

 

 

 

 

 

555

 

 

 

2,913

 

Total loans, net

 

 

 

 

 

 

195,321

 

 

 

206,636

 

Total assets

 

 

 

 

 

 

206,298

 

 

 

217,757

 

Total borrowings

 

 

 

 

 

 

159,913

 

 

 

173,226

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

1.94

%

 

 

2.13

%

 

 

1.98

%

Return on average equity

 

 

7.88

 

 

 

9.74

 

 

 

8.65

 

Interest yield

 

 

9.46

 

 

 

10.02

 

 

 

9.44

 

Net interest margin

 

 

7.36

 

 

 

8.43

 

 

 

7.40

 

Reserve coverage

 

 

1.39

 

 

 

0.28

 

 

 

1.39

 

Delinquency status(1)

 

 

0.08

 

 

 

0.06

 

 

 

0.08

 

Charge-off %

 

 

0.17

 

 

 

0.30

 

 

 

0.26

 

Page 63 of 97


Total loan allowance(1)

555

Total loans, net

195,321

Total assets

206,298

Total borrowings

159,913

Selected Financial Ratios

Return on average assets

2.13

Return on average equity

9.74

Interest yield

10.02

Net interest margin

8.43

Reserve coverage

0.28

Delinquency status(1)

0.06

Charge off %

0.30

(1)

Loans 90 days or more past due.

Commercial Lending

We originate both senior and subordinated loans nationwide to businesses in a variety of industries, including manufacturing and various service providers, more than 55%67% of which are located in the Midwest and Northeast regions, with the rest scattered across the country. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $1,000,000$2,000,000 to $5,000,000 at origination, and typically included an equity component as part of the financing. The commercial lending business has concentrations in manufacturing and professional, scientific, and technical services, and information making up 48%, 16%60% and 11%15% of the total business.

Page 58 of 76

(dollars in thousands)

  Commercial 

Selected Earnings Data

  

Total interest income

  $2,322 

Total interest expense

   655 
  

 

 

 

Net Interest income

   1,667 

Provision for loan losses

   175 
  

 

 

 

Net interest income after loss provision

   1,492 

Total non interest income (expense)

   (1,110
  

 

 

 

Net income before taxes

   382 

Income tax (provision)

   (85
  

 

 

 

Net income

  $297 
  

 

 

 

Balance Sheet Data

  

Total loans, gross

  $80,105 

Total loan allowance

   175 
  

 

 

 

Total loans, net

   79,930 

Total assets

   109,261 

Total borrowings

   68,224 

The following table presents certain financial data and ratios as of and for the three months ended June 30, 2019 and 2018, and for the six months ended June 30, 2019. The commercial segment encompasses the mezzanine lending business and the other legacy commercial loans (immaterial to total) have been re-allocated to corporate and other investments for all periods presented.

 

 

 

Three Months Ended

June 30,

 

 

Six Months

Ended

June 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

Selected Earnings Data

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

1,641

 

 

$

2,217

 

 

$

3,517

 

Total interest expense

 

 

666

 

 

 

485

 

 

 

1,367

 

Net interest income

 

 

975

 

 

 

1,732

 

 

 

2,150

 

Provision for loan losses

 

 

 

 

 

175

 

 

 

 

Net interest income after loss provision

 

 

975

 

 

 

1,557

 

 

 

2,150

 

Total non-interest income (expense)

 

 

(780

)

 

 

(942

)

 

 

(1,095

)

Net income before taxes

 

 

195

 

 

 

615

 

 

 

1,055

 

Income tax provision

 

 

(48

)

 

 

(136

)

 

 

(254

)

Net income

 

$

147

 

 

$

479

 

 

$

801

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, gross

 

 

 

 

 

$

74,785

 

 

$

60,395

 

Total loan allowance

 

 

 

 

 

 

175

 

 

 

 

Total loans, net

 

 

 

 

 

 

74,610

 

 

 

60,395

 

Total assets

 

 

 

 

 

 

86,107

 

 

 

86,725

 

Total borrowings

 

 

 

 

 

 

50,872

 

 

 

68,654

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.66

%

 

 

2.17

%

 

 

1.81

%

Return on average equity

 

 

3.31

 

 

 

4.64

 

 

 

9.03

 

Interest yield

 

 

11.02

 

 

 

11.10

 

 

 

11.85

 

Net interest margin

 

 

6.55

 

 

 

8.67

 

 

 

7.24

 

Reserve coverage(2)

 

 

0.71

 

 

 

0.23

 

 

 

0.71

 

Delinquency status(1) (2)

 

 

1.13

 

 

 

0.27

 

 

 

1.13

 

Charge-off %(2)

 

 

 

 

 

 

 

 

 

Page 64 of 97


Selected Financial Ratios(1)

Return on average assets

1.05

Return on average equity

2.53

Interest yield

10.54

Net interest margin

7.57

Reserve coverage

0.22

Delinquency status(1)

0.27

Charge off %

0.00

(1)

Loans 90 days or more past due.

(2)

Ratio is based off of total commercial balances, and relates solely to the legacy commercial loan balances.

 

Geographic Concentrations

  Total Gross Loans   % of Market 

Geographic Concentrations (Dollars in thousands)

 

Total Gross

Loans

 

 

% of Market

 

Minnesota

  $15,162    18.93

 

$

9,768

 

 

 

16

%

Kansas

   8,484    10.59

Delaware

   5,627    7.02

Michigan

 

 

8,782

 

 

 

15

%

Illinois

 

 

5,407

 

 

 

9

%

New Jersey

 

 

5,153

 

 

 

9

%

California

 

 

4,985

 

 

 

8

%

Other(1)

   50,832    63.46

 

 

26,300

 

 

 

43

%

  

 

   

Total

  $80,105    100.00

 

$

60,395

 

 

 

100

%

 

(1)

Includes 1610 other states within the US with no othernone greater than 6%7%.

Page 59 of 76


Medallion Lending

The medallion lending segment operates mainly in the New York, Chicago,Newark, and NewarkChicago markets. We have a long history of owning, managing, and financing taxicab fleets, taxicab medallion,medallions, and corporate car services. During the three months ended June 30, 2019, the medallion values for New York remained constant (market value of $169,500, net of liquidation costs), while they declined in the Chicago market (market value of $29,500 to $19,500, net of liquidation costs). We have continued to see a decline in medallion value due to increased competition in the market, which has led toexperience a decline in interest income because when a loan agesdue to loans aging greater than 90 days it isand being placed on nonaccrual. However,nonaccrual and by removing underperforming loans from the portfolio by transferring them to loan collateral in process of foreclosure with charge-offs to collateral value. With the continuing market change, we began to work with borrowers to collect on the loans. Lastly, in the fourth quarter of 2018 we de-consolidated Trust III, leading to an overall decline in medallion loans. All the loans are all secured by the medallionmedallions and enhanced by personal guarantees of the shareholders and owners.

(dollars in thousands)

  Medallion 

Selected Earnings Data

  

Total interest income

  $3,189 

Total interest expense

   3,373 
  

 

 

 

Net interest loss

   (184

Provision for loan losses

   24,814 
  

 

 

 

Net interest loss after loss provision

   (24,998

Total non interest income (expense)

   (2,811
  

 

 

 

Net loss before taxes

   (27,809

Income benefit

   6,157 
  

 

 

 

Net loss

  $(21,652
  

 

 

 
The following table presents certain financial data and ratios as of and for the three months ended June 30, 2019 and 2018, and the six months ended June 30, 2019.

 

Page 65 of 97


 

Three Months Ended

June 30,

 

 

Six Months

Ended

June 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

Selected Earnings Data

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

666

 

 

$

3,189

 

 

$

1,507

 

Total interest expense

 

 

1,591

 

 

 

3,373

 

 

 

3,500

 

Net interest loss

 

 

(925

)

 

 

(184

)

 

 

(1,993

)

Provision for loan losses

 

 

8,182

 

 

 

24,814

 

 

 

13,516

 

Net interest loss after loss provision

 

 

(9,107

)

 

 

(24,998

)

 

 

(15,509

)

Total non-interest income (expense)

 

 

(6,558

)

 

 

(2,811

)

 

 

(5,344

)

Net loss before taxes

 

 

(15,665

)

 

 

(27,809

)

 

 

(20,853

)

Income tax benefit

 

 

3,779

 

 

 

6,157

 

 

 

5,030

 

Net loss

 

$

(11,886

)

 

$

(21,652

)

 

$

(15,823

)

Balance Sheet Data

  

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, gross

  $276,794 

 

 

 

 

 

$

276,794

 

 

$

145,944

 

Total loan allowance

   18,732 

 

 

 

 

 

 

18,732

 

 

 

24,630

 

  

 

 

Total loans, net

   258,062 

 

 

 

 

 

 

258,062

 

 

 

121,314

 

Total assets

   386,225 

 

 

 

 

 

 

386,225

 

 

 

235,948

 

Total borrowings

   402,955 

 

 

 

 

 

 

402,955

 

 

 

187,575

 

Selected Financial Ratios

  

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

   (21.69%) 

 

 

(19.43

)%

 

 

(21.69

)%

 

 

(12.53

)%

Return on average equity

   NM 

 

 

(97.16

)

 

NM

 

 

 

(62.63

)

Interest yield

   4.43 

 

 

1.99

 

 

 

4.43

 

 

 

2.17

 

Net interest margin

   (0.26

 

 

(2.77

)

 

 

(0.26

)

 

 

(2.87

)

Reserve coverage

   6.77 

 

 

16.88

 

 

 

6.77

 

 

 

16.88

 

Delinquency status(1)

   4.49 

 

 

2.66

 

 

 

4.49

 

 

 

2.66

 

Charge off %

   2.18 

Charge-off %

 

 

26.47

 

 

 

2.18

 

 

 

23.94

 

 

(1)

Loans 90 days or more past due.

 

Geographic

Concentration

  Total Gross
Loans
   % of Market 

Geographic Concentration (dollars in thousands)

 

Total Gross

Loans

 

 

% of Market

 

New York City

  $243,941    88.13

 

$

127,871

 

 

 

88

%

Newark

   22,570    8.15

 

 

15,815

 

 

 

11

%

Chicago

   7,851    2.84

 

 

1,724

 

 

 

1

%

All Other

   2,432    0.88

 

 

534

 

 

 

0

%

  

 

   

 

 

Total

  $276,794    100.00

 

$

145,944

 

 

 

100

%

RPAC

We are the majority owner and managing member of RPAC Racing, LLC, a performance and marketing company for NASCAR. Revenues are mainly earned through sponsorships and race winning activity over the tennine month race season (February through November) during the year.

Page 60 of 76

(Dollars in thousands)

  RPAC 

Selected Earnings Data

  

Sponsorship, race winnings, and other income

  $5,228 

Race and other expenses

   4,777 

Interest expense

   41 
  

 

 

 

Total expenses

   4,818 

Net income before taxes

   410 

Income tax (provision)

   (43
  

 

 

 

Net income

  $367 
  

 

 

 

Balance Sheet Data

  

Total assets

  $37,861 

Total borrowings

   7,578 

Selected Financial Ratios

  

Return on average assets

   3.89

Return on average equity

   22.38 

The following table presents certain financial data and ratios as of and for the three months ended June 30, 2019 and 2018, and the six months ended June 30, 2019.

 

 

 

Three Months Ended

June 30,

 

 

Six Months

Ended

June 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

Selected Earnings Data

 

 

 

 

 

 

 

 

 

 

 

 

Sponsorship, race winnings, and other income

 

$

4,889

 

 

$

5,228

 

 

$

8,068

 

Race and other expenses

 

 

4,267

 

 

 

4,777

 

 

 

8,062

 

Interest expense

 

 

36

 

 

 

41

 

 

 

72

 

Total expenses

 

 

4,303

 

 

 

4,818

 

 

 

8,134

 

Net income (loss) before taxes

 

 

586

 

 

 

410

 

 

 

(66

)

Income tax (provision) benefit

 

 

(141

)

 

 

(43

)

 

 

16

 

Net income (loss)

 

$

445

 

 

$

367

 

 

$

(50

)

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

$

37,861

 

 

$

33,526

 

Total borrowings

 

 

 

 

 

 

7,578

 

 

 

7,713

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

5.54

%

 

 

3.89

%

 

 

(0.32

)%

Return on average equity

 

 

(47.72

)

 

 

22.38

 

 

 

(3.13

)

Page 66 of 97


Corporate and Other Investments

This nonoperating segment relates to our equity and investment securities, as well as our legacy commercial business, other assets, liabilities, revenues, and expenses not allocated to the other main operating segments. This activitysegment also includesreflects the elimination of all intercompany activity amongstamong the consolidated entities.

(Dollars in thousands)

  Corporate and
Other
 

Selected Earnings Data

  

Interest income

  $364 

Interest expense

   981 
  

 

 

 

Net interest loss

   (617

Total non interest income (expense), net

   (1,373
  

 

 

 

Net loss before taxes

   (1,990

Income tax benefit

   450 
  

 

 

 

Net loss

  ($1,540
  

 

 

 

Balance Sheet Data

  

Total assets

  $194,924 

Total borrowings

   130,717 

Selected Financial Ratios

  

Return on average assets

   (2.99%) 

Return on average equity

   (8.15

Page 67 of 97


Trends in Investment Portfolio under Investment Company Accounting

Our investment income is driven by the principal amount of and yields on our investment portfolio. To identify trends in the balances and yields, the following table illustrates our investments at fair value, grouped by medallion loans, commercial loans, equity investments, and investment securities, and also presents the portfolio information for Medallion Bank, at the dates indicated under Investment Company Accounting.

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

(Dollars in  thousands)

  Interest
Rate (1)
  Investment
Balances
  Interest
Rate (1)
  Investment
Balances
  Interest
Rate (1)
  Investment
Balances
 

Medallion loans

       

New York

   4.33 $140,661   4.23 $167,226   4.19 $191,922 

Newark

   5.38   21,316   5.34   21,935   5.31   22,792 

Chicago

   4.72   15,718   4.74   19,436   4.81   36,158 

Boston

   4.41   6,304   4.51   18,564   4.47   25,442 

Cambridge

   4.49   309   4.55   773   4.47   4,392 

Other

   7.93   421   7.95   482   7.24   950 
   

 

 

   

 

 

   

 

 

 

Total medallion loans

   4.50   184,729   4.41   228,416   4.40   281,656 
  

 

 

   

 

 

   

 

 

  

Deferred loan acquisition costs

    187    201    215 

Unrealized depreciation on loans

    (23,761   (20,338   (48,456
   

 

 

   

 

 

   

 

 

 

Net medallion loans

   $161,155   $208,279   $233,415 
   

 

 

   

 

 

   

 

 

 

Commercial loans

       

Secured mezzanine

   12.14 $92,782   12.09 $88,334   13.31 $76,478 

Other secured commercial

   7.37   1,434   9.39   2,477   9.57   2,914 
   

 

 

   

 

 

   

 

 

 

Total commercial loans

   12.07   94,216   12.02   90,811   13.18   79,392 
  

 

 

   

 

 

   

 

 

  

Deferred loan acquisition income

    (101   (110   (108

Unrealized depreciation on loans

    (495   (513   (1,192
   

 

 

   

 

 

   

 

 

 

Net commercial loans

   $93,620   $90,188   $78,092 
   

 

 

   

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

   0.90 $133,454   0.83 $143,227   0.00 $146,089 

Unrealized appreciation on subsidiary investments

    197,715    158,920    155,730 
   

 

 

   

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

   $331,169   $302,147   $301,819 
   

 

 

   

 

 

   

 

 

 

Equity investments

   0.00 $7,335   0.00 $6,400   0.00 $6,608 
  

 

 

   

 

 

   

 

 

  

Unrealized appreciation on equities

    2,123    3,121    3,708 
   

 

 

   

 

 

   

 

 

 

Net equity investments

   $9,458   $9,521   $10,316 
   

 

 

   

 

 

   

 

 

 

Investment securities

   —   $—    —   $—    —   $—  
  

 

 

   

 

 

   

 

 

  

Unrealized depreciation on investment securities

    —      —      —   
   

 

 

   

 

 

   

 

 

 

Net investment securities

   $—    $—    $—  
   

 

 

   

 

 

   

 

 

 

Investments at cost(2)

   4.97 $419,733   4.73 $468,854   4.45 $513,745 
  

 

 

   

 

 

   

 

 

  

Deferred loan acquisition costs

    86    91    107 

Unrealized appreciation on controlled subsidiaries, equity investments, and investment securities

    199,839    162,041    159,438 

Unrealized depreciation on loans

    (24,256   (20,851   (49,648
   

 

 

   

 

 

   

 

 

 

Net investments

   $595,402   $610,135   $623,642 
   

 

 

   

 

 

   

 

 

 

Medallion Bank investments

       

Consumer loans

   14.86 $726,838   15.02 $693,289   14.59 $738,770 

Medallion loans

   4.34   204,570   4.30   222,252   4.22   252,425 

Commercial loans

   2.52   3,180   2.28   1,598   2.63   1,904 

Investment securities

   2.40   42,036   2.40   43,582   2.33   39,653 
   

 

 

   

 

 

   

 

 

 

Medallion Bank investments at cost(2)

   12.08   976,624   11.94   960,721   11.56   1,032,752 
  

 

 

   

 

 

   

 

 

  

Deferred loan acquisition costs

    11,597    11,097    12,439 

Unrealized depreciation on investment securities

    (986   (368   83 

Premiums paid on purchased securities

    244    265    271 

Unrealized depreciation on loans

    (68,575   (63,417   (54,872
   

 

 

   

 

 

   

 

 

 

Medallion Bank net investments

   $918,904   $908,298   $990,673 
   

 

 

   

 

 

   

 

 

 

(1)

Represents the weighted average interest or dividend rate of the respective portfolio as of the date indicated.

(2)

The weighted average interest rate for the entire managed loan portfolio (medallion, commercial, and consumer loans) was 11.26%, 10.89%, and 10.12% at March 31, 2018, December 31, 2017, and June 30, 2017.

Page 68 of 97


Investment Activity

The following table sets forth the componentspresents certain financial data and ratios as of investment activity in the investment portfolioand for the periods indicated under Investment Company Accounting.three months ended June 30, 2019 and 2018, and for the six months ended June 30, 2019.

 

   Three Months Ended,   Six Months Ended, 

(Dollars in thousands)

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

Net investments at beginning of period

  $610,135   $635,250   $652,278 

Investments originated(1)

   8,684    8,883    8,993 

Repayments of investments(1)

   (13,371   (11,949   (29,513

Net realized gains (losses) on investments

   (34,745   1,996    2,841 

Net increase in unrealized appreciation (depreciation)(2)

   24,712    (10,520   (10,919

Accretion of net origination fees

   (13   (18   (38
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in investments

   (14,733   (11,608   (28,636
  

 

 

   

 

 

   

 

 

 

Net investments at end of period

  $595,402   $623,642   $623,642 
  

 

 

   

 

 

   

 

 

 

(1)

Includes refinancings.

(2)

Excludes net unrealized depreciation of $1,915 and $0 for the three months ended March 31, 2018 and June 30, 2017, and $0 for the six months ended June 30, 2017, related to investments other than securities and other assets.

Total Portfolio Yield

The weighted average yield (which is calculated by dividing the aggregate yield of each investment in the portfolio by the aggregate portfolio balance and does not include expenses and sales load for any offering) of the total managed portfolio under Investment Company Accountng at March 31, 2018 was 10.96%, an increase of 35 basis points from 10.61% at December 31, 2017, and an decrease of 49 basis points from 10.12% at June 30, 2017.

Medallion Loan Portfolio

The medallion loan portfolio decreased $69,137,000 or 18% on a managed basis from December 31, 2017 to March 31, 2018, primarily reflecting increased realized and unrealized losses and net amortization of loan principal, especially in the New York, Boston, and Chicago markets.

The weighted average yield of the managed medallion loan portfolio at March 31, 2018 was 4.42%, an increase of 6 basis points from 4.36% at December 31, 2017, and an increase of 6 basis points from 4.31% at June 30, 2017. The fluctuation in yield primarily reflected the repricing of the existing portfolio to current market interest rates. At March 31, 2018, 15% of the managed medallion loan portfolio represented loans outside New York, compared to 19% at December 31, 2017 and 23% from June 30, 2017.

Commercial Loan Portfolio

Our commercial loans represented 15%, 15%, and 12% of the net investment portfolio as of March 31, 2018, December 31, 2017, and March 31, 2017, and were 7%, 7%, and 5% on a managed basis. Commercial loans increased by $4,986,000 or 5% on a managed basis, primarily reflecting growth in the mezzanine loan portfolio.

The weighted average yield of the managed commercial loan portfolio at March 31, 2018 was 11.76%, a decrease of 9 basis points from 11.85% at December 31, 2017, and a decrease of 108 basis points from 12.93% at March 31, 2017. The decreases from the prior periods primarily reflected the recent lower rates on certain mezzanine loans.

 

 

Three Months Ended

June 30,

 

 

Six Months

Ended

June 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

Selected Earnings Data

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

660

 

 

$

469

 

 

$

1,182

 

Interest expense

 

 

2,302

 

 

 

1,151

 

 

 

3,698

 

Net interest loss

 

 

(1,642

)

 

 

(682

)

 

 

(2,516

)

Provision for loan losses

 

 

 

 

 

 

 

 

455

 

Net interest loss after loss provision

 

 

(1,642

)

 

 

(682

)

 

 

(2,971

)

Total non interest income (expense), net

 

 

(2,128

)

 

 

(1,541

)

 

 

(3,231

)

Net loss before taxes

 

 

(3,770

)

 

 

(2,223

)

 

 

(6,202

)

Income tax benefit

 

 

882

 

 

 

501

 

 

 

2,150

 

Net loss

 

$

(2,888

)

 

$

(1,722

)

 

$

(4,052

)

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, gross

 

 

 

 

 

$

6,230

 

 

$

4,047

 

Total loan allowance

 

 

 

 

 

 

 

 

 

455

 

Total loans, net

 

 

 

 

 

 

6,230

 

 

 

3,592

 

Total assets

 

 

 

 

 

 

218,078

 

 

 

240,397

 

Total borrowings

 

 

 

 

 

 

148,069

 

 

 

186,460

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

(4.82

)%

 

 

(3.01

)%

 

 

(3.16

)%

Return on average equity

 

 

(20.68

)

 

 

(8.32

)

 

 

(12.54

)

 

Page 6961 of 9776


Consumer Loan Portfolio

Medallion Bank originates fixed rate consumer loans secured by recreational vehicles, boats, trailers and home improvements located in all 50 states. The weighted average gross yield of the managed consumer loan portfolio was 14.86% at March 31, 2018, a decrease of 16 basis points from 15.02% at December 31, 2017, and an increase of 43 basis points from 14.59% at March 31, 2017. The changes in yield primarily reflect the changes in the mix of loans originated.

Investment in Medallion Bank and Other Controlled Subsidiaries

As an investment company prior to April 2, 2018, our investment in Medallion Bank was previously subject to quarterly assessments of fair value. We conducted a thorough valuation analysis, and determined 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, our Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, we had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the 2015 second quarter, we first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued. 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, $7,849,000 was recorded in 2017, and $39,826,000 was recorded in the first quarter of 2018.

 

Page 70 of 97


SELECTED FINANCIAL DATA

Summary Consolidated Financial Data

As described herein, for the three and six months ended June 30, 2019 and for the three months ended June 30, 2018, the Company reported under Bank Holding Company Accounting. For the three months ended March 31, 2018, the Company reported under Investment Company Accounting. You should read the consolidated financial information below with the Consolidated Financial Statementsconsolidated financial statements and Notesaccompanying notes thereto included in this report. As described therein, for the quarter ended June 30, 2018, for the Company reported under Bank Holding Company Accounting.

 

(Dollars in thousands, except per share data)

  Three Months Ended June 30, 2018 

 

Three Months

Ended

June 30, 2019

 

 

Six Months

Ended

June 30, 2019

 

Statement of operations

  

 

 

 

 

 

 

 

 

Net interest income

  $24,719 

 

$

23,194

 

 

$

45,515

 

Provision for loan losses

   30,576 

 

 

15,171

 

 

 

28,514

 

Non-interest income (expense), net

   (12,048

 

 

(16,501

)

 

 

(24,340

)

  

 

 

Net loss before taxes

   (17,905

 

 

(8,478

)

 

 

(7,339

)

Income tax benefit

   4,021 

 

 

1,835

 

 

 

2,091

 

Lessnon-controlling interest

   763 

 

 

857

 

 

 

1,024

 

  

 

 

Net loss after taxes

   (14,647

 

$

(7,500

)

 

$

(6,272

)

  

 

 

Per share data

  

 

 

 

 

 

 

 

 

Net loss after taxes

   (0.60

 

$

(0.31

)

 

$

(0.26

)

Distribution per share

   0.00 
  

 

 

Distributions per share

 

 

0.00

 

 

 

0.00

 

Weighted average common shares outstanding

  

 

 

 

 

 

 

 

 

Diluted

   24,230,815 

 

 

24,359,280

 

 

 

24,323,967

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

Balance sheet data

  

 

 

 

 

 

 

 

 

Net loan receivable

  $1,128,698 

Net loans receivable

 

 

 

 

 

$

1,047,805

 

Total assets

   1,534,529 

 

 

 

 

 

 

1,481,953

 

Total borrowings

   1,226,342 

Total borrowings(1)

 

 

 

 

 

 

1,168,481

 

Total liabilities

   1,249,613 

 

 

 

 

 

 

1,196,449

 

Total equity(1)

   284,916 

Total equity(2)

 

 

 

 

 

 

285,504

 

 

 

 

 

 

 

 

 

  

 

 

 

Three Months

Ended

June 30, 2019

 

 

Six Months

Ended

June 30, 2019

 

Selected financial ratios

  

 

 

 

 

 

 

 

 

Return on average assets (ROA)

   (4.53%) 

 

 

(2.06

)%

 

 

(0.89

)%

Return on average equity (ROE)

   (22.00%) 

 

 

(10.34

)

 

 

(4.36

)

Dividend payout ratio

   0.00

 

 

0.00

 

 

 

0.00

 

Net interest margin

 

 

8.46

 

 

 

8.49

 

Other income ratio(3)

 

 

0.61

 

 

 

1.59

 

Total expense ratio(4)

 

 

9.18

 

 

 

8.83

 

Equity to assets(1)(2)

   18.57

 

 

19.27

 

 

 

19.27

 

Net charge offs

   9,151 

Net charge offs as a % of average loan receivable

   0.81

Debt to equity (1)

 

4.1x

 

 

4.1x

 

Loans receivable to assets

 

 

71

%

 

 

71

%

Net charge-offs

 

$

(11,363

)

 

$

(24,239

)

Net charge-offs as a % of average loans receivable

 

 

4.46

%

 

 

4.88

%

Allowance coverage ratio

   1.86

 

 

3.74

 

 

 

3.74

 

 

(1)

Includes $13,145 related to the operating lease liability.

(2)

Includes $27,436 related to non-controlling interest in consolidated subsidiaries.

(3)

Other income ratio represents other income divided by average interest earning assets, and includes the gain on extinguishment of debt of $4,145 for the six months ended June 30, 2019.

(4)

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

Page 62 of 76


(Dollars in thousands, except per share data)

 

Three Months

Ended

June 30, 2018

 

Statement of operations

 

 

 

 

Net interest income

 

$

24,719

 

Provision for loan losses

 

 

30,576

 

Non-interest income (expense), net

 

 

(12,048

)

Net loss before taxes

 

 

(17,905

)

Income tax benefit

 

 

4,021

 

Less non-controlling interest

 

 

763

 

Net loss after taxes

 

$

(14,647

)

Per share data

 

 

 

 

Net loss after taxes

 

$

(0.60

)

Distribution per share

 

 

0.00

 

Weighted average common shares outstanding

 

 

 

 

Diluted

 

 

24,230,815

 

Balance sheet data

 

 

 

 

Net loan receivable

 

$

1,128,698

 

Total assets

 

 

1,534,529

 

Total borrowings

 

 

1,226,342

 

Total liabilities

 

 

1,249,613

 

Total equity(1)

 

 

284,916

 

Selected financial ratios

 

 

 

 

Return on average assets (ROA)

 

 

(4.53

)%

Return on average equity (ROE)

 

 

(22.00

)

Dividend payout ratio

 

 

 

Net interest margin

 

 

8.57

 

Other income ratio(2)

 

 

1.66

 

Total expense ratio(3)

 

 

7.08

 

Equity to assets(1)

 

 

18.57

 

Debt to equity

 

4.3x

 

Loans receivable to assets

 

 

74

%

Net charge offs

 

$

9,151

 

Net charge offs as a % of average loan receivable

 

 

0.81

%

Allowance coverage ratio

 

 

1.86

 

(1)

Includes $27,236 related tonon-controlling interest in consolidated subsidiaires.subsidiaries.

(2)

Other income ratio represents other income divided by average interest earning assets.

(3)

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

Page 63 of 76


 

 

Three Months

Ended

March 31,

 

(Dollars in thousands, except per share data)

 

2018

 

Statement of operations

 

 

 

 

Investment income

 

$

4,033

 

Interest expense

 

 

3,551

 

Net interest income

 

 

482

 

Noninterest income

 

 

60

 

Operating expenses

 

 

4,108

 

Net investment loss before income taxes

 

 

(3,566

)

Income tax benefit

 

 

336

 

Net investment loss after income taxes

 

 

(3,230

)

Net realized losses on investments

 

 

(34,745

)

Net change in unrealized appreciation on Medallion Bank and

   other controlled subsidiaries(1)

 

 

29,115

 

Net change in unrealized depreciation on investments other

   than securities

 

 

(1,915

)

Net change in unrealized depreciation on investments(1)

 

 

(4,403

)

Income tax benefit

 

 

304

 

Net decrease in net assets resulting from operations

 

$

(14,874

)

Per share data

 

 

 

 

Net investment loss

 

$

(0.15

)

Income tax benefit

 

 

0.03

 

Net realized losses on investments

 

 

(1.44

)

Net change in unrealized appreciation on investments(1)

 

 

0.94

 

Net decrease in net assets resulting from operations

 

$

(0.62

)

Distributions declared per share

 

$

0.00

 

Weighted average common shares outstanding

 

 

 

 

Basic

 

 

24,154,879

 

Diluted

 

 

24,154,879

 

 

 

 

 

 

 

 

March 31, 2018

 

Balance sheet data

 

 

 

 

Net investments

 

$

595,402

 

Total assets

 

 

616,710

 

Total funds borrowed

 

 

320,662

 

Total liabilities

 

 

344,273

 

Total shareholders’ equity

 

 

272,437

 

Managed balance sheet data(2)

 

 

 

 

Net investments

 

$

1,386,136

 

Total assets

 

 

1,479,826

 

Total funds borrowed

 

 

1,167,888

 

Total liabilities

 

 

1,207,389

 

 

 

 

 

 

 

 

Three Months

Ended

March 31, 2018

 

Selected financial ratios and other data

 

 

 

 

Return on average assets (ROA)(3)

 

 

 

 

Net investment loss after taxes

 

 

(2.08

)%

Net decrease in net assets resulting from operations

 

 

(9.55

)

Return on average equity (ROE)(4)

 

 

 

 

Net investment loss after taxes

 

 

(4.62

)

Net decrease in net assets resulting from operations

 

 

(21.24

)

Weighted average yield

 

 

2.70

%

Weighted average cost of funds

 

 

2.38

 

Net interest margin(5)

 

 

0.32

 

Noninterest income ratio(6)

 

 

0.01

 

Total expense ratio(7)

 

 

1.16

 

Operating expense ratio(8)

 

 

0.68

 

 

 

 

 

 

 

 

March 31, 2018

 

As a percentage of net investment portfolio

 

 

 

 

Medallion loans

 

 

27

%

Commercial loans

 

 

15

 

Investment in Medallion Bank and other controlled subsidiaries

 

 

56

 

Equity investments

 

 

2

 

Investment securities

 

 

 

Investments to assets(9)

 

 

97

%

Equity to assets(10)

 

 

44

 

Debt to equity(11)

 

 

118

 

 

Page 7164 of 9776


You should read the consolidated financial information below with the Consolidated Financial Statements and Notes thereto included in this report. As described therein, for the three months ended March 31, 2018 and June 30, 2017 and the six months ended June 30, 2017, the Company reported under Investment Company Accounting.

 

   Three Months Ended,   Six Months Ended , 

(Dollars in  thousands, exceptshare and per sharedata)

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

Statement of operations

      

Investment income

  $4,033   $3,787   $8,037 

Interest expense

   3,551    3,408    6,742 
  

 

 

   

 

 

   

 

 

 

Net interest income

   482    379    1,295 

Noninterest income

   60    12    14 

Operating expenses

   4,108    3,682    5,907 
  

 

 

   

 

 

   

 

 

 

Net investment loss before income taxes

   (3,566   (3,291   (4,598

Income tax benefit

   336    1,998    2,870 
  

 

 

   

 

 

   

 

 

 

Net investment loss after income taxes

   (3,230   (1,293   (1,728

Net realized gains (losses) on investments

   (34,745   1,996    2,841 

Net change in unrealized appreciation on Medallion Bank and other controlled subsidiaries(1)

   29,115    930    9,054 

Net change in unrealized depreciation on investments other than securities

   (1,915   —      —   

Net change in unrealized depreciation on investments(1)

   (4,403   (11,450   (19,973

Income tax benefit

   304    5,020    6,120 
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  ($14,874  ($4,797  ($3,686
  

 

 

   

 

 

   

 

 

 

Per share data

      

Net investment loss

  ($0.15  ($0.14  ($0.19

Income tax benefit

   0.03    0.29    0.37 

Net realized gains (losses) on investments

   (1.44   0.08    0.12 

Net change in unrealized appreciation (depreciation) on investments (1)

   0.94    (0.43   (0.45
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  ($0.62  ($0.20  ($0.15
  

 

 

   

 

 

   

 

 

 

Distributions declared per share

  $0.00   $0.00   $0.00 
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

      

Basic

   24,154,879    23,925,567    23,909,344 

Diluted

   24,154,879    23,925,567    23,909,344 

   December 31,
2017
 

Balance sheet data

  

Net investments

  $610,135 

Total assets

   635,522 

Total funds borrowed

   327,623 

Total liabilities

   348,363 

Total shareholders’ equity

   287,159 
  

 

 

 

Managed balance sheet data(2)

  

Net investments

  $1,380,054 

Total assets

   1,565,889 

Total funds borrowed

   1,234,371 

Total liabilities

   1,278,730 

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

Selected financial ratios and other data

    

Return on average assets (ROA)(3)

    

Net investment income (loss) after taxes

   (2.08%)   (0.77%)   (0.52%) 

Net decrease in net assets resulting from operations

   (9.55  (2.87  (1.10

Return on average equity (ROE)(4)

    

Page 72 of 97


Net investment income (loss) after taxes

   (4.62  (1.81  (1.22

Net decrease in net assets resulting from operations

   (21.24  (6.70  (2.60
  

 

 

  

 

 

  

 

 

 

Weighted average yield

   2.70  2.41  2.55

Weighted average cost of funds

   2.38   2.17   2.14 
  

 

 

  

 

 

  

 

 

 

Net interest margin(5)

   0.32   0.24   0.41 
  

 

 

  

 

 

  

 

 

 

Noninterest income ratio(6)

   0.01  0.01  0.00

Total expense ratio(7)

   1.16   0.05   1.16 

Operating expense ratio(8)

   0.68   2.33   1.87 
  

 

 

  

 

 

  

 

 

 

December 31, 2017

As a percentage of net investment portfolio

Medallion loans

34

Commercial loans

15

Investment in Medallion Bank and other controlled subsidiaries

49

Equity investments

2

Investment securities

—  

(1)

Investments to assets(9)

96

Equity to assets(10)

45

Debt to equity(11)

114

(1)

Unrealized appreciation (depreciation) on investments represents the increase (decrease) for the period in the fair value of our investments, including the results of operations for Medallion Bank and other controlled subsidiaries, where applicable.

(2)

Includes the balances of wholly-owned,wholly owned, unconsolidated portfolio companies, primarily Medallion Bank.

(3)

ROA represents the net investment incomeloss after taxes or net increasedecrease in net assets resulting from operations, divided by average total assets.

(4)

ROE represents the net investment income (losses)loss after taxes or net increase (decrease)decrease in net assets resulting from operations, divided by average shareholders’ equity.

(5)

Net interest margin represents net interest income for the period divided by average interest earning assets, and included dividends from Medallion Bank and other controlled subsidiaries of $28 $0 and $0 infor the respective periods.three months ended March 31, 2018. On a managed basis, combined with Medallion Bank, the net interest margin was 6.96% and 6.63% for the quartersthree months ended March 31, 2018 and June 30, 2017 and was 6.61% for the six months ended June 30, 2017.2018.

(6)

Noninterest income ratio represents noninterest income divided by average interest earning assets.

(7)

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

(8)

Operating expense ratio represents operating expenses divided by average interest earning assets.

(9)

Represents net investments divided by total assets as of the date indicated.

(10)

Represents total shareholders’ equity divided by total assets as of the date indicated.

(11)

Represents total funds borrowed divided by total shareholders’ equity as of the date indicated.

Consolidated Results of Operations

2019 Second Quarter Compared to 2018 Second Quarter under Bank Holding Company Accounting

Net loss attributable to shareholders was $7,500,000 or ($0.31) per diluted common share in the 2019 second quarter compared to $14,647,000 or ($0.60) per diluted common share in the 2018 second quarter.

Total interest income for the 2019 second quarter was $32,015,000 compared to $32,644,000 in the 2018 second quarter. Interest income in the 2019 second quarter reflected contraction in the medallion lending segment as well as $1,081,000 of loan premium amortization compared to $0 in the prior year quarter, partially offset by continued growth in the consumer lending segment.  The yield on interest earning assets was 11.67% in the 2019 quarter, an improvement from 11.23% in the 2018 quarter. Average interest earning assets were $1,100,024,000 in the quarter, a decline from $1,179,410,000 during the 2018 second quarter.quarter, mainly due to shrinkage in the medallion portfolio reflecting increased provisions, as well as the deconsolidation of Trust III in the 2018 fourth quarter, partially offset by the growing consumer portfolio.

Loans before allowance for loan losses were $1,150,123,000$1,088,475,000 as of June 30, 2019, and were comprised of recreation ($668,540,000), home improvement ($209,549,000), medallion ($145,944,000) and commercial ($64,442,000) loans. The Company had an allowance for loan losses as of the end of the 2019 second quarter of $40,670,000, which was attributable to the medallion (61%), recreation (31%), home improvement (7%) and commercial (1%) loan portfolios. Loans increased from $1,024,200,000 at March 31, 2019 primarily due to $145,498,000 of originations, a majority in the recreation and home improvement segments, partially offset by principal repayments and charge offs. As of June 30, 2018, the loans before allowance were $1,150,123,000 and were comprised of recreation ($597,348,000), home improvement ($195,876,000), medallion ($276,793,000) and commercial ($80,105,000) loans. The Company had an allowance for loan losses as of the end of the 2018 second quarter of $21,425,000, which was attributable to the medallion (87%), recreation (9%), home improvement (3%) and commercial (1%) loan portfolios. Loans increased from $1,097,198,000 at

Page 73The overall loan balance decline was mainly the result of 97


April 2, 2018 primarily due to $135,205,000the deconsolidation of originations, a majorityTrust III in the recreation2018 fourth quarter, along with the decline in the medallion values and home improvement segment, partially offset by principal repayments and charge offs.the continued aging of the medallion loans over 120 days which are then transferred to loans in process of foreclosure.  The provision for loan losses was $15,171,000 in the 2019 second quarter, compared to $30,576,000 in the 2018 second quarter, reflecting losses throughout the entirequarter. The improvement was reflective of a lower medallion loan portfolio, and includedin which the medallion values remained consistent in the current quarter for the New York market, while there had been a decline in the prior year quarter, as well as improvement on the non-specific general reserve for medallion loansin the current quarter compared to the initial recording of $6,663,000.$6,663,000 in the 2018 second quarter. See Note 4 for additional information on loans and the allowance for loan losses.

Interest expense was $8,821,000 at the 2019 second quarter compared to $7,925,000 in the 2018 second quarter, and the cost of borrowed funds was 3.14% compared to 2.65%., mainly driven by market conditions. Average debt outstanding was $1,127,509,000 compared to $1,197,450,000 for the 2018-quarter.2018 quarter. See page 5749 for a table which shows average balances and cost of funds for our funding sources.

Net interest income was $23,194,000 for the 2019 quarter compared to $24,719,000 for the 2018 quarter and the net interest margin was 7.93% for the 2018-quarter.8.46% compared to 8.57%.

Page 65 of 76


Noninterest income, which is comprised of sponsorship and race winnings, prepayment fees, servicing fee income, late charges, write-downs of loan collateral, impairment of equity investments and other miscellaneous income, was $1,683,000 in the 2019 quarter compared to $4,878,000 in the 2018 quarter. The change was driven by the decline in the Chicago medallion values for both the loans in process of foreclosure and the owned Chicago medallions.  

Operating expenses were $18,184,000 in the 2019 second quarter compared to $16,926,000 in the 2018 second quarter. Salaries and benefits expense waswere $6,321,000 in the 2019 quarter compared to $5,639,000 in the 2018 quarter, reflective of lower bonus expenses in the prior year, and collection costs were $2,253,000 compared to $837,000, primarily reflective of increased efforts with the medallion loan portfolio. The remaining expenses during the 2019 second quarter included professional fees were $2,246,000,of $2,048,000, primarily reflecting legal costs for a variety of corporate and investment-related matters, race team costs were $2,540,000,of $2,550,000, loan servicing costs were $1,128,000,of $1,293,000, primarily reflecting the cost of servicing the recreational and home improvement consumer loans, and occupancy and other operating expenses were $5,373,000.of $3,719,000, all relatively in line, or slightly improved, compared to the 2018 second quarter.

Total income tax benefit was $1,835,000 in the 2019 quarter compared to $4,021,000 in the 2018 quarter. See Note 89 for more information.

Loan collateral in process of foreclosure was $60,052,000 at the end$52,368,000 as of the 2018 second quarter,June 30, 2019, an increase of $2,560,000 from March 31, 2019, reflective of $10,355,000 of transfers from loans offset by dispositions and cash payments as well as valuation adjustments incurred during the quarter. At June 30, 2018, the balance was $60,052,000, an increase of $21,749,000 atfrom April 2, 2018. The increase primarily reflects there-classification of $33,750,000 from nonperforming loans shown as investments during the 2018 first quarter, as well as the net increase in loans that reached 120 days past due and were charged down to collateral value and reclassified.

Goodwill and intangible assets were $211,123,000 at the end$204,062,000 as of the 2018 second quarterJune 30, 2019 and arose during the quarter almost entirely in connection with the consolidationwas $204,785,000 as of Medallion Bank and RPAC.December 31, 2018. See Note 2 for further information regarding goodwill and intangible assets.

2019 First Quarter under Bank Holding Company Accounting

Net income attributable to shareholders was $1,228,000, or $0.05 per diluted share for the three months ended March 31, 2019.

Total interest income was $30,043,000 for the three months ended March 31, 2019 was primarily reflective of activity on the consumer and commercial loans, which had slightly declined from the three months ended December 31, 2018 due to exits in the commercial loans and lower earnings on recreation loans. The yield on interest earning assets was 11.52%. Average interest earning assets were $1,057,488,000 for the three months.

Loans before allowance for loan losses were $1,024,200,000 as of March 31, 2019, and were comprised of recreation ($609,999,000), home improvement ($193,275,000), medallion ($165,715,000), and commercial ($55,211,000) loans. The Company had an allowance for loan losses as of March 31, 2019 of $36,862,000, which was attributable to the medallion (69%), recreation (24%), home improvement (6%), and commercial (1%) loan portfolios. The provision for loan loss remained relatively in line with provision as of December 31, 2018 even as total gross loans had increased, mainly due to consumer loan originations. The provision for loan loss was $13,343,000, and reflected an increase of reserves on the consumer loan portfolio and to a lesser extent an increase in reserves on the medallion portfolio due to a decline in the medallion values.

Interest expense was $7,722,000 for the 2019 first quarter and the cost of borrowed funds was 2.93%. Interest expense declined from $8,004,000 for the three months ended December 31, 2018 mainly due to lower borrowings as the DZ loan had been settled during the fourth quarter of 2018. Average debt outstanding was $1,067,075,000.

Net interest income was $22,321,000 and the net interest margin was 8.56% for the 2019 first quarter for the reasons stated above.

Noninterest income was $6,863,000 for the 2019 first quarter, which included a $4,145,000 gain on the extinguishment of debt, $3,179,000 of race team related revenues, as well as gains on equity investments and value adjustments on the Chicago owned medallions, which were partly offset by the decline in collateral value on the loans in process of foreclosure of $2,119,000 mainly due to the change in the New York market.

Operating expenses were $14,702,000 for the three months ended March 31, 2019 compared to $25,691,000 for the three months ended December 31, 2018. For the three months ended March 31, 2019, salaries and benefits were $5,341,000, race team costs were $1,998,000, professional fees were $1,636,000, loan servicing costs were $1,194,000, primarily related to the recreation and home improvement consumer loans, and occupancy and other operating expenses were $4,533,000. For the three months ended December 31, 2018, the majority of the change was due to $5,615,000 impairment recorded as well as higher collection costs incurred mainly related to medallion loans.

Page 66 of 76


Total income tax benefit was $256,000 for the three months ended March 31, 2019.

Loan collateral in process of foreclosure was $49,808,000 at March 31, 2019, an increase from $49,495,000 at December 31, 2018. The increase was primarily reflective of additional loans having reached 120 days past due being charged-down to their collateral value and reclassified to loans in process of foreclosure, partially offset by the decline in collateral values and to a lesser extent the disposition of collateral assets.

Goodwill and intangible assets were $204,423,000 at March 31, 2019, compared to $204,785,00 as of December 31, 2018.

2018 First Quarter under Investment Company Accounting

Net decrease in net assets resulting from operations was $14,874,000 or ($0.62) per diluted common share in the 2018 first quarter primarily reflecting an increase in net realized/unrealized losses on the investment portfolio, increased operating expenses and higher income taxes. Net investment loss after income taxes was $3,230,000 or ($0.13) per share in the 2018 quarter.

Investment income was $4,033,000 in the 2018 first quarter and included $1,643,000 of interest reversals related to nonaccrual loans in 2018. The yield on the investment portfolio was 2.69% in the 2018 quarter.

Interest expense was $3,551,000 in the 2018 first quarter. The increase in interest expense was primarily due to increased borrowing costs. The cost of borrowed funds was 4.44% in 2018 reflecting the continuing increase in market interest rates. Average debt outstanding was $324,322,000 for the 2018 quarter primarily reflecting decreased borrowings required to fund the contracting loan portfolio.

Net interest income was $482,000 and the net interest margin was 0.32% for the 2018 quarter.

Noninterest income, which is comprised of prepayment fees, servicing fee income, late charges, and other miscellaneous income, was $60,000 in the 2018 quarter primarily reflecting the reversal of a previously earned management fee due from a portfolio company in the prior year quarter.

Operating expenses were $4,108,000 in the 2018 first quarter. Salaries and benefits expense was $2,349,000 in the 2018 quarter primarily due to executive and employee bonus accrual. Professional fees were $723,000 in 2018 primarily reflecting higher legal expenses for a variety of corporate and investment-related matters. Occupancy and other operating expenses of $1,036,000 in 2018 primarily reflecting higher road or miscellaneous taxes, collection costs related to the medallion loan portfolio and directors’ fees.

Page 74 of 97


Total income tax benefit was $640,000 in 2018, and was comprised of three components,components: a $336,000 benefit related to the net investment loss, a $8,426,000 benefit related to realized losses, and a provision of $8,122,000 related to net unrealized gains on investments.

Net change in unrealized appreciation (depreciation) on investments before income tax was appreciation of $22,797,000 in the 2018 first quarter. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries was depreciation of $6,318,000 in 2018, resulting in decreased depreciation of $2,205,000 and related almost entirely to the medallion portfolio. Unrealized appreciation (depreciation) arisesarose when we makemade valuation adjustments to the investment portfolio. When investments arewere sold or written off, any resulting realized gain (loss) iswas grossed up to reflect previously recorded unrealized components. As a result, movement between periods can appear distorted. The current quarter activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $29,115,000 and by reversals of unrealized depreciation on loans which were charged off of $34,747,000, offset by unrealized depreciation on loans and other investments of $40,067,000 mainly due to the continuing declining values of the medallions.

Our net realized losses on investments before taxes were $34,745,000 in the 2018 quarter. The 2018 activity reflected the realized losses in the loan portfolio.

Our net realized/unrealized loss on investments before income taxes was $11,948,000 in the 2018 first quarter reflecting the above.

2017 Second Quarter and Six Months under Investment Company Accounting

Net increase (decrease) in net assets resulting from operations was ($4,797,000) or ($0.20) per diluted common share and ($3,686,000) or ($0.15) in the 2017 second quarter and six months, primarily reflecting higher unrealized depreciation on the investment portfolio, lower interest income from the medallion loan portfolio, lower dividend income from controlled subsidiaries and higher interest expenses, offset by lower operating expenses, higher realized gains, and higher income tax benefits. Net investment income (loss) after income taxes was ($1,293,000) or ($0.05) per share and ($1,728,000) or ($0.07) in the 2017 quarter and six months.

Investment income was $3,787,000 and $8,037,000 in the 2017 second quarter and six months. This included $2,248,000 and $2,895,000Page 67 of interest reversals related to nonaccrual loans in the 2017 quarter and six months. This also included $0 and $0 in dividends from Medallion Bank in the 2017 quarter and six months. The yield on the investment portfolio was 2.41% in the 2017 quarter, and was 2.55% in the 2017 six months. Excluding the dividends in prior year, the 2017 second quarter and six month yields were down 35% and 34%, reflecting the increases in the level of loans on nonaccrual and interest applied to principal.76

Interest expense was $3,408,000 and $6,742,000 in the 2017 quarter and six months, was primarily due to increased borrowing costs. The cost of borrowed funds was 4.08% and 4.02% in the 2017 quarter and six months, reflecting the adjustable rate nature of much of our borrowings, and changes in our funding mix. Average debt outstanding was $335,010,000 for the 2017 quarter, and $338,459,000 in the six months, primarily reflecting decreased borrowings required to fund the contracting loan and investment securities portfolios.

Net interest income was $379,000 and $1,295,000 and the net interest margin was 0.24% and 0.41% for the 2017 second quarter and six months, down $2,098,000 or 85% and $7,628,000 or 85%, which represented net interest margins of 1.57% and 2.92% all reflecting the items discussed above.

Noninterest income, which is comprised of management fees, late charges, servicing fees, prepayment fees, and other miscellaneous income was $12,000 and $14,000 in the 2017 second quarter and six months reflecting lower servicing and other fees generated from the portfolio base at Medallion Bank, and lower prepayment fees.

Operating expenses were $3,682,000 and $5,907,000 in the 2017 second quarter and six months. Salaries and benefits expense was $2,097,000 and $2,861,000 in the second quarter and six months, primarily due to a reduction in bonus costs recorded in the current period. Professional fees were $616,000 and $1,308,000 in the quarter and six months, primarily reflecting higher legal expenses for a variety of corporate and investment-related matters. Occupancy and other operating expense was $969,000 and $1,738,000 in the quarter and six months, primarily reflecting higher lease costs in the current periods and offset by higher business development reimbursements from Medallion Bank in the current six months.


 

Page 75 of 97


Total income tax benefit was $7,018,000 and $8,990,000 in the 2017 second quarter and six months, and was comprised of two components, a $1,998,000 and $2,870,000 benefit related to the net investment loss in the 2017 quarter and six months, and a benefit of $5,020,000 and $6,120,000 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.

Net change in unrealized appreciation on investments before tax was depreciation of $10,520,000 and $10,919,000 in the 2017 second quarter and six months. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries, was depreciation of $11,450,000 and $19,973,000 in the 2017 quarter and six months, resulting in increased depreciation of $9,898,000 and $14,950,000 in the 2017 quarter and six 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 $930,000 ($9,054,000 in the six months) and by reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $974,000 ($2,285,000 in the six months), offset by net unrealized depreciation on equity investments, investment securities, and loans of $12,424,000 ($20,168,000 of net depreciation in the six months.)

Our net realized gains on investments were $1,996,000 and $2,841,000 in the 2017 quarter and six months. The 2017 activity reflected $2,958,000 ($3,002,000 in the six months) of other gains, offset by net realized losses, and recoveries of $962,000 ($161,000 in the six months).

Our net realized/unrealized losses on investments before tax were $8,524,000 and $8,078,000 in the 2017 quarter and six months, reflecting the above.

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of medallion, commercial, and consumer loans, and investment securities) reprice on a different basis over time in comparison to our interest-bearing liabilities (consisting primarily of bank certificates of deposit, credit facilities withand borrowings from banks and other lenders, bank certificates of deposit, and SBA debentures).

Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Abrupt increases in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at the higher prevailing interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning assets and interest-bearing liabilities results in interest rate risk.

The effect of changes in interest rates is mitigated by regular turnover of the portfolio. Based on past experience, we anticipate that approximately 40% of the taxicab medallion portfolio will mature or be prepaid each year. We believe that the average life of our loan portfolio varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment. However, borrowers may prepay for a variety of other reasons, such as to monetize increases in the underlying collateral values, particularly in the medallion loan portfolio.

In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years. We had outstanding SBA debentures and borrowings of $78,097,000$75,452,000 with a weighted average interest rate of 3.39%3.41%, constituting 6%7% of our total indebtedness, and retail notes of $33,625,000, with a weighted average interest rate of 9.00%, constituting 3% of total indebtedness, and $30,000,000 of private placement notes, with a weighted average interest rate of 8.25%, constituting 2% of total indebtedness as of June 30, 2018.2019. Also, as of June 30, 2018,2019, certain of the certificates of deposit were for terms of up to 6059 months, further mitigating the immediate impact of changes in market interest rates.

Page 76 of 97


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.

Page 68 of 76


The following table presents our interest rate sensitivity gap at June 30, 2018.2019. The principal amounts of interest earning assets are assigned to the time frames in which such principal amounts are contractually obligated to be repriced. We have not reflected an assumed annual prepayment rate for such assets in this table.

 

June 30, 2018 Cumulative Rate Gap(1)

 

June 30, 2019 Cumulative Rate Gap (1)

June 30, 2019 Cumulative Rate Gap (1)

 

(Dollars in thousands)

  Less Than 1
Year
 More Than
1 and Less
Than 2
Years
 More
Than 2
and Less
Than 3
Years
 More
Than 3
and Less
Than 4
Years
 More
Than 4
and Less
Than 5
Years
 More Than
5 and Less
Than 6
Years
 Thereafter Total 

 

Less Than 1

Year

 

 

More Than

1 and Less

Than 2

Years

 

 

More Than

2 and Less

Than 3

Years

 

 

More Than

3 and Less

Than 4

Years

 

 

More Than

4 and Less

Than 5

Years

 

 

More Than

5 and Less

Than 6

Years

 

 

Thereafter

 

 

Total

 

Earning assets

         

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Floating-rate

  $25,237  $—   $—   $—   $—   $—   $—   $25,237 

 

$

37,171

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

37,171

 

Adjustable rate

   52,965   23,997  9,109   13,468   3,475  1,105  2,865   106,984 

 

 

37,173

 

 

 

5,227

 

 

 

15,615

 

 

 

1,690

 

 

 

12,519

 

 

 

 

 

 

29

 

 

 

72,253

 

Fixed-rate

   132,880   45,527   61,498   59,997   68,738   44,348   663,605   1,076,593 

 

 

56,891

 

 

 

44,488

 

 

 

35,002

 

 

 

56,482

 

 

 

62,521

 

 

 

57,411

 

 

 

740,661

 

 

 

1,053,456

 

Cash

   10,444   —     —     —     —     —     —     10,444 

 

 

35,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,138

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total earning assets

  $221,526  $69,524  $70,607  $73,465  $72,213  $45,453  $666,470  $1,219,258 

 

$

166,373

 

 

$

49,715

 

 

$

50,617

 

 

$

58,172

 

 

$

75,040

 

 

$

57,411

 

 

$

740,690

 

 

$

1,198,018

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Interest bearing liabilities

         

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

  $330,290  $260,172  $123,143  $142,250  $40,547  $—   $—   $896,402 

 

$

330,902

 

 

$

183,873

 

 

$

229,929

 

 

$

97,811

 

 

$

85,143

 

 

$

 

 

$

 

 

$

927,658

 

DZ loan

   96,925   —     —     —     —     —     —     96,925 

SBA debentures and borrowings

 

 

24,452

 

 

 

8,500

 

 

 

 

 

 

5,000

 

 

 

2,500

 

 

 

12,500

 

 

 

22,500

 

 

 

75,452

 

Notes payable to banks

   72,715   —     —     —     —     —     —     72,715 

 

 

23,524

 

 

 

23,104

 

 

 

 

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

 

47,888

 

SBA debentures and borrowings

   —     29,597   8,500   —     5,000   2,500   32,500   78,097 

Retail notes

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

Retail and privately placed notes

 

 

 

 

 

33,625

 

 

 

 

 

 

 

 

 

30,000

 

 

 

 

 

 

 

 

 

63,625

 

Preferred securities

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

 

 

33,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,000

 

Other borrowings

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

 

 

7,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,713

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities

  $541,430  $296,847  $165,268  $142,250  $45,547  $2,500  $32,500  $1,226,342 

 

$

419,591

 

 

$

249,102

 

 

$

229,929

 

 

$

104,071

 

 

$

117,643

 

 

$

12,500

 

 

$

22,500

 

 

$

1,155,336

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Interest rate gap

  ($319,904 ($227,323 ($94,661 ($68,785 $26,666  $42,953  $633,970  ($7,084

 

$

(253,218

)

 

$

(199,387

)

 

$

(179,312

)

 

$

(45,899

)

 

$

(42,603

)

 

$

44,911

 

 

$

718,190

 

 

$

42,682

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Cumulative interest rate gap(2)

  ($319,904 ($547,227 ($641,888 ($710,673 ($684,007 ($641,054 ($7,084  —   

 

$

(253,218

)

 

$

(452,605

)

 

$

(631,917

)

 

$

(677,816

)

 

$

(720,419

)

 

$

(675,508

)

 

$

42,682

 

 

 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

December 31, 2018

 

$

(232,323

)

 

$

(409,272

)

 

$

(563,100

)

 

$

(638,264

)

 

$

(600,146

)

 

$

(554,335

)

 

$

59,833

 

 

 

 

December 31, 2017(3)

 

$

(172,208

)

 

$

(324,049

)

 

$

(361,494

)

 

$

(425,785

)

 

$

(411,672

)

 

$

(379,286

)

 

$

168,501

 

 

 

 

 

(1)

The ratio of the cumulative one year gap to total interest rate sensitive assets was (26%(21%) as of June 30, 2018.2019.

(2)

Adjusted for the medallion loan 40% prepayment assumption results in a cumulative one year negative interest rate gap and related ratio of ($286,291)224,688) or (23%(19%) foras of June 30, 2018.2019.

(3)

Represents the cumulative rate gap on a combined basis with Medallion Bank for the years noted.

Our interest rate sensitive assets were $1,219,258,000$1,198,018,000 and interest rate sensitive liabilities were $1,226,342,000$1,155,336,000 at June 30, 2018.2019. Theone-year cumulative interest rate gap was a negative $319,404,000$253,218,000 or 26%21% of interest rate sensitive assets. However, using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of $286,291,000$224,688,000 or 23%19% at June 30, 2018.2019. 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.

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 $30,000,000 of notional value of principal from various multinational banks, with termination dates ranging to December 2018. The caps provide for payments to us if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases were generally fully expensed when paid, including $0 in the quarter ended June 30, 2018, and all are carried at $0 on the balance sheet at June 30, 2018.

Liquidity and Capital Resources

Our sources of liquidity are with a variety of local and regional banking institutions, unfunded commitments to sell debentures to the SBA, loan amortization and prepayments, private issuances of debt securities, participations or sales of loans to third parties, the disposition of other assets of the Company, and dividends from Medallion BankCapital and Medallion Capital.Bank, although we have not received any from Medallion Bank since 2016, and are subject to compliance with regulatory ratios. Additionally, there were $5,500,000we had $3,000,000 of unfunded commitments from the SBA as of June 30, 2018.2019.

Page 77 of 97


Additionally, Medallion Bank has access to independent sources of funds for our business originated there, primarily through brokered certificates of deposit. Medallion Bank has $45,000,000 available under Fed Funds lines with several commercial banks as of June 30, 2018.2019. In addition, Medallion Bank is allowed tocan retain all earnings in the business to fund future growth.

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.

Page 69 of 76


The components of our debt were as follows at June 30, 2018.2019. See Note 7 to the consolidated financial statements for details of the contractual terms of our borrowings.

 

(Dollars in thousands)

  Balance   Percentage Rate (1) 

 

Balance

 

 

Percentage

 

 

Rate (1)

 

Deposits

  $896,402    73  1.91

 

$

927,658

 

 

 

80

%

 

 

2.36

%

DZ loan

   96,925    8   3.75 

SBA debentures and borrowings

   78,097    6   3.39 

 

 

75,452

 

 

 

7

 

 

 

3.41

 

Retail and privately placed notes

 

 

63,625

 

 

 

5

 

 

 

8.65

 

Notes payable to banks

   72,715    6   4.19 

 

 

47,888

 

 

 

4

 

 

 

4.78

 

Retail notes

   33,625    3   9.00 

Preferred securities

   33,000    3   4.44 

 

 

33,000

 

 

 

3

 

 

 

4.60

 

Other borrowings

   15,578    1   2.26 

 

 

7,713

 

 

 

1

 

 

 

2.00

 

  

 

   

 

  

Total outstanding debt

  $1,226,342    100  2.59

 

$

1,155,336

 

 

 

100

%

 

 

2.94

%

  

 

   

 

  

 

 

 

(1)

Weighted average contractual rate as of June 30, 2018.2019.

Our contractual obligations expire on or mature at various dates through September 2037. The following table shows our contractual obligations at June 30, 2018.2019.

 

  Payments due by period 

 

Payments due by period

 

(Dollars in thousands)

  Less than 1 year   1 – 2 years   2 – 3 years   3 – 4 years   4 – 5 years   More than 5 years   Total 

 

Less than

1 year

 

 

1 – 2 years

 

 

2 – 3 years

 

 

3 – 4 years

 

 

4 – 5 years

 

 

More than

5 years

 

 

Total

 

Deposits

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

 

$

330,902

 

 

$

183,873

 

 

$

229,929

 

 

$

97,811

 

 

$

85,143

 

 

$

 

 

$

927,658

 

DZ loan

   96,925    —      —      —      —      —      96,925 

SBA debentures and borrowings

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

 

 

24,452

 

 

 

8,500

 

 

 

 

 

5,000

 

 

 

2,500

 

 

 

35,000

 

 

 

75,452

 

Retail and privately placed notes

 

 

 

 

33,625

 

 

 

 

 

 

 

 

30,000

 

 

 

 

 

63,625

 

Notes payable to banks

   70,551    2,164    —      —      —      —      72,715 

 

 

14,523

 

 

 

32,665

 

 

 

280

 

 

 

280

 

 

 

140

 

 

 

 

 

47,888

 

Retail notes

   —      —      33,625    —      —      —      33,625 

Preferred securities

   —      —      —      —      —      33,000    33,000 

 

 

 

 

 

 

 

 

 

 

 

 

33,000

 

 

 

33,000

 

Other borrowings

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

 

 

7,713

 

 

 

 

 

 

 

 

 

 

 

 

 

7,713

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Operating lease obligations

 

 

2,362

 

 

 

2,304

 

 

 

2,262

 

 

 

2,189

 

 

 

1,960

 

 

 

5,141

 

 

 

16,218

 

Total

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

 

$

379,952

 

 

$

260,967

 

 

$

232,471

 

 

$

105,280

 

 

$

119,743

 

 

$

73,141

 

 

$

1,171,554

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Most of our borrowing relationships have maturity dates from 2018during 2019 through 2020.2021. We have been in active and ongoing discussions with each of these lenders and have extended each of the facilities as they matured except as set forth in the following paragraph.matured. The lenders have worked with us to extend and change the terms of the borrowing agreements. We have arranged for changes to the terms of the notes and payment and borrowing base calculations which we anticipate will facilitate our operations for the foreseeable future.

We andOn July 16, 2019, we paid $10,819,000 at maturity in satisfaction of all our subsidiaries obtain financingoutstanding obligations under lending facilities extended by various banksone of our credit facilities. In connection with this payment, we obtained a waiver from one of our other lenders, with a term note of $3,096,000, of certain resulting repayment and other financial institutions, some ofobligations, which waiver expires on August 16, 2019. While there can be no assurance, we are secured by loans, taxi medallions and other assets. Where these facilities are extendedworking with the lender 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.extend such waiver.

Page 78 of 97


In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of them at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of our portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net 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. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity a hypothetical immediate 1% increase in interest rates would result in an increase to the line item net income as of June 30, 20182019 by $349,000$862,000 on an annualized basis, and the impact of such an immediate increase of 1% over aan one year period would have been ($2,126,000)1,024,000) at June 30, 2018.2019. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net income from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

Page 70 of 76


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.

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 June 30, 2018 and December 31, 2018.2019. See Note 7 to the consolidated financial statements for additional information about each credit facility.

 

  Bank Holding Company Accounting  Investment
Company
Accounting
 

(Dollars in  thousands)

 The Company  MFC  MCI  FSVC  MB  RPAC  June 30, 2018  December 31, 2017 

Cash(1)

 $2,084  $1,849  $4,089  $605  $25,395  $1,559  $35,581  $122,923 

Bank loans

  51,217   21,498   —     —     —     —     72,715   81,450 

Average interest rate

  4.54  3.34  —     —     —     —     4.19  3.94

Maturity

  7/18-8/19   10/16-6/19   —     —     —     —     10/16-8/19   10/16-11/18 

Preferred securities

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

Average interest rate

  4.44  —     —     —     —     —     4.44  3.63

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

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

Average interest rate

  —     3.74  —     —     —     —     3.75  3.02

Maturity

  —     12/18   —     —     —     —     12/18   3/18 

SBA debentures and other borrowings

  —     —     54,000   29,597   —     —     83,597   85,064 

Amounts
undisbursed (3)

  —     —     5,500   —     —     —     5,500   5,500 

Amounts outstanding

  —     —     48,500   29,597   —     —     78,097   79,564 

Average interest rate

  —     —     3.48  3.25  —     —     3.39  3.39

Maturity

  —     —     3/21-3/27   2/20   —     —     2/20-3/27   2/20-3/27 

Brokered CDs & other funds borrowed

      896,402   —     896,402   906,748 

Average interest rate

  —     —     —     —     1.91  —     1.91  1.51

Maturity

  —     —     —     —     07/18-06/23   —     07/18-06/23   1/18-10/22 

Other borrowings

  —     —     —     —     8,000  7,578  15,578   —   

Average interest rate

  —     —     —     —     2.50%  2.00%  2.26  —  

Maturity

  —     —     —     —     7/18  3/20  7/18-3/20   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total cash

 $2,084  $1,849  $4,089  $605  $25,395  $1,559  $35,581  $122,923 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total debt outstanding

 $117,842  $118,423  $48,500  $29,597  $904,402  $7,578  $1,226,342  $1,234,371 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Dollars in thousands)

 

Medallion

Financial

Corp.

 

 

MB

 

 

MFC

 

 

MCI

 

 

FSVC

 

 

RPAC and

Other

 

 

June 30,

2019

 

 

December 31,

2018

 

Cash

 

$

14,499

 

(1)

$

37,071

 

 

$

397

 

 

$

19,021

 

 

$

287

 

 

$

873

 

 

$

72,148

 

 

$

57,713

 

Brokered CDs & other funds

   borrowed

 

 

 

 

 

927,658

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

927,658

 

 

 

848,040

 

Average interest rate

 

 

 

 

 

2.36

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.36

%

 

 

2.14

%

Maturity

 

 

 

 

07/19-06/24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7/19-6/24

 

 

1/19-07/23

 

Retail and privately placed notes

 

 

63,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63,625

 

 

 

33,625

 

Average interest rate

 

 

8.65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.65

%

 

 

9.00

%

Maturity

 

4/21-3/24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4/21-3/24

 

 

4/21

 

SBA debentures and borrowings

 

 

 

 

 

 

 

 

 

 

 

54,000

 

 

 

24,452

 

 

 

 

 

 

78,452

 

 

 

83,099

 

Amounts undisbursed

 

 

 

 

 

 

 

 

 

 

 

3,000

 

 

 

 

 

 

 

 

 

3,000

 

 

 

3,000

 

Amounts outstanding

 

 

 

 

 

 

 

 

 

 

 

51,000

 

 

 

24,452

 

 

 

 

 

 

75,452

 

 

 

80,099

 

Average interest rate

 

 

 

 

 

 

 

 

 

 

 

3.48

%

 

 

3.25

%

 

 

 

 

 

3.41

%

 

 

3.40

%

Maturity

 

 

 

 

 

 

 

 

 

 

3/21-3/29

 

 

2/20

 

 

 

 

 

2/20-3/29

 

 

2/20-3/29

 

Bank loans

 

 

35,096

 

 

 

 

 

 

12,792

 

 

 

 

 

 

 

 

 

 

 

 

47,888

 

 

 

59,615

 

Average interest rate

 

 

5.23

%

 

 

 

 

 

3.55

%

 

 

 

 

 

 

 

 

 

 

 

4.78

%

 

 

4.55

%

Maturity

 

7/19-3/21

 

 

 

 

 

2/21-12/23

 

 

 

 

 

 

 

 

 

 

 

7/19-12/23

 

 

3/19-12/23

 

Preferred securities

 

 

33,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,000

 

 

 

33,000

 

Average interest rate

 

 

4.60

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.60

%

 

 

4.86

%

Maturity

 

9/37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9/37

 

 

9/37

 

Other borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,713

 

 

 

7,713

 

 

 

7,649

 

Average interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.00

%

 

 

2.00

%

 

 

2.00

%

Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/19-3/20

 

 

12/19-3/20

 

 

12/19-3/20

 

Total cash

 

$

14,499

 

 

$

37,071

 

 

$

397

 

 

$

19,021

 

 

$

287

 

 

$

873

 

 

$

72,148

 

 

$

57,713

 

Total debt outstanding

 

$

131,721

 

 

$

927,658

 

 

$

12,792

 

 

$

51,000

 

 

$

24,452

 

 

$

7,713

 

 

$

1,155,336

 

 

$

1,062,028

 

 

Page 79 of 97


(1)

Includes federal funds sold$2,475 of an interest reserve associated with the March 2019 private placement, which can be used for no other purpose for three years.

Loan amortization, prepayments, and sales also provide a source of funding for us. Prepayments on loans are influenced significantly by general interest rates, medallion loan market values, economic conditions, and competition.

We also generate liquidity through deposits generated at Medallion Bank, borrowing arrangements with other banks, and through the issuance of SBA debentures, as well as from cash flow from operations. In addition, we may choose to participate a greater portion of our loan portfolio to third parties. We are actively seeking additional sources of liquidity,liquidity; however, given current market conditions, we cannot assure you that we will be able to secure additional liquidity on terms favorable to us or at all. If that occurs, we may decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become more favorable; or we may be required to dispose of assets when we would not otherwise do so, and at prices which may be below the net book value of such assets in order for us to repay indebtedness on a timely basis.

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value. The objective of this update is to modify the disclosure requirements as they relate to the fair value of assets and liabilities. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. We do not believe this update will have a material impact on our financial condition.

In January 2017, the FASB issued ASU2017-04, Intangibles “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 doesWe do not believe this update will have a material impact on itsour financial condition.

Page 71 of 76


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

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 GAAP. ASU2016-02 applies to all entities and is effective for fiscal years beginning after December 15, 2018 for public entities. The Company has assessed the impact the update willDividends

We have on its financial condition and does not believe this update will have a material impactpaid dividends on its financial condition.

Common Stock

Our common stock is quoted on NASDAQ under the symbol “MFIN.” Our common stock commenced trading on May 23, 1996. As of August 10, 2018, there were approximately 322 holders of record of our common stock.

On August 10, 2018, the last reported sale price of our common stock was $6.29 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.

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The following table sets forth, for the periods indicated, the range of high and low closing prices for our common stockfuture depending on the Nasdaq Global Select Market.

2018

  DISTRIBUTIONS
DECLARED
   HIGH   LOW 

Second Quarter

  $0.00   $5.77   $3.64 

First Quarter

   0.00    5.43    3.65 

2017

      

Fourth Quarter

  $0.00   $4.09   $2.12 

Third Quarter

   0.00    2.64    2.10 

Second Quarter

   0.00    2.93    1.84 

First Quarter

   0.00    3.33    1.68 

We are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains, and are not subject to the annual distribution requirements under Subchapter M of the Code. Thus, there can be no assurance that we will pay any cash distributions as we may retain our earnings in certain circumstances to facilitate the growth of our business, to finance our investments, to provide liquidity or for other corporate purposes.

We have 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.conditions.

Control Statutes

Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly, Medallion Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations.AlthoughMedallionBankisan “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act, your investment in Medallion Financial Corp. is not insureddepositoryinstitution”within or guaranteed by themeaningoftheFederalDepositInsuranceAct FDIC, or any other agency, andtheChangeinBankControlAct,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.

In addition to the regulations detailed above, our operations are subject to supervision and regulation by other federal, state, and local laws and regulations. Additionally, our operations may be subject to various laws and judicial and administrative decisions. This oversight may serve to:

regulate credit granting activities, including establishing licensing requirements, if any, in various jurisdictions;

establish maximum interest rates, finance charges and other charges;

require disclosures to customers;

govern secured transactions;

set collection, foreclosure, repossession, and claims handling procedures and other trade practices;

prohibit discrimination in the extension of credit and administration of loans; and

regulate the use and reporting of information related to a borrower’s credit experience and other data collection.

Changes to laws of states in which we do business could affect the operating environment in substantial and unpredictable ways. We cannot predict whether such changes will occur or, if they occur, the ultimate effect they would have upon our financial condition or results of operations.

Page 72 of 76


ITEM 3. QUANTITATIVE AND QUALITATIVEQUALITATIVE 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, 2017.

2018.

Page 81 of 97


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure 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 June 30, 2018. In addition, based on our evaluation2019 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported 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 Office and Chief Financial Officer, as of June 30, 2018, there have beenappropriate to allow timely decisions regarding required disclosures.

Changes in Internal Controls

There were no changes that occurredin our internal controls over financial reporting during the three monthsquarter ended June 30, 20182019 that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.

Page 73 of 76


PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We 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 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 certain 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.

On December 20, 2017, a stockholder derivative action was filed in the Supreme Court of the State of New York, County of New York (Shields v. Murstein, et al.). The complaint names us as a nominal defendant and purports to assert claims derivatively on our behalf against certain of our current directors, one of our former directors, and a former independent contractor for one of our subsidiaries. The complaint alleges that the director defendants breached their fiduciary duties with respect to certain alleged misconduct by the former independent contractor involving postings about us under an alleged pseudonym. On January 25, 2018, we and the director defendants filed a motion to dismiss the action. Plaintiff filed his opposition to the motion on March 1, 2018. We and the director defendants filed reply papers in further support of the motion on March 22, 2018. A hearing on the motion to dismiss was held on June 27, 2018, and the parties are awaiting a ruling on the motion. We believe the case is without merit and intend to defend it vigorously.

Page 82 of 97


ITEM 1A. RISK FACTORS

Risks Relating to Our Business and Structure

Our business is heavily concentrated in consumer lending, which carries a high risk of loss and could be adversely affected by an economic downturn.

Our business is heavily concentrated in consumer lending. As a result, we are more susceptible to fluctuations and risks particular to consumer credit than a more diversified company. For example, our business is particularly sensitive to macroeconomic conditions that affect the US economy, consumer spending and consumer credit. We are also more susceptible to the risks of increased regulations and legal and other regulatory actions that are targeted at consumer credit or the specific consumer credit products that we offer (including promotional financing). Our business concentration could have a material adverse effect on our results of operations.

By its nature, lending to consumers carries with it different risks and typically a higher risk of loss than commercial lending. Although the net interest margins are intended to be higher to compensate us for this increased risk, an economic downturn could result in higher loss rates and lower returns than expected, and could affect the profitability of our consumer loan portfolio. During periods of economic slowdown such as the 2007-2009 recession, delinquencies, defaults, repossessions, and losses generally increase, and consumers are likely to reduce their discretionary spending in areas such as recreation and home improvement. These periods may also be accompanied by increasing unemployment rates and declining values of consumer products securing outstanding accounts, which weaken collateral coverage and increase the amount of a loss in the event of default.

Additionally, higher gasoline prices, volatile real estate values, reset of adjustable rate mortgages to higher interest rates, general availability of consumer credit, or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for RVs, boats, trailers and other consumer products (including in connection with home improvement projects), as well as weaken collateral values on certain types of consumer products. Any decrease in consumer demand for those products could have a material adverse effect on our ability to originate new loans and, accordingly, on our business, financial condition, and results of operations.

Although declines in commodity prices, and more particularly gasoline prices, generally are financially beneficial to the individual consumer, such declines may also have a negative impact on unemployment rates in geographic areas that are highly dependent upon the oil and natural gas industry, which could adversely affect the credit quality of consumers in those areas.

Our balance sheet consists of a significant percentage of nonprime consumer loans, which are associated with higher than average delinquency rates. The actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn. In addition, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in our net interest income.

Furthermore, our business is significantly affected by monetary and regulatory policies of the US federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control and could have a material adverse effect on us through interest rate changes, costs of compliance with increased regulation, and other factors. Although market conditions have improved since the 2007-2009 recession, conditions remain challenging for financial institutions.

The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how those economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the quality of our assets.

Changes in the taxicab andfor-hire vehicle industries have resulted in significantly increased competition and have had a material adverse effect on our business, financial condition, and operations.

There have been recent changes in the taxicab andfor-hire vehicle industries that have resulted in significantly increased competition in all of our taxi medallion markets. Ridesharing applications, or ridesharing apps, utilized byfor-hire vehicles were introduced in New York City in 2011 and continue to expand domestically and globally. Many of thesefor-hire vehicle operators operate outside of the regulatory regime with which we and our borrowers operate, which 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 2018 and July 2018 approximately 7,200 newfor-hire vehicle licenses were issued, increasing the total number offor-hire vehicles to approximately 112,307 as of August 6, 2018, a 6.9% increase from January 2018.

Page 83 of 97


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 3,500 are active.

TLC annualized data through December 2017 has shown a 13.9% reduction in total New York City taxicab fares, compared to the same period in 2016, and a 13.5% 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 June 30, 2018, 4.5% of our medallion loan portfolio was 90 days or more past due. As discussed in further detail below, there have also been recent decreases in the values of our medallion loan collateral and our Chicago medallions purchased out of foreclosure. Increased competition from ridesharing apps and Street Hail Livery licenses has reduced our market share, the overall market for taxicab services, the supply of taxicab drivers, income from operating medallions, and the value of taxicab medallions. If these trends continue and intensify, there would be a furtherno 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 2017 and 2018. In March 2017, the New York City Council made changes to the medallion classes, eliminating the distinction between individual and corporate medallions. Until the market fully stabilizes we will not be able to determine the ultimate impact of this change, however, we believe it will allow for greater economic investment over time as these rules were a significant barrier of entry into the industry. Like many other financial institutions, we have evaluated the transactions and cash flows of our underlying borrowers performance and determined that a market value of $186,400, $181,000 net of liquidation costs, was appropriate, reflecting the median transactional activity for the quarter.

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 $36,000, $34,900 net of liquidation costs, as of June 30, 2018.

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 medallion loans was approximately 211% as of June 30, 2018. If taxicab medallion values continue to decline, there could be an increase in medallion loan delinquencies, foreclosures, and borrower bankruptcies. Our ability to recover on defaulted medallion loans by foreclosing on and selling the medallion collateral could be diminished, which could result in material losses on defaulted medallion loans which could have a material adverse effect on our business. A substantial decrease in the value of our Chicago medallions purchased out of foreclosure could 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 could realize less than the value at which we had previously recorded such medallions.

Our financial condition, liquidity and results of operations depend on the credit performance of our loans.

As of June 30, 2018, more than half of our recreation consumer loans are nonprime receivables with obligors who do not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history. While our underwriting guidelines are designed to confirm that, notwithstanding such factors, the obligor would be a reasonable credit risk, the receivables nonetheless are expected to experience higher default rates than a portfolio of obligations of prime obligors. The weakening of our underwriting guidelines for any reason, such as in response to the competitive environment, in an effort to originate higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans or our inability to adequately adapt policies and procedures to changes in economic or other conditions, may result in loan defaults and charge-offs that may necessitate increases to our allowance for loan losses, each of which could adversely affect our net income. In the event of a default on a recreation loan, generally the most practical recovery method is repossession of the financed vehicle, although the collateral value of the vehicle usually does not fully cover the outstanding account balance and costs of recovery. Repossession sales that do not yield sufficient proceeds to repay the receivables in full typically result in losses on those receivables.

Page 84 of 97


In addition, our prime portfolio has grown in proportion to our overall portfolio over the past several years. While prime portfolios typically have lower default rates than nonprime portfolios, we have less ability to make risk adjustments to the pricing of prime loans compared to nonprime loans. As a result, to the extent our prime portfolio continues to grow, a larger proportion of our business will consist of loans with respect to which we will have less flexibility to adjust pricing to absorb losses. As a result of these factors, we may sustain higher losses than anticipated in our prime portfolio. Additionally, if our prime loan losses are higher than expected then we may also be at risk with regards to our forecasted losses, which could impact our loss reserves and results of operations.

Our business, financial condition and results of operations could be negatively impacted if we are unsuccessful in developing and maintaining relationships with dealerships, contractors and financial service providers (FSPs).

We originate loans by working with third-party sellers of consumer products and not working directly with consumers. As a result, our ability to originate consumer loans depends on our relationships with dealerships, contractors and FSPs. Although we have relationships with various dealerships, contractors and FSPs, none of our relationships are exclusive and each may be terminated at any time. In particular, there is significant competition for the contractor and FSP relationships we depend on in connection with our Home Improvement Lending business. The loss of any of these relationships, our failure to develop additional relationships, and circumstances in which our existing base experiences decreased sales and loan volume all may have a material adverse effect on our business, financial condition and results of operations.

We borrow money, which magnifies the potential for gain or loss on amounts invested, and may 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.

As of June 30, 2018, we had $1,226,342,000 of outstanding indebtedness, with a weighted average borrowing cost of 2.59%.

Most of our borrowing relationships have maturity dates during 2018 through 2020. 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 7 of our consolidated financial statements for a discussion of the current and new lending arrangements to date.

Failure to obtain an extension of our existing credit facilities or failure to obtain additional revolving credit facilities could have a material adverse effect on our results of operations and financial position.

We utilize secured revolving credit facilities and other facilities to fund our investments. We cannot guarantee that our credit facilities will continue to be available beyond their current maturity dates on reasonable terms or at all or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. Our revolving credit facilities have converted to term loans. Obtaining additional revolving credit facilities or other alternative sources of financing may be difficult and we cannot guarantee that we will be able to do so on terms favorable to us or at all. The availability of revolving credit facilities depends, in part, on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit, the financial strength and strategic objectives of the banks that participate in our credit facilities and the availability of bank liquidity in general. If the credit facilities are not renewed or extended by our lenders by their maturity dates, we will not be able to make further borrowings under the facilities after they mature and the outstanding principal balances under such facilities will be due and payable at maturity. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, our financial condition would be adversely affected and our lenders may foreclose on the property securing such indebtedness. If we are unable to extend or replace these facilities or arrange new credit facilities or other types of interim financing, we may need to curtail or suspend loan origination and funding activities which could have a material adverse effect on our results of operations and financial position.

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

Page 85 of 97


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.

Our use of brokered deposits for our deposit-gathering activities may not be available when needed. The inability to accept and renew brokered deposits would have a material adverse effect on our business, financial condition, liquidity and results of operations.

We rely on the established brokered deposit market to originate deposits to fund our operations. Additionally, our business, strategy and prospects are dependent on our ability to accept and renew brokered deposits without limitation and, therefore, dependent on our ability to be “well-capitalized” under the FDIC’s regulatory framework.

Our brokered deposits consist of deposits raised through the brokered deposit market rather than through retail branches. Although we have developed contractual relationships with a diversified group of investment brokers, and the brokered deposit market is well developed and utilized by many banking institutions, conditions could change that might affect the availability of brokered deposits. In addition, our ability to rely on brokered deposits as a source of funding is subject to capitalization requirements set forth in the FDIC’s prompt corrective action framework. We may not accept or renew brokered deposits unless we are “well-capitalized” or we are “adequately capitalized” and we receive a waiver from the FDIC. A bank that is “adequately capitalized” and that accepts or renews brokered deposits under a waiver from the FDIC is subject to additional restrictions on the interest rates it may offer. See “Supervision and Regulation” for additional information.

If our capital levels fall below the “well-capitalized” level as defined by the FDIC our ability to raise brokered deposits would be materially impaired. If our capital levels fall below the “adequately-capitalized” level as defined by the FDIC, we would be unable to raise brokered deposits. Any impairment or inability to raise brokered deposits would have a material adverse effect on our business, financial condition, liquidity and results of operations. Brokered deposits may also not be as stable as other types of deposits, and if we experience a period of sustained operating losses, the cost of attracting deposits from the brokered deposit market could increase significantly. Our ability to manage our growth to stay within the “well-capitalized” level is critical to our ability to retain open access to this funding source.

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.

We were not in compliance with a financial covenant in the DZ loan agreement. We are currently in the process of working with DZ Bank to amend such covenant in the DZ loan agreement and there can be no assurance that we will be successful.

The issuance of debt securities or preferred stock and our borrowing money from banks or other financial institutions may affect holders of our common stock.

Our business may periodically require capital. We may issue debt securities or preferred stock, and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities. Any amounts that we use to service our debt or make payments on preferred stock will not be available for distributions to our common shareholders. It is likely that any senior securities we issue will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, some of these securities or other indebtedness may be rated by rating agencies, and in obtaining a rating for such securities and other indebtedness, we may be required to abide by operating and investment guidelines that further restrict operating and financial flexibility. We and, indirectly, our shareholders will bear the cost of issuing and servicing such securities and other indebtedness. Preferred stock or any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges more favorable than those of our common stock, including separate voting rights, and could delay or prevent a transaction or a change in control to the detriment of the holders of our common stock.

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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.

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, Larry D. Hall, our Chief Financial Officer, Donald Poulton and his management team for Medallion Bank, and Dean Pickerell and his management team at Medallion Capital. The departure of Messrs. Murstein or Mr. Hall, or any other member of our senior management team, could have a material adverse effect on our ability to achieve our investment objective.

Changes in taxicab industry regulations that result in the issuance of additional medallions or increases in the expenses involved in operating a medallion would lead to a decrease in the value of our medallion loan collateral and our Chicago medallions purchased out of foreclosure.

Every city in which we originate medallion loans, and most other major cities in the United States, limits the supply of taxicab medallions. This regulation results in supply restrictions that support the value of medallions. Actions that loosen these restrictions and result in the issuance of additional medallions into a market could decrease the value of medallions in that market. If this were to occur, the value of the collateral securing our then outstanding medallion loans in that market would be adversely affected. We are unable to forecast with any degree of certainty whether any other potential increases in the supply of medallions will occur.

In New York City, Chicago, Boston, and other markets where we originate medallion loans, taxicab fares are generally set by government agencies. Expenses associated with operating taxicabs are largely unregulated. As a result, the ability of taxicab operators to recoup increases in expenses is limited in the short term. Escalating expenses, such as rising gas prices and an increase in interest rates, can render taxicab operations less profitable, could cause borrowers to default on loans from us and would adversely affect the value of our collateral.

We operate in a highly regulated environment, and if we are found to be in violation of any of the federal, state, or local laws or regulations applicable to us, our business could suffer.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted in 2010. The Dodd-Frank Act significantly changed federal financial services regulation and affects, among other things, the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. In addition to the statutory requirements under the Dodd-Frank Act, the legislation also delegated authority to 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.

Other changes in the laws or regulations applicable to us more generally, may negatively impact the profitability of our business activities, require us to change certain of our business practices, materially affect our business model, limit the activities in which we may engage, affect retention of key personnel, require us to raise additional regulatory capital, increase the amount of liquid assets that we hold, or otherwise affect our funding profile or expose us to additional costs (including increased compliance costs). Any such changes may also require us to invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our business as previously conducted or our results of operations or financial condition.

We are also subject to a wide range of federal, state, and local laws and regulations, such as local licensing requirements, and retail financing, debt collection, consumer protection, environmental, health and safety, creditor, wage-hour, anti-discrimination, whistleblower and other employment practices laws and regulations and we expect these costs to increase going forward. The violation of these or future requirements or laws and regulations could result in administrative, civil, or criminal sanctions against us, which may include fines, a cease and desist order against the subject operations or even revocation or suspension of our license to operate the subject business. As a result, we have incurred and will continue to incur capital and operating expenditures and other costs to comply with these requirements and laws and regulations.

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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.

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Federal and state law may discourage certain acquisitions of our common stock which could have a material adverse effect on our shareholders.

Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly Medallion Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of the Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations. Under the Utah Financial Institutions Act, control is defined as the power to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an individual. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval. These provisions could delay or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the market price of our common stock. AlthoughMedallionBankisan“insureddepositoryinstitution”withinthemeaningoftheFederalDepositInsuranceActandtheChangeinBankControlAct,yourinvestmentinMedallionFinancialCorp.isnotinsuredorguaranteedbytheFDIC,oranyotheragency,andissubjecttoloss.

The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a significant adverse effect on our operations.

The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, federal deposit insurance funds, and the banking system as a whole, not for the protection of our stockholders and creditors. We are subject to regulation and supervision by the FDIC and the Utah Department of Financial Institutions. The laws and regulations applicable to us govern a variety of matters, including permissible types, amounts, and terms of loans and investments we may make, the maximum interest rate that may be charged, the amount of reserves we must hold against deposits we take, the types of deposits we may accept, maintenance of adequate capital and liquidity, changes in the control of Medallion Bank and us, restrictions on dividends, and establishment of new offices. As long as we remain well-capitalized under federal regulatory standards, there are no restrictions on the rates we may pay on brokered deposits. We must obtain approval from our regulators before engaging in certain activities or acquisitions, and there is the risk that such approvals may not be obtained, either in a timely manner or at all. Our regulators also have the ability to compel us to take, or restrict us from taking, certain actions entirely, such as actions that our regulators deem to constitute an unsafe or unsound banking practice. Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties, or damage to our reputation, all of which could have a material adverse effect our business, financial condition or results of operations.

Since the 2007-2009 recession, federal and state banking laws and regulations, as well as interpretations and implementations of these laws and regulations, have undergone substantial review and change. In particular, the Dodd-Frank Act drastically revised the laws and regulations under which we operate. Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities. These changes and increased scrutiny have resulted and may continue to result in increased costs of doing business and may in the future result in decreased revenues and net income, reduce our ability to effectively compete to attract and retain customers, or make it less attractive for us to continue providing certain products and services. Any future changes in federal and state law and regulations, as well as the interpretations and implementations, or modifications or repeals, of such laws and regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial condition or results of operations.

Our SBIC subsidiaries are licensed by the SBA, and are therefore subject to SBA regulations.

Our SBIC subsidiaries are licensed to operate as SBICs and are regulated by the SBA. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause the SBIC subsidiaries to forego attractive investment opportunities that are not permitted under SBA regulations.

Further, SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change 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

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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.

Non-compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations could result in fines or sanctions against us.

The USA PATRIOT Act of 2001 and the Bank Secrecy Act require financial institutions to design and implement programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the US Treasury Department’s Office of Financial Crimes Enforcement Network (FinCEN). These rules require financial institutions to establish procedures for identifying and verifying the identity of customers and beneficial owners of certain legal entity customers seeking to open new financial accounts. Federal and state bank regulators also have focused on compliance with Bank Secrecy Act and anti-money laundering regulations. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or expanding activities. During the last several years, a number of banking institutions have received large fines fornon-compliance with these laws and regulations. Although we have policies and procedures designed to assist in compliance with the Bank Secrecy Act and other anti-money laundering laws and regulations, there can be no assurance that such policies or procedures will work effectively all of the time or protect us against liability for actions taken by our employees, agents, and intermediaries with respect to our business or any businesses that we may acquire. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us, which could have a material adverse effect on our business, financial condition or results of operations.

Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.

We are subject to various privacy, information security, and data protection laws, including requirements concerning security breach notification, and we could be negatively affected by these laws. For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing safeguards appropriate based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security, and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection, and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level, by the Federal Trade Commission, as well as at the state level.

Compliance with current or future privacy, data protection, and information security laws (including those regarding security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial conditions or results of operations. Our failure to comply with privacy, data protection, and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions, and damage to our reputation, which could have a material adverse effect on our business, financial condition, or results of operations.

Having withdrawn our election to be regulated as a BDC, we must maintain an exception from registration under the 1940 Act which could limit our ability to take advantage of attractive investment opportunities, and the failure to maintain that exception could have material adverse consequences on our business.

A company that meets the definition of an “investment company” under the 1940 Act, in the absence of an exception or exemption, must either register with the SEC as an investment company or elect BDC status. Historically, the composition of the Company’s assets caused us to meet the definition of an “investment company,” and the Company made a corresponding election to be treated as a BDC. The Company hasde-elected BDC status, and now operates so as to fall outside the definition of an “investment company” or within an applicable exception. The Company expects to fall within the exception from the definition of an “investment

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company” provided under Section 3(c)(6) of the 1940 Act as a company primarily engaged, directly or through majority-owned subsidiaries, in the business of, among other things, (i) banking, (ii) purchasing and otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance and services, and (iii) making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services. The Company is required to monitor its continued compliance with this exception, which could limit our ability to take advantage of attractive investment opportunities that would cause us to be out of compliance with its limitations and could have a material adverse effect on our business. For example, we could be limited in growing Medallion Capital, Inc., which is currently engaged in a business that generally does not qualify for the exception.

If the SEC or a court were to find that we were required, but failed, to register as an investment company in violation of the 1940 Act, we may have to cease business activities, we would breach representations and warranties and/or be in default as to certain of our contracts and obligations, civil or criminal actions could be brought against us, our contracts would be unenforceable unless a court were to require enforcement and a court could appoint a receiver to take control of us and liquidate our business, any or all of which could have a material adverse effect on our business.

We operate in a highly competitive market for investment opportunities.

We compete for 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.

We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time.

Changes in interest rates may affect our cost of capital and net 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 commercial borrowers generally have the right to prepay their loans upon payment of a fee ranging from 1% to 2% for standard loans, and for higher amounts, as negotiated, for larger more custom loan arrangements. A borrower is likely to exercise prepayment rights at a time when the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. In a lower interest rate environment, we will have difficultyre-lending prepaid funds at comparable rates, which may reduce the net interest income that we receive. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if a substantial number of our portfolio companies elect to prepay amounts owed to us and we are not able to reinvest the proceeds for comparable yields in a timely fashion. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.

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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 of June 30, 2018 Medallion Bank’s leverage ratio was 14.9% and Medallion Bank may be restricted from declaring and paying dividends as a result of the leverage ratio being below 15%.

Medallion Bank’s use of brokered deposit sources for its deposit-gathering activities may not be available when needed.

Medallion Bank relies on the established brokered deposit market to originate deposits to fund its operations. Medallion Bank’s brokered deposits consist of deposits raised through the brokered deposit market rather than through retail branches. While Medallion Bank has developed contractual relationships with a diversified group of investment brokers, and the brokered deposit market is well developed and utilized by many banking institutions, conditions could change that might affect the availability of deposits. Applicable statutes and regulations restrict the use of brokered deposits and the interest rates paid on such deposits for institutions that are less than “well- capitalized”. If the capital levels at Medallion Bank fall below the “well-capitalized” level as defined by the FDIC or the capital level currently required by the FDIC pursuant to its capital maintenance agreement, or if Medallion Bank experiences a period of sustained operating losses, the cost of attracting deposits from the brokered deposit market could increase significantly, and the ability of Medallion Bank to raise deposits from this source could be impaired. Brokered deposits may also not be as stable as other types of deposits. Medallion Bank’s ability to manage its growth to stay within the “well-capitalized” level, and the capital level currently required by the FDIC pursuant to its capital maintenance agreement, which is also considerably higher than the level required to be classified as “well-capitalized”, is critical to Medallion Bank’s retaining open access to this funding source.

Uncertainty relating to the reporting of collateral values for our loans may adversely affect the value of our portfolio.

Medallion loans are primarily collateral-based lending, whereby the collateral value exceeds the amount of the loan, providing sufficient excess collateral to protect us against losses. Despite our reliance on collateral values, medallions are income producing assets that generate cash flow which is utilized to repay our loans. We rely on the integrity of the collateral value benchmarks obtained by the applicable regulatory agencies and other third parties. If these benchmarks are artificially influenced by market participants we could suffer losses. We have experienced a significant downward movement in medallion collateral values which may continue, and has caused a negative impact on our valuation analysis and could result in further significant lower fair market value measurements of our portfolio.

We require an objective benchmark in determining the fair value of our portfolio. If the benchmarks that we currently use are deemed to be unreliable, we will need to use other intrinsic factors in determining the collateral values for our loans.

Our allowance for loan losses may prove to be insufficient to cover losses on our loans.

We maintain an allowance for loan losses (a reserve established through a provision for losses that decreases our earnings and that, accordingly, affects our financial condition) that we believe is appropriate to provide for incurred losses in our loan portfolio.

The process for establishing an allowance for loan losses is critical to our results of operations and financial condition, and requires complex models and judgments, including forecasts of economic conditions. Changes in economic conditions affecting borrowers, growth in our loan portfolio, changes in the credit characteristics of our loan portfolio, new information regarding our loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. We may underestimate our incurred losses and fail to maintain an allowance for loan losses sufficient to account for these losses. In cases where we modify a loan, if the modified loans do not perform as anticipated, we may be required to establish additional allowances on these loans.

We periodically review and update our methodology, models and the underlying assumptions, estimates and assessments we use to establish our allowance for loan losses to reflect our view of current conditions. Moreover, our regulators, as part of their supervisory function, periodically review the methodology, models and the underlying assumptions, estimates and assessments we use

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for calculating, and the adequacy of, our allowance for loan losses. Our regulators, based on their judgment, may conclude that we should modify our methodology, models or the underlying assumptions, estimates and assessments, increase our allowance for loan losses, and/or recognize further losses. We continue to review and evaluate our methodology, models and the underlying assumptions, estimates, and assessments we use and we will implement further enhancements or changes to them, as needed. We cannot assure you that our loan loss reserves will be sufficient to cover actual losses. Future increases in the allowance for loan losses or recognized losses (as a result of any review, update, regulatory guidance, changes in accounting standards or otherwise) will result in a decrease in net earnings and capital and could have a material adverse effect on our business, results of operations, and financial condition.

The lack of liquidity in our investments may adversely affect our business.

We generally make investments in private companies. Substantially all of these securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded our investments. We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we have materialnon-public information regarding such portfolio company.

In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item “net income” as of June 30, 2018 by approximately $349,000 on an annualized basis, and the impact of such an immediate increase of 1% over a one year period would have been approximately ($2,126,000) at June 30, 2018. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net increase in net assets resulting from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability to make investments in 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.

A reduction in demand for our products and failure by us to adapt to such reduction could adversely affect our business, financial condition and results of operations.

The demand for the products we offer may be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences or financial conditions, regulatory restrictions that decrease customer access to particular products or the availability of competing products. If we fail to adapt to significant changes in our customers’ demand for, or access to, our products, our revenues could decrease and our operations could be adversely affected. Even if we do make changes to our product offerings to fulfill customer demand, customers may resist such changes or may reject such products. Moreover, the effect of any product change on the resultsrisk factors from those disclosed in Part 1, Item 1A of our business may not be fully ascertainable untilAnnual Report on Form 10-K for the change has been in effect for some time,fiscal year ended December 31, 2018, which was filed with the Securities and by that time, it may be too late to make further modifications to such product without causing further adverse effects to our business, results of operations and financial condition.

Exchange Commission on March 13, 2019.

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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.

Our operations could be interrupted if certain external vendors on which we rely experience difficulty, terminate their services or fail to comply with banking laws and regulations.

We depend to a significant extent on relationships with third parties that provide services, primarily information technology services that are critical to our operations. Currently, we obtain services from third parties that include information technology infrastructure and support, plus loan origination, loan servicing, and accounting systems and support. If any of our third party service providers experience difficulties or terminate their services and we are unable to replace our service providers with other service providers, our operations could be interrupted. It may be difficult for us to replace some of our third-party vendors, particularly vendors providing our loan origination, loan servicing and accounting services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason. If an interruption were to continue for a significant period of time, it could have a material adverse effect on our business, financial condition or results of operations. Even if we are able to replace these third parties, it may be at higher cost to us, which could have a material adverse effect on our business, financial condition or results of operations. In addition, if a third-party provider fails to provide the services we require, fails to meet contractual requirements, such as compliance with applicable laws and regulations, or suffers a cyber-attack or other security breach, our business could suffer economic and reputational harm that could have a material adverse effect on our business, financial condition or results of operations.

We continually encounter technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new, technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to serve customers better and to reduce costs. Our future success depends, in part, upon our ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to effectively implement new, technology-driven products and services or be successful in marketing these products and services to our customers. In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. Failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition or results of operations.

We expect that new technologies and business processes applicable to the banking industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to maintain current technology and business processes could cause disruptions in our operations or cause our products and services to be less competitive, all of which could have a material adverse effect on our business, financial condition or results of operations.

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 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.

Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, and industries and sectors, which will subject us to a risk of significant loss if any of these companies defaults on its obligations to us or by a downturn in the particular industry or sector.

Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, and industries and sectors. In addition, taxicab companies that constitute separate issuers may have related management or guarantors and constitute larger business relationships to us. As of June 30, 2018, investments in New York City taxi medallion loans represented approximately 88% of our taxi medallion loans, which in turn represented 22% of our net loan 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.

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If we are unable to continue to diversify geographically, our business may be further adversely affected if New York City 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 New York City could lead to an additional increase in defaults on our medallion loans. We cannot assure you that we will be able to sufficiently diversify our operations geographically.

An economic downturn could result in additional commercial and consumer loan customers experiencing declines in business activities and/or personal resources, which could lead to difficulties in their servicing of their loans with us, and increasing the level of delinquencies, defaults, and loan losses in our commercial and consumer loan portfolios.

Laws and regulations implemented in response to climate change could result in increased operating costs for our portfolio companies.

Congress and other governmental authorities have either considered or implemented various laws and regulations in response to climate change and the reduction of greenhouse gases. Existing environmental regulations could be revised or reinterpreted, new laws and regulations could be adopted, and future changes in environmental laws and regulations could occur, which could impose additional costs on the operation of our portfolio companies. For example, regulations to cut gasoline use and control greenhouse gas emissions from new cars could adversely affect our medallion portfolio companies. Our portfolio companies may have to make significant capital and other expenditures to comply with these laws and regulations. Changes in, or new, environmental restrictions may force our portfolio companies to incur significant expenses or expenses that may exceed their estimates. There can be no assurance that such companies would be able to recover all or any increased environmental costs from their customers or that their business, financial condition or results of operations would not be materially and adversely affected by such expenditures or any changes in environmental laws and regulations, in which case the value of these companies could be adversely affected.

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

We invest in our portfolio companies primarily through senior secured loans, junior secured loans, and subordinated debt issued by small- tomid-sized companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization, or bankruptcy of the relevant portfolio company.

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

Even though we may have structured most of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance.

We may not control many of 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.

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We may not realize gains from our equity investments.

Certain investments that we have made in the past and may make in the future include warrants or other equity securities. In addition, we may from time to time makenon-control, equityco-investments in companies in conjunction with private equity sponsors. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization, or public offering, which would allow us to sell the underlying equity interests.

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

We did not repurchase any of our shares during the three months ended June 30, 2018.2019. Accordingly, under our Stock Repurchase Program previously authorized by our Board of Directors, up to 22,874,509$22,874,509 of shares remain authorized for repurchase under the program.

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ITEM 6. EXHIBITS

EXHIBITS

 

Number

Description

31.1

Certification of Alvin Murstein pursuant to Rule13a-14(a) and15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

31.2

Certification of Larry D. Hall pursuant to Rule13a-14(a) and15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

32.1

Certification of Alvin Murstein pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

32.2

Certification of Larry D. Hall pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

99.1

101.INS

Consolidated Schedules of Investments as of December 31, 2017. Filed herewith.

XBRL Instance

101.INS

101.SCH

XBRL Instance
101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation

101.DEF

XBRL Taxonomy Extension Definition

101.LAB

XBRL Taxonomy Extension Labels

101.PRE

XBRL Taxonomy Extension Presentation

IMPORTANT INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain forward-looking statements contained in this Form10-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 this Form10-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.

 

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SIGNATURESSIGNATURES

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:

August 14, 20188, 2019

By:

/s/ Alvin Murstein

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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