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MFIN Medallion Financial

Filed: 1 Nov 19, 4:10pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from                 to                 

Commission file number 001-37747

 

MEDALLION FINANCIAL CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

 

DELAWARE

04-3291176

(State of Incorporation)

(IRS Employer

Identification No.)

437 MADISON AVENUE, 38th Floor

NEW YORK, NEW YORK 10022

(Address of Principal Executive Offices) (Zip Code)

(212) 328-2100

(Registrant’s Telephone Number, Including Area Code)

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES      NO  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

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

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

 

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of October 30, 2019 was 24,609,203.

 

 


 

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

 

 

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 77


 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASIS OF PREPARATION

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

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

 

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

 

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

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

We historically have had a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. Recently, our strategic growth has been through Medallion Bank which originates consumer loans for the purchase of recreational vehicles, boats, and trailers, and to finance small-scale home improvements. Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 17% (19% if there had been no loan sales during 2016, 2017, and 2018). In January 2017, we announced our plans to transform our overall strategy. We have transitioned away from medallion lending and have placed 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 $1,649,000,000 as of September 30, 2019, and were $1,522,000,000 as of December 31, 2018, and have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid 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 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.

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

Our consolidated balance sheet as of September 30, 2019, and the related consolidated statements of operations, consolidated statements of other comprehensive income/(loss), consolidated statements of stockholders’ equity and cash flows for the quarter and nine 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 nine months ended September 30, 2019 may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Page 3 of 77


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

UNAUDITED

 

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

 

September 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Cash(1)

 

$

21,724

 

 

$

23,842

 

Federal funds sold

 

 

33,291

 

 

 

33,871

 

Equity investments

 

 

9,880

 

 

 

9,197

 

Investment securities

 

 

47,422

 

 

 

45,324

 

Loans

 

 

1,142,282

 

 

 

1,017,882

 

Allowance for losses

 

 

(43,113

)

 

 

(36,395

)

Net loans receivable

 

 

1,099,169

 

 

 

981,487

 

Accrued interest receivable

 

 

8,040

 

 

 

7,413

 

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

 

 

13,544

 

 

 

1,222

 

Loan collateral in process of foreclosure(2)

 

 

53,539

 

 

 

49,495

 

Goodwill

 

 

150,803

 

 

 

150,803

 

Intangible assets, net

 

 

52,898

 

 

 

53,982

 

Other assets

 

 

29,444

 

 

 

25,210

 

Total assets

 

$

1,519,754

 

 

$

1,381,846

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses(3)

 

$

18,651

 

 

$

18,789

 

Accrued interest payable

 

 

3,511

 

 

 

3,852

 

Deposits

 

 

962,987

 

 

 

848,040

 

Short-term borrowings

 

 

42,503

 

 

 

55,178

 

Deferred tax liabilities and other tax payables

 

 

5,597

 

 

 

6,973

 

Operating lease liabilities

 

 

12,090

 

 

 

 

Long-term debt

 

 

181,625

 

 

 

158,810

 

Total liabilities

 

 

1,226,964

 

 

 

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- 27,560,539

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

 

 

276

 

 

 

274

 

Additional paid in capital

 

 

275,143

 

 

 

274,292

 

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

 

 

(24,919

)

 

 

(24,919

)

Accumulated other comprehensive income (loss)

 

 

1,240

 

 

 

(82

)

Retained earnings

 

 

11,746

 

 

 

13,043

 

Total stockholders’ equity

 

 

263,486

 

 

 

262,608

 

Non-controlling interest in consolidated subsidiaries

 

 

29,304

 

 

 

27,596

 

Total equity

 

 

292,790

 

 

 

290,204

 

Total liabilities and equity

 

$

1,519,754

 

 

$

1,381,846

 

Number of shares outstanding

 

 

24,609,296

 

 

 

24,434,357

 

Book value per share

 

$

10.71

 

 

$

10.75

 

 

(1)

Includes restricted cash of $2,970 as of September 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 $6,091 as of September 30, 2019 and $3,134 as of December 31, 2018.

(3)

Includes the short-term portion of lease liabilities of $1,820 as of September 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 4 of 77


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Bank Holding

Company Accounting

 

 

Bank Holding

Company

Accounting

 

 

Combined(1)

 

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

 

For the Three Months Ended September 30, 2019

 

 

For the Nine Months Ended September 30, 2019

 

 

For the Three Months Ended September 30, 2018

 

 

For the Nine Months Ended September 30, 2018

 

Interest and fees on loans

 

$

34,081

 

 

$

94,833

 

 

$

32,692

 

 

$

64,718

 

Interest and dividends on investment securities

 

 

521

 

 

 

1,756

 

 

 

430

 

 

 

1,032

 

Medallion lease income

 

 

38

 

 

 

109

 

 

 

30

 

 

 

100

 

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)

 

 

34,640

 

 

 

96,698

 

 

 

33,152

 

 

 

69,829

 

Interest on deposits

 

 

6,003

 

 

 

16,409

 

 

 

5,064

 

 

 

9,264

 

Interest on short-term borrowings

 

 

730

 

 

 

2,616

 

 

 

1,698

 

 

 

3,557

 

Interest on long-term debt

 

 

2,492

 

 

 

6,743

 

 

 

2,125

 

 

 

3,991

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

3,551

 

Total interest expense(3)

 

 

9,225

 

 

 

25,768

 

 

 

8,887

 

 

 

20,363

 

Net interest income/net investment income

 

 

25,415

 

 

 

70,930

 

 

 

24,265

 

 

 

49,466

 

Provision for loan losses

 

 

8,337

 

 

 

36,851

 

 

 

18,205

 

 

 

48,781

 

Net interest income after provision for loan losses

 

 

17,078

 

 

 

34,079

 

 

 

6,060

 

 

 

685

 

Other income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sponsorship and race winnings

 

 

7,940

 

 

 

16,008

 

 

 

5,371

 

 

 

10,599

 

Change in collateral value on in process of foreclosure

 

 

(113

)

 

 

(4,204

)

 

 

(1,265

)

 

 

(1,361

)

Gain on the extinguishment of debt

 

 

 

 

 

4,145

 

 

 

 

 

 

 

Gain on sale of loans

 

 

 

 

 

 

 

 

5,488

 

 

 

5,488

 

Impairment of equity investments

 

 

 

 

 

 

 

 

(388

)

 

 

(862

)

Other income

 

 

1,047

 

 

 

1,471

 

 

 

235

 

 

 

515

 

Total other income, net

 

 

8,874

 

 

 

17,420

 

 

 

9,441

 

 

 

14,379

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,795

 

 

 

18,457

 

 

 

5,999

 

 

 

13,987

 

Race team related expenses

 

 

2,663

 

 

 

7,211

 

 

 

2,876

 

 

 

5,416

 

Professional fees

 

 

2,277

 

 

 

5,961

 

 

 

3,951

 

 

 

6,920

 

Collection costs

 

 

1,698

 

 

 

4,589

 

 

 

1,381

 

 

 

2,218

 

Loan servicing fees

 

 

1,364

 

 

 

3,851

 

 

 

1,185

 

 

 

2,313

 

Rent expense

 

 

592

 

 

 

1,769

 

 

 

615

 

 

 

1,449

 

Regulatory fees

 

 

252

 

 

 

1,147

 

 

 

563

 

 

 

1,145

 

Amortization of intangible assets

 

 

361

 

 

 

1,084

 

 

 

361

 

 

 

722

 

Travel, meals, and entertainment

 

 

300

 

 

 

770

 

 

 

313

 

 

 

1,122

 

Other expenses(4)

 

 

2,050

 

 

 

6,399

 

 

 

2,220

 

 

 

5,206

 

Total other expenses

 

 

18,352

 

 

 

51,238

 

 

 

19,464

 

 

 

40,498

 

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

 

 

7,600

 

 

 

261

 

 

 

(3,963

)

 

 

(25,434

)

Income tax (provision) benefit

 

 

(165

)

 

 

1,926

 

 

 

117

 

 

 

4,474

 

Net income (loss) after taxes/net investment loss after taxes

 

 

7,435

 

 

 

2,187

 

 

 

(3,846

)

 

 

(20,960

)

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 income (loss) after taxes/net decrease on net assets resulting from operations

 

 

7,435

 

 

 

2,187

 

 

 

(3,846

)

 

 

(32,604

)

Less: income attributable to the noncontrolling interest

 

 

2,460

 

 

 

3,484

 

 

 

851

 

 

 

1,614

 

Total net income (loss) attributable to Medallion Financial

   Corp./net decrease on net assets resulting from operations

 

$

4,975

 

 

$

(1,297

)

 

$

(4,697

)

 

$

(34,218

)

Basic net income (loss) per share

 

$

0.20

 

 

$

(0.05

)

 

$

(0.19

)

 

$

(1.41

)

Diluted net income (loss) per share

 

$

0.20

 

 

$

(0.05

)

 

$

(0.19

)

 

$

(1.41

)

Distributions declared per share

 

$

 

 

$

 

 

$

 

 

$

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,361,680

 

 

 

24,336,677

 

 

 

24,235,242

 

 

 

24,207,273

 

Diluted

 

 

24,607,167

 

 

 

24,336,677

 

 

 

24,235,242

 

 

 

24,207,273

 

 

(1)

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

Page 5 of 77


 

(2)

Included in interest and investment income is $212 and $637 of paid in kind interest for the three and nine months ended September 30, 2019 and $450 and $1,428 for the comparable 2018 periods.

(3)

Average borrowings outstanding were $1,169,182 and $1,121,693, and the related average borrowing costs were 3.13% and 3.07% for the three and nine months ended September 30, 2019, and were $1,255,945 and $1,226,896, and 2.81% and 2.22% for the comparable 2018 periods.

(4)

See Note 12 for the components of other operating expenses as of March 31, 2018.

(5)

Includes $256 of net revenues received from Medallion Bank for the three months ended March 31, 2018, primarily for expense reimbursements. See Notes 6 and 15 for additional information.

(6)

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

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

 

Page 6 of 77


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS)

(UNAUDITED)

 

 

 

Bank Holding

Company

Accounting

 

 

Bank Holding

Company

Accounting

 

 

Combined(1)

 

(Dollars in thousands)

 

For the Three Months Ended September 30, 2019

 

 

For the Nine Months Ended September 30, 2019

 

 

For the Three Months Ended September 30, 2018

 

 

For the Nine Months Ended September 30, 2018

 

Net income (loss) after taxes/net decrease on net assets resulting

   from operations

 

$

7,435

 

 

$

2,187

 

 

$

(3,846

)

 

$

(32,604

)

Other comprehensive income (loss), net of tax

 

 

95

 

 

 

1,322

 

 

 

(214

)

 

 

(469

)

Total comprehensive income (loss)

 

 

7,530

 

 

 

3,509

 

 

 

(4,060

)

 

 

(33,073

)

Less comprehensive income attributable to the noncontrolling

   interest

 

 

2,460

 

 

 

3,484

 

 

 

851

 

 

 

1,614

 

Total comprehensive income (loss) attributable to Medallion

   Financial Corp.

 

$

5,070

 

 

$

25

 

 

$

(4,911

)

 

$

(34,687

)

 

(1)

Results include the six months ended September 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 7 of 77


 

 

MEDALLION FINANCIAL CORP.

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

(UNAUDITED)

 

 

 

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 (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,975

 

 

 

 

 

 

4,975

 

 

 

2,460

 

 

 

7,435

 

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(592

)

 

 

(592

)

Stock-based compensation

 

 

 

 

 

1

 

 

 

 

 

 

347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

348

 

 

 

 

 

 

348

 

Issuance of restricted stock, net

 

 

10,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock, net

 

 

(679

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains

   on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95

 

 

 

95

 

 

 

 

 

 

95

 

Balance at September 30, 2019

 

 

27,560,539

 

 

$

276

 

 

 

 

 

$

275,143

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

11,746

 

 

$

1,240

 

 

$

263,486

 

 

$

29,304

 

 

$

292,790

 

 

 

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

Page 8 of 77


 

 

 

 

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

 

 

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

 

 

 

 

 

 

 

 

 

27,065

 

 

 

27,065

 

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

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,697

)

 

 

 

 

 

(4,697

)

 

 

851

 

 

 

(3,846

)

Distributions to noncontrolling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(592

)

 

 

(592

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

151

 

 

 

 

 

 

151

 

Issuance of restricted stock, net

 

 

1,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized losses on

   investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(214

)

 

 

(214

)

 

 

 

 

 

(214

)

Balance at September 30, 2018

 

 

27,391,295

 

 

$

274

 

 

 

 

 

$

274,163

 

 

 

(2,951,243

)

 

$

(24,919

)

 

$

 

 

$

 

 

$

3,871

 

 

$

(469

)

 

$

252,920

 

 

$

27,495

 

 

$

280,415

 

 

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

 

Page 9 of 77


 

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Bank Holding

Company

Accounting

 

 

Combined(1)

 

(Dollars in thousands)

 

For the Nine Months Ended September 30, 2019

 

 

For the Nine Months Ended September 30, 2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income/net decrease in net assets resulting from operations

 

$

2,187

 

 

$

(32,604

)

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

   provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

36,851

 

 

 

48,781

 

Paid-in-kind interest

 

 

(637

)

 

 

(1,428

)

Depreciation and amortization

 

 

6,014

 

 

 

2,995

 

(Decrease) increase in deferred and other tax liabilities

 

 

(1,375

)

 

 

8,676

 

Amortization of origination fees, net

 

 

3,753

 

 

 

2,192

 

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

   of foreclosure

 

 

12,714

 

 

 

 

Net change in loan collateral in process of foreclosure

 

 

9,126

 

 

 

3,258

 

Net realized losses on sale of investments

 

 

(1,810

)

 

 

(4,726

)

Net change in unrealized depreciation on investments

 

 

1,299

 

 

 

5,380

 

Stock-based compensation expense

 

 

853

 

 

 

446

 

Gain on extinguishment of debt

 

 

(4,145

)

 

 

 

(Increase) decrease in accrued interest receivable

 

 

(627

)

 

 

486

 

Increase in other assets

 

 

(4,890

)

 

 

(7,173

)

Decrease in accounts payable and accrued expenses

 

 

(1,763

)

 

 

(675

)

Increase (decrease) in accrued interest payable

 

 

(341

)

 

 

41

 

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 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

 

 

 

 

3,159

 

Net cash provided by operating activities

 

 

57,209

 

 

 

41,532

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Loans originated

 

 

(374,642

)

 

 

(256,933

)

Proceeds from principal receipts, sales, and maturities of loans

 

 

188,226

 

 

 

240,915

 

Purchases of investments

 

 

(6,849

)

 

 

(8,304

)

Proceeds from principal receipts, sales, and maturities of investments

 

 

5,902

 

 

 

2,475

 

Net cash used for investing activities

 

 

(187,363

)

 

 

(21,847

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from time deposits and funds borrowed

 

 

450,192

 

 

 

336,108

 

Repayments of time deposits and funds borrowed

 

 

(324,960

)

 

 

(253,497

)

Purchase of federal funds

 

 

4,000

 

 

 

8,000

 

Repayments of federal funds

 

 

 

 

 

(8,000

)

Distributions to noncontrolling interests

 

 

(1,776

)

 

 

(1,184

)

Payments of declared distributions

 

 

 

 

 

(65

)

Net cash provided by financing activities

 

 

127,456

 

 

 

81,362

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND

   RESTRICTED CASH

 

 

(2,698

)

 

 

101,047

 

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)

 

$

55,015

 

 

$

143,560

 

SUPPLEMENTAL INFORMATION

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

24,252

 

 

$

17,381

 

Cash paid during the period for income taxes

 

 

135

 

 

 

52

 

NON-CASH INVESTING

 

 

 

 

 

 

 

 

Loans transferred to loan collateral in process of foreclosure

 

$

25,884

 

 

$

19,472

 

 

(1)

Results include the six months ended September 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 nine months ended September 30, 2018 includes $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.

(3)

Includes federal funds sold.

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

Page 10 of 77


 

MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

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

Medallion Financial Corp. (the Company) is a finance company organized as a Delaware corporation that reports as a bank holding company, but is not a bank holding company for regulatory purposes. The Company conducts its business through various wholly-owned subsidiaries including its primary operating company, Medallion Bank (the Bank), a Federal Deposit Insurance Corporation (FDIC) insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activities. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and undergoes examinations by those agencies. The 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 the Bank’s affiliates that have extensive prior experience in these asset groups. Subsequent to its formation, the Bank began originating consumer loans to finance the purchases of 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 that conducts a mezzanine financing business, and Freshstart Venture Capital Corp. (FSVC), an SBIC that originated and services taxicab medallion and commercial loans. MFC, MCI, and FSVC, as SBICs, are regulated by the Small Business Administration (SBA). MCI and FSVC are financed in part by the SBA.

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

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

Taxi Medallion Loan Trust III (Trust III) was established for the purpose of owning medallion loans originated by MFC or others. Trust III is a variable interest entity (VIE), and MFC was the primary beneficiary. 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 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 are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC.

The Company established a wholly-owned subsidiary, Medallion Financing Trust I (Fin Trust) for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,139,000 at September 30, 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 $3,091,000 in other assets on the Company’s consolidated balance sheet at September 30, 2019, compared to a net realizable value of $4,305,000 and $5,535,000 at December 31, 2018 and September 30, 2018.

Page 11 of 77


 

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Change to Bank Holding Company Accounting

Effective April 2, 2018, the Company withdrew its previous election to be regulated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). Prior to such time, the Company was a closed-end, non-diversified management investment company that had elected to be treated as a BDC under the 1940 Act. Accordingly, commencing with the three months ended June 30, 2018, the Company (which now consolidates the results of the 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 loans 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. As a result of the Company’s election to withdraw from being regulated as a BDC under the 1940 Act effective April 2, 2018, the Bank and various other Company subsidiaries that were not previously consolidated with the Company prior to the three months ended June 30, 2018, were now consolidated effective April 2, 2018. See Note 6 for the presentation of financial information for the 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 $2,970,000 of an interest reserve associated with the private placements of debt in March and August 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 16 and 17 to the consolidated financial statements.

Page 12 of 77


 

Equity Investments

Equity investments of $9,880,000 and $9,197,000 at September 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.

Investment Securities (Bank Holding Company Accounting)

The Company follows FASB ASC Topic 320, Investments – Debt and Equity Securities (ASC 320), which requires that all applicable investments in equity securities with readily determinable fair values, and debt securities be classified as trading securities, available-for-sale securities, or held-to-maturity securities. Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. The net premium on investment securities totaled $236,000 at September 30, 2019 and $154,000 at December 31, 2018, and $21,000 and $46,000 was amortized to interest income for the three and nine months ended September 30, 2019, and $26,000 and $47,000 was amortized to interest income for the three and six months ended September 30, 2018. Refer to Note 3 for more details. ASC 320 further requires that held-to-maturity securities be reported at amortized cost and available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the consolidated financial statements, and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity, net of the effect of income taxes, until they are sold. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in stockholders’ equity, which were recorded net of the income tax effect, will be reversed.

Other Investment Valuation (Investment Company Accounting)

Prior to April 2, 2018, under the 1940 Act, the Company’s investment in the 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 the Bank on at least an annual basis. The Company’s analysis included factors such as various regulatory restrictions that were established at the Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013 and the lack of any new charter issuances since the moratorium’s expiration. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that the Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used the 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 the Bank and its portfolio assets at values in excess of their book value. Expression of interest in the Bank from both investment bankers and interested parties continued. The Company incorporated these new factors in the Bank’s fair value analysis and the Board of Directors determined that the 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 heightened the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of the 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.

Loans

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

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At September 30, 2019 and December 31, 2018, net loan origination costs were $17,867,000 and $14,416,000. The majority of these loan origination costs were capitalized into the loan balances on April 2, 2018 in connection with the change in reporting status. Net amortization to income for the three months ended September 30, 2019 and 2018 was $1,364,000 and $1,147,000, and was $3,753,000 and $2,192,000 ($3,065,000 when combined with the Bank) for the comparable nine month period.

Page 13 of 77


 

Interest income is recorded on the accrual basis. Taxicab medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. The consumer portfolio has different characteristics, typified by a larger number of lower dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is likely the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Management considers loans that are in bankruptcy status, but have not been charged-off, to be impaired. These loans are placed on nonaccrual, when they become 90 days past due, or earlier if they enter bankruptcy, and are charged-off in their entirety when deemed 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 recreation consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged-off. If the collateral is repossessed, a loss is recorded to write the collateral down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off. Proceeds collected on charged-off accounts are recorded as a recovery. Total loans more than 90 days past due were $8,123,000 at September 30, 2019, or 0.73% of the total loan portfolio, compared to $20,154,000, or 2.03% at December 31, 2018.

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a trouble debt restructuring (“TDR”). The Company strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before it reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize the economic loss to the Company and to avoid foreclosure or repossession of the collateral. For modifications where the Company forgives principal, the entire amount of such principal forgiveness is immediately charged off. Loans classified as TDRs are considered impaired loans. Beginning in fiscal year 2019, all consumer loans which are party to a bankruptcy are immediately classified as TDRs. The Company’s policy with regard to bankrupt loans is take an immediate 40% write down of the loan balance.

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

The Company had $30,295,000 and $40,500,000 of net loans and loans in process of foreclosure pledged as collateral under borrowing arrangements at September 30, 2019 and December 31, 2018.

The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing (FASB ASC 860), which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, 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 $125,818,000 at September 30, 2019 and $140,180,000 at December 31, 2018. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860, which relates to servicing assets held by MFC (related to the remaining assets in Trust III) and determined that no material servicing asset or liability existed as of September 30, 2019 and December 31, 2018. The Company assigned its servicing rights of the 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 the 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, nonperforming loans are valued at the median sales price over the most recent quarter, and performing medallion loans are reserved utilizing historical loss ratios over a three-year lookback period. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. As a result, reserves of $4,608,000 were recorded by the Company as a general reserve on medallion loans as an additional buffer against future 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 $6,032,000. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.

Page 14 of 77


 

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

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

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

Goodwill and Intangible Assets

The Company’s goodwill and intangible assets arose as a result of the excess of fair value over book value for several of the Company’s previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under the Company’s new reporting, and was subject to a purchase price accounting allocation process conducted by an independent third party expert to arrive at the current categories and amounts. Goodwill is not amortized, but is subject to quarterly review by management to determine whether additional impairment testing is needed, said testing which is performed at least on an annual basis. Intangible assets are amortized over their useful life of approximately 20 years. As of September 30, 2019, December 31, 2018, and September 30, 2018, the Company had goodwill of $150,803,000, which all related to the Bank, and intangible assets of $52,898,000, $53,982,000 and $59,958,000, and the Company recognized $361,000 and $361,000 of amortization expense on the intangible assets for the three months ended September 30, 2019 and 2018, and $1,084,000 and $722,000 of amortization expense on the intangible assets for the nine months ended September 30, 2019 and 2018. Additionally, loan portfolio premiums of $12,387,000 were determined as of April 2, 2018, of which $6,161,000, $9,048,000, and $10,607,000 were outstanding at September 30, 2019, December 31, 2018, and September 30, 2018, and of which $713,000 and $1,780,000 were amortized to interest income for the three months ended September 30, 2019 and 2018, and of which $2,886,000 and $1,780,000 were amortized to interest income for the nine months ended September 30, 2019 and 2018. 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.

 

(Dollars in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Brand-related intellectual property

 

$

20,350

 

 

$

21,176

 

Home improvement contractor relationships

 

 

6,383

 

 

 

6,641

 

Race organization

 

 

26,165

 

 

 

26,165

 

Total intangible assets

 

$

52,898

 

 

$

53,982

 

 

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 $109,000 and $131,000 for the three months ended September 30, 2019 and 2018, and was $313,000 and $289,000 for the comparable nine months.

Deferred Costs

Deferred financing costs, included in other assets, represent 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 $613,000 and $558,000 for the three months ended September 30, 2019 and 2018, and was $1,731,000 and $1,322,000 for the comparable nine 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 $5,589,000, $4,461,000, and $4,859,000 as of September 30, 2019, December 31, 2018, and September 30, 2018.

Page 15 of 77


 

Income Taxes

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

Sponsorship and Race Winnings

The Company accounts for sponsorship and race winnings revenue under FASB ASC Topic 606, Revenue from Contracts with Customers. Sponsorship revenue is recognized when the Company’s performance obligations are completed in according with 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 stockholders 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 September 30,

 

 

Nine Months Ended September 30,

 

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

 

2019

 

 

2018

 

 

2019

 

 

2018

 

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

   available to common stockholders

 

$

4,975

 

 

$

(4,697

)

 

$

(1,297

)

 

$

(34,218

)

Weighted average common shares outstanding applicable to

   basic EPS

 

 

24,361,680

 

 

 

24,235,242

 

 

 

24,336,677

 

 

 

24,207,273

 

Effect of dilutive stock options

 

 

16,543

 

 

 

 

 

 

 

 

 

 

Effect of restricted stock grants

 

 

228,944

 

 

 

 

 

 

 

 

 

 

Adjusted weighted average common shares outstanding

   applicable to diluted EPS

 

 

24,607,167

 

 

 

24,235,242

 

 

 

24,336,677

 

 

 

24,207,273

 

Basic income (loss) per share

 

$

0.20

 

 

$

(0.19

)

 

$

(0.05

)

 

$

(1.41

)

Diluted income (loss) per share

 

 

0.20

 

 

 

(0.19

)

 

 

(0.05

)

 

 

(1.41

)

 

Potentially dilutive common shares excluded from the above calculations aggregated 468,055 and 115,000 shares as of September 30, 2019 and 2018.

Stock Compensation

The Company follows FASB ASC Topic 718 (ASC 718), Compensation – Stock Compensation, for its equity incentive, stock option, and restricted stock plans, and accordingly, the Company recognizes the expense of these grants as required. Stock-based employee compensation costs pertaining to stock options are reflected in net increase in net income/net assets resulting from operations for any new grants using the fair values established by usage of the Black-Scholes option pricing model, expensed over the vesting period of the underlying option. Stock-based employee compensation costs pertaining to restricted stock are reflected in net income/net increase 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 77


 

During the nine months ended September 30, 2019 and 2018, the Company issued 178,266 and 101,010 of restricted shares of stock-based compensation awards, 375,481 and 39,000 shares of stock options, and 26,040 and no restricted stock units and recognized $348,000 and $853,000, or $0.01 and $0.03 per share, for the 2019 third quarter and nine months, and $151,000 and $466,000, or $0.01 and $0.02, per share, for each of the comparable 2018 periods, of non-cash stock-based compensation expense related to the grants. As of September 30, 2019, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $1,663,000, which is expected to be recognized over the next 14 quarters (see Note 10).

Regulatory Capital

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

FDIC-insured banks, including the 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, the 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 could preclude its ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As of September 30, 2019, the Bank’s Tier 1 leverage ratio was 15.91%. The Bank’s actual capital amounts and ratios, and the regulatory minimum ratios are presented in the following table.

 

 

 

Regulatory

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Minimum

 

 

Well-

Capitalized

 

 

September 30, 2019

 

 

December 31, 2018

 

Common equity Tier 1 capital

 

 

 

 

 

 

 

$

153,580

 

 

$

141,608

 

Tier 1 capital

 

 

 

 

 

 

 

 

179,883

 

 

 

167,911

 

Total capital

 

 

 

 

 

 

 

 

194,436

 

 

 

180,917

 

Average assets

 

 

 

 

 

 

 

 

1,130,642

 

 

 

1,059,461

 

Risk-weighted assets

 

 

 

 

 

 

 

 

1,120,179

 

 

 

993,374

 

Leverage ratio(1)

 

 

4.0

%

 

 

5.0

%

 

 

15.9

%

 

 

15.8

%

Common equity Tier 1 capital ratio(2)

 

 

7.0

 

 

 

6.5

 

 

 

13.7

 

 

 

14.3

 

Tier 1 capital ratio(3)

 

 

8.5

 

 

 

8.0

 

 

 

16.1

 

 

 

16.9

 

Total capital ratio(3)

 

 

10.5

 

 

 

10.0

 

 

 

17.4

 

 

 

18.2

 

 

(1)

Calculated by dividing Tier 1 capital by average assets.

(2)

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

(3)

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

In addition, the Bank is subject to a Common Equity Tier 1 capital conservation buffer on top of the minimum risk-based capital ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% each subsequent January 1 until January 1, 2019. Including the buffer, as of January 1, 2019, the Bank is required to maintain the following minimum capital ratios: a Common Equity Tier 1 risk-based capital ratio of greater than 7.0%, a Tier 1 risk-based capital ratio of greater than 8.5% and a total risk-based capital ratio of greater than 10.5%. 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 77


 

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. 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, with early adoption permitted. In October 2019, the FASB voted to defer implementation of the standard for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022. The Company is assessing the impact the update will have on its financial statements, and expects the update to have an impact on the Company’s accounting for estimated credit losses on its loans.

(3) INVESTMENT SECURITIES (Bank Holding Company Accounting)

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

 

September 30, 2019

(Dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations of US

   federal agencies

 

$

34,431

 

 

$

569

 

 

$

(65

)

 

$

34,935

 

State and municipalities

 

 

12,279

 

 

 

262

 

 

 

(54

)

 

 

12,487

 

Total

 

$

46,710

 

 

$

831

 

 

$

(119

)

 

$

47,422

 

 

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 September 30, 2019 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

 

$

35

 

 

$

35

 

Due after one year through five years

 

 

12,416

 

 

 

12,497

 

Due after five years through ten years

 

 

10,267

 

 

 

10,417

 

Due after ten years

 

 

23,992

 

 

 

24,473

 

Total

 

$

46,710

 

 

$

47,422

 

 

Page 18 of 77


 

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

 

 

 

Less than Twelve Months

 

 

Twelve Months and Over

 

September 30, 2019

(Dollars in thousands)

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Mortgage-backed securities, principally obligations

   of US federal agencies

 

$

(39

)

 

$

4,083

 

 

$

(26

)

 

$

5,075

 

State and municipalities

 

 

(1

)

 

 

169

 

 

 

(53

)

 

 

2,770

 

Total

 

$

(40

)

 

$

4,252

 

 

$

(79

)

 

$

7,845

 

 

 

 

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.

(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 September 30, 2019 and December 31, 2018.

 

 

 

As of September 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

 

$

706,393

 

 

 

62

%

 

$

587,038

 

 

 

58

%

Home improvement

 

 

230,726

 

 

 

20

 

 

 

183,155

 

 

 

18

 

Commercial

 

 

68,209

 

 

 

6

 

 

 

64,083

 

 

 

6

 

Medallion

 

 

136,954

 

 

 

12

 

 

 

183,606

 

 

 

18

 

Total gross loans

 

 

1,142,282

 

 

 

100

%

 

 

1,017,882

 

 

 

100

%

Allowance for loan losses

 

 

(43,113

)

 

 

 

 

 

 

(36,395

)

 

 

 

 

Total net loans

 

$

1,099,169

 

 

 

 

 

 

$

981,487

 

 

 

 

 

 

The following tables show the activity of the gross loans for the three and nine months ended September 30, 2019.

 

Three Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

 

 

Medallion

 

 

Total

 

Gross loans – June 30, 2019

 

$

668,540

 

 

$

209,549

 

 

$

64,442

 

 

$

145,944

 

 

$

1,088,475

 

Loan originations

 

 

82,662

 

 

 

42,641

 

 

 

4,750

 

 

 

 

 

 

130,053

 

Principal payments

 

 

(40,790

)

 

 

(20,729

)

 

 

(375

)

 

 

(4,013

)

 

 

(65,907

)

Charge-offs, net

 

 

(3,489

)

 

 

(51

)

 

 

(819

)

 

 

(1,535

)

 

 

(5,894

)

Transfer to loans in process of foreclosure, net

 

 

(3,429

)

 

 

 

 

 

 

 

 

(3,005

)

 

 

(6,434

)

Other

 

 

2,899

 

 

 

(684

)

 

 

211

 

 

 

(437

)

 

 

1,989

 

Gross loans – September 30, 2019

 

$

706,393

 

 

$

230,726

 

 

$

68,209

 

 

$

136,954

 

 

$

1,142,282

 

Page 19 of 77


 

 

Nine Months Ended September 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

 

 

248,989

 

 

 

102,821

 

 

 

14,520

 

 

 

 

 

 

366,330

 

Principal payments

 

 

(113,680

)

 

 

(53,508

)

 

 

(9,789

)

 

 

(10,612

)

 

 

(187,589

)

Charge-offs, net

 

 

(10,853

)

 

 

(295

)

 

 

(819

)

 

 

(18,166

)

 

 

(30,133

)

Transfer to loans in process of foreclosure, net

 

 

(10,311

)

 

 

 

 

 

 

 

 

(15,573

)

 

 

(25,884

)

Other

 

 

5,210

 

 

 

(1,447

)

 

 

214

 

 

 

(2,301

)

 

 

1,676

 

Gross loans – September 30, 2019

 

$

706,393

 

 

$

230,726

 

 

$

68,209

 

 

$

136,954

 

 

$

1,142,282

 

 

The following table sets forth the activity in the allowance for loan losses for the three and nine months ended September 30, 2019 and the three and six months ended September 30, 2018.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Six Months

Ended

September 30,

 

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Allowance for loan losses – beginning

   balance

 

$

40,670

 

 

$

21,425

 

 

$

36,395

 

 

$

 

(1)

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

 

(5,444

)

 

 

(4,825

)

 

 

(16,366

)

 

 

(9,471

)

 

Home improvement

 

 

(568

)

 

 

(659

)

 

 

(1,655

)

 

 

(1,220

)

 

Commercial

 

 

(819

)

 

 

 

 

 

(819

)

 

 

 

Medallion

 

 

(2,378

)

 

 

(6,457

)

 

 

(20,408

)

 

 

(12,737

)

 

Total charge-offs

 

 

(9,209

)

 

 

(11,941

)

 

 

(39,248

)

 

 

(23,428

)

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

 

1,955

 

 

 

1,318

 

 

 

5,513

 

 

 

3,217

 

 

Home improvement

 

 

517

 

 

 

367

 

 

 

1,360

 

 

 

606

 

 

Commercial

 

 

 

 

 

 

 

 

 

4

 

 

Medallion

 

 

843

 

 

 

110

 

 

 

2,242

 

 

 

304

 

 

Total recoveries

 

 

3,315

 

 

 

1,795

 

 

 

9,115

 

 

 

4,131

 

 

Net charge-offs(2)

 

 

(5,894

)

 

 

(10,146

)

 

 

(30,133

)

 

 

(19,297

)

 

Provision for loan losses

 

 

8,337

 

 

 

18,205

 

 

 

36,851

 

 

 

48,781

 

 

Allowance for loan losses – ending balance

 

$

43,113

 

(3)

$

29,484

 

 

$

43,113

 

(3)

$

29,484

 

 

 

(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 six months ended September 30, 2018.

(2)

As of September 30, 2019, cumulative net charge-offs of loans and loans in process of foreclosure in the medallion portfolio were $242,889, representing collection opportunities for the Company.

(3)

Includes $4,608 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 11% of the total allowance, and 3.56% of the medallion loans under 90 days past due as of September 30, 2019. This figure excludes $17,351 of a general reserve on loans at the Bank, which was netted against loan balances at consolidation on April 2, 2018. Subsequent to April 2, 2018, the Bank recorded general reserves of $6,032.

Page 20 of 77


 

The following tables set forth the composition of the allowance for loan losses by type as of September 30, 2019 and December 31, 2018.

 

September 30, 2019

(Dollars in thousands)

 

Amount

 

 

Percentage of

Allowance

 

 

Allowance as a

Percent of Loan

Category

 

Recreation

 

$

15,927

 

 

 

37

%

 

 

2.25

%

Home improvement

 

 

2,235

 

 

 

5

 

 

 

0.97

 

Commercial

 

 

 

 

 

 

 

 

0.00

 

Medallion

 

 

24,951

 

 

 

58

 

 

 

18.22

 

Total

 

$

43,113

 

 

 

100

%

 

 

3.77

%

 

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

%

 

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

 

(Dollars in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

 

September 30, 2018

 

Total nonaccrual loans

 

$

27,078

 

 

$

34,877

 

 

$

45,765

 

Interest foregone quarter to date

 

 

403

 

 

 

487

 

 

 

563

 

Amount of foregone interest applied

   to principal in the quarter

 

 

75

 

 

 

166

 

 

 

350

 

Interest foregone year to date

 

 

915

 

 

 

1,153

 

 

 

1,032

 

Amount of foregone interest applied

   to principal in the year

 

 

244

 

 

 

535

 

 

 

987

 

Interest foregone life to date

 

 

2,432

 

 

 

1,952

 

 

 

8,530

 

Amount of foregone interest applied

   to principal life to date

 

 

655

 

 

 

1,214

 

 

 

3,412

 

Percentage of nonaccrual loans to gross loan

   portfolio

 

 

2

%

 

 

3

%

 

 

4

%

 

The following tables present the performance status of loans as of September 30, 2019 and December 31, 2018.

 

September 30, 2019

(Dollars in thousands)

 

Performing

 

 

Nonperforming

 

 

Total

 

 

Percentage of

Nonperforming

to Total

 

Recreation

 

$

699,685

 

 

$

6,708

 

 

$

706,393

 

 

 

0.95

%

Home improvement

 

 

230,487

 

 

 

239

 

 

 

230,726

 

 

 

0.10

 

Commercial

 

 

56,178

 

 

 

12,031

 

 

 

68,209

 

 

 

17.64

 

Medallion

 

 

128,854

 

 

 

8,100

 

 

 

136,954

 

 

 

5.91

 

Total

 

$

1,115,204

 

 

$

27,078

 

 

$

1,142,282

 

 

 

2.37

%

Page 21 of 77


 

 

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

%

 

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

The following tables provide additional information on attributes of the nonperforming loan portfolio as of September 30, 2019 and 2018, and December 31, 2018, all of which had an allowance recorded against the principal balance.

 

 

 

September 30, 2019

 

 

For the Three Months Ended September 30, 2019

 

 

For the Nine Months Ended September 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

 

$

6,708

 

 

$

6,708

 

 

$

256

 

 

$

6,687

 

 

$

152

 

 

$

6,921

 

 

$

366

 

Home improvement

 

 

239

 

 

 

239

 

 

 

4

 

 

 

243

 

 

 

2

 

 

 

245

 

 

 

2

 

Commercial

 

 

12,031

 

 

 

12,126

 

 

 

 

 

 

9,616

 

 

 

36

 

 

 

6,827

 

 

 

321

 

Medallion

 

 

8,100

 

 

 

8,660

 

 

 

3,160

 

 

 

13,418

 

 

 

27

 

 

 

11,279

 

 

 

39

 

Total nonperforming loans

  with an allowance

 

$

27,078

 

 

$

27,733

 

 

$

3,420

 

 

$

29,964

 

 

$

217

 

 

$

25,272

 

 

$

728

 

 

 

 

December 31, 2018

 

 

September 30, 2018

 

 

For the Three Months Ended September 30, 2018

 

 

Six Months Ended

September 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

 

 

Average

Investment

Recorded

 

 

Interest

Income

Recognized

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

$

5,788

 

 

$

5,788

 

 

$

204

 

 

$

5,075

 

 

$

5,075

 

 

$

180

 

 

$

5,494

 

 

$

106

 

 

$

4,496

 

 

$

231

 

Home improvement

 

 

137

 

 

 

137

 

 

 

3

 

 

 

167

 

 

 

167

 

 

 

3

 

 

 

178

 

 

 

 

 

 

119

 

 

 

 

Commercial

 

 

3,834

 

 

 

3,929

 

 

 

 

 

 

5,403

 

 

 

5,814

 

 

 

100

 

 

 

7,047

 

 

 

(82

)

 

 

5,838

 

 

 

(12

)

Medallion

 

 

25,118

 

 

 

26,237

 

 

 

22,035

 

 

 

38,057

 

 

 

39,038

 

 

 

10,085

 

 

 

55,065

 

 

 

101

 

 

 

54,917

 

 

 

215

 

Total nonperforming loans

   with an allowance

 

$

34,877

 

 

$

36,091

 

 

$

22,242

 

 

$

48,702

 

 

$

50,094

 

 

$

10,368

 

 

$

67,784

 

 

$

125

 

 

$

65,370

 

 

$

434

 

 

The following tables show the aging of all loans as of September 30, 2019 and December 31, 2018.

 

 

 

Days Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

(Dollars in thousands)

 

31-60

 

 

61-90

 

 

91 +

 

 

Total

 

 

Current

 

 

Total (1)

 

 

Recorded

Investment

90 Days and

Accruing

 

Recreation

 

$

20,615

 

 

$

6,771

 

 

$

4,431

 

 

$

31,817

 

 

$

651,122

 

 

$

682,939

 

 

$

 

Home improvement

 

 

687

 

 

 

280

 

 

 

228

 

 

 

1,195

 

 

 

232,804

 

 

 

233,999

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

276

 

 

 

276

 

 

 

67,933

 

 

 

68,209

 

 

 

 

Medallion

 

 

31,062

 

 

 

1,756

 

 

 

3,188

 

 

 

36,006

 

 

 

96,541

 

 

 

132,547

 

 

 

 

Total

 

$

52,364

 

 

$

8,807

 

 

$

8,123

 

 

$

69,294

 

 

$

1,048,400

 

 

$

1,117,694

 

 

$

 

 

(1)

Excludes loan premiums of $6,161 resulting from purchase price accounting and $18,427 of capitalized loan origination costs.

Page 22 of 77


 

 

 

 

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.

The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 202%, 220%, and 224% as of September 30, 2019, December 31, 2018, and September 30, 2018.

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

 

(Dollars in thousands)

 

Number of

Loans

 

 

Pre-

Modification

Investment

 

 

Post-

Modification

Investment

 

Medallion loans - 2019 three months

 

 

1

 

 

$

758

 

 

$

758

 

Recreation loans - 2019 three months

 

 

40

 

 

 

587

 

 

 

505

 

Medallion loans - 2019 nine months

 

 

10

 

 

$

4,041

 

 

$

4,041

 

Recreation loans - 2019 nine months

 

 

276

 

 

 

4,109

 

 

 

2,619

 

 

During the twelve months ended September 30, 2019, three medallion loans modified as troubled debt restructurings were in default and had an investment value of $812,000 as of September 30, 2019, net of a $365,000 allowance for loan losses, and 191 recreation loans modified as trouble debt restructurings were in default and had an investment value of $1,727,000 as of September 30, 2019, net of a $66,000 allowance for loan losses.

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

 

(Dollars in thousands)

 

Number of

Loans

 

 

Pre-

Modification

Investment

 

 

Post-

Modification

Investment

 

Medallion loans - 2018 three months

 

 

10

 

 

$

4,810

 

 

$

4,810

 

Medallion loans - 2018 nine months

 

 

17

 

 

$

7,505

 

 

$

7,505

 

 

During the twelve months ended September 30, 2018, three loans modified as troubled debt restructurings were in default and had an investment value of $1,305,000 as of September 30, 2018, net of a $773,000 allowance for loan losses.

The following tables show the activity of the loans in process of foreclosure, which relate only to the recreation and medallion loans, for the three and nine months ended September 30, 2019.

 

Three Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Medallion

 

 

Total

 

Loans in process of foreclosure – June 30, 2019

 

$

955

 

 

$

51,413

 

 

$

52,368

 

Transfer from loans, net

 

 

3,429

 

 

 

3,005

 

 

 

6,434

 

Sales

 

 

(1,604

)

 

 

(387

)

 

 

(1,991

)

Cash payments received

 

 

 

 

 

(1,556

)

 

 

(1,556

)

Collateral valuation adjustments

 

 

(1,603

)

 

 

(113

)

 

 

(1,716

)

Loans in process of foreclosure – September 30, 2019

 

$

1,177

 

 

$

52,362

 

 

$

53,539

 

Page 23 of 77


 

 

Nine Months Ended September 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

 

 

10,311

 

 

 

15,573

 

 

 

25,884

 

Sales

 

 

(5,715

)

 

 

(899

)

 

 

(6,614

)

Cash payments received

 

 

 

 

 

(6,100

)

 

 

(6,100

)

Collateral valuation adjustments

 

 

(4,922

)

 

 

(4,204

)

 

 

(9,126

)

Loans in process of foreclosure – September 30, 2019

 

$

1,177

 

 

$

52,362

 

 

$

53,539

 

 

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

The following table sets forth the pre-tax change in the Company’s unrealized appreciation (depreciation) on investments for the three months ended March 31, 2018.

 

(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

 

 

The table below summarizes pre-tax components of unrealized and realized gains and losses in the investment portfolio for the three months ended March 31, 2018 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 24 of 77


 

(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 the Bank’s results.

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

 

(Dollars in thousands)

 

Three Months

Ended

March 31, 2018

 

Statement of comprehensive income

 

 

 

 

Investment income

 

$

26,880

 

Interest expense

 

 

3,615

 

Net interest income

 

 

23,265

 

Noninterest income

 

 

19

 

Operating expenses

 

 

7,158

 

Net investment income before income taxes

 

 

16,126

 

Income tax benefit

 

 

3,321

 

Net investment income after income taxes

 

 

19,447

 

Net realized/unrealized losses of Medallion Bank

 

 

(28,539

)

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

 

$

29,115

 

 

(1)

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

(7) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows:

 

 

 

Payments Due for the Twelve Months Ending September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

 

September 30, 2019

 

 

December 31, 2018

 

 

Interest

Rate (1)

 

Deposits

 

$

348,385

 

 

$

182,587

 

 

$

225,560

 

 

$

112,413

 

 

$

94,042

 

 

$

 

 

$

962,987

 

 

$

848,040

 

 

 

2.37

%

SBA debentures and

   borrowings

 

 

23,093

 

 

 

8,500

 

 

 

 

 

 

5,000

 

 

 

5,000

 

 

 

32,500

 

 

 

74,093

 

 

 

80,099

 

 

 

3.41

 

Retail and privately placed

   notes

 

 

 

 

 

33,625

 

 

 

 

 

 

 

 

 

36,000

 

 

 

 

 

 

69,625

 

 

 

33,625

 

 

 

8.61

 

Notes payable to banks

 

 

7,652

 

 

 

27,370

 

 

 

280

 

 

 

280

 

 

 

70

 

 

 

 

 

 

35,652

 

 

 

59,615

 

 

 

4.25

 

Preferred securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,000

 

 

 

33,000

 

 

 

33,000

 

 

 

4.24

 

Other borrowings

 

 

11,758

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,758

 

 

 

7,649

 

 

 

2.09

 

Total

 

$

390,888

 

 

$

252,082

 

 

$

225,840

 

 

$

117,693

 

 

$

135,112

 

 

$

65,500

 

 

$

1,187,115

 

 

$

1,062,028

 

 

 

2.91

%

 

(1)

Weighted average contractual rate as of September 30, 2019.

Page 25 of 77


 

(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)

 

September 30, 2019

 

Three months or less

 

$

84,392

 

Over three months through six months

 

 

66,100

 

Over six months through one year

 

 

197,893

 

Over one year

 

 

614,602

 

Total deposits

 

$

962,987

 

 

(B) DZ LOAN

In December 2008, Trust III entered into the DZ loan agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC (DZ loan). The line, which currently terminates on November 15, 2019, is under negotiation to be extended.

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. In addition, if certain financial tests are not met, MFC can be replaced as the servicer. See Note 19 for more information about Trust III and the DZ loan.

(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 a minimum of $7,600,000 of principal and interest to be paid on or before 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 September 30, 2019, $172,485,000 of commitments had been fully utilized, there were $3,000,000 of commitments available, and $74,093,000 was outstanding, including $23,093,000 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. The notes are typically secured by various assets of the underlying borrower.

Page 26 of 77


 

The table below summarizes the key attributes of the Company’s various borrowing arrangements with these lenders as of September 30, 2019.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower

 

# of

Lenders/

Notes

 

Note

Dates

 

Maturity

Dates

 

Type

 

Note

Amounts

 

 

 

Balance

Outstanding

at September 30,

2019

 

 

Payment

 

Average

Interest

Rate at

September 30,

2019

 

 

Interest

Rate

Index(1)

Medallion Financial

   Corp.

 

5/5

 

4/11 - 8/14

 

9/20 - 3/21

 

Term loans

and demand

notes secured

by pledged

loans(2)

 

$

23,231

 

(2)

 

$

23,231

 

 

Interest

only(3)

 

 

4.63

%

 

Various(3)

Medallion Chicago

 

2/23

 

11/11 - 12/11

 

2/21

 

Term loans

secured by

owned

Chicago

medallions(4)

 

 

18,449

 

 

 

 

11,231

 

 

$134 of

principal &

interest

paid

monthly

 

 

3.50

%

 

N/A

Medallion Funding

 

1/1

 

11/18

 

12/23

 

 

 

 

1,400

 

 

 

 

1,190

 

 

$70

principal &

interest

paid

quarterly

 

 

4.00

%

 

N/A

 

 

 

 

 

 

 

 

 

 

$

43,080

 

 

 

$

35,652

 

 

 

 

 

 

 

 

 

 

(1)

At September 30, 2019, 30 day LIBOR was 2.02%, 360 day LIBOR was 2.03%, and the prime rate was 5.00%.

(2)

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

(3)

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

(4)

Guaranteed 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.

On July 6, 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 obligation, which waiver expires on December 1, 2019.

(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 August 2019, the private placement was reopened and an additional $6,000,000 of notes was issued to certain institutional investors.

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

Page 27 of 77


 

(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 (2.09% at September 30, 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 September 30, 2019, $33,000,000 was outstanding on the preferred securities.

(G) OTHER BORROWINGS

In November and December 2017, RPAC amended the terms of various promissory notes with affiliate Richard Petty (refer to Note 15 for more details). At December 31, 2018, the total outstanding on these notes was $7,149,000 at a 2.00% annual interest rate compounded monthly and due March 31, 2020. As of September 30, 2019, $7,258,000 was outstanding on these notes. Additionally, RPAC has a short term promissory note to an unrelated party for $500,000 due on December 31, 2019.

In September 2019, the Company issued federal funds of $4,000,000 at a 2.25% interest rate, which funds were repaid in October 2019.

(H) COVENANT COMPLIANCE

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

(8) LEASES

The Company has leased premises that expire at various dates through November 30, 2027 that are operating leases. The Company has implemented ASC Topic 842 under a modified retrospective approach in which no adjustments have been made to the prior year balances.

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

 

(Dollars in thousands)

 

For the Three Months Ended September 30, 2019

 

 

For the Nine Months Ended September 30, 2019

 

Operating lease costs

 

$

531

 

 

$

1,593

 

Other information

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease

   liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

556

 

 

 

1,680

 

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

 

 

29

 

 

 

(1

)

 

The following table presents the breakout of the operating leases as of September 30, 2019.

 

(Dollars in thousands)

 

September 30, 2019

 

Operating lease right-of-use assets

 

$

12,559

 

Other current liabilities

 

 

1,820

 

Operating lease liabilities

 

 

12,090

 

Total operating lease liabilities

 

 

13,910

 

Weighted average remaining lease term

 

3.7 years

 

Weighted average discount rate

 

 

4.00

%

 

Page 28 of 77


 

At September 30, 2019, maturities of the lease liabilities were as follows.

 

(Dollars in thousands)

 

 

 

 

Remainder of 2019

 

$

600

 

2020

 

 

2,397

 

2021

 

 

2,295

 

2022

 

 

2,228

 

2023

 

 

2,136

 

Thereafter

 

 

6,042

 

Total lease payments

 

$

15,698

 

Less imputed interest

 

 

1,788

 

Total operating lease liabilities

 

$

13,910

 

 

(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% 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 September 30, 2019 and December 31, 2018.

 

(Dollars in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Goodwill and other intangibles

 

$

(44,315

)

 

$

(45,272

)

Provision for loan losses

 

 

19,529

 

 

 

25,790

 

Net operating loss carryforwards(1)

 

 

21,166

 

 

 

11,132

 

Accrued expenses, compensation, and other assets

 

 

1,932

 

 

 

1,844

 

Unrealized gains on other investments

 

 

(4,737

)

 

 

(2,024

)

Total deferred tax liability

 

 

(6,425

)

 

 

(8,530

)

Valuation allowance

 

 

(462

)

 

 

(255

)

Deferred tax liability, net

 

 

(6,887

)

 

 

(8,785

)

Taxes receivable

 

 

1,290

 

 

 

1,812

 

Net deferred and other tax liabilities

 

$

(5,597

)

 

$

(6,973

)

 

(1)

As of September 30, 2019, the Company and its subsidiaries had an estimated $87,433 of net operating loss carryforwards, $1,712 of which expire at various dates between December 31, 2026 and December 31, 2035, which had a net asset value of $20,704 as of September 30, 2019.

The components of our tax (provision) benefit for the three and nine months ended September 30, 2019 and 2018 were as follows.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

(230

)

 

$

(9,353

)

 

$

(1,099

)

 

$

(3,040

)

State

 

 

(661

)

 

 

(2,318

)

 

 

(1,620

)

 

 

(1,078

)

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(887

)

 

 

9,100

 

 

 

1,311

 

 

 

8,128

 

State

 

 

1,613

 

 

 

2,688

 

 

 

3,334

 

 

 

768

 

Net (provision) benefit for income taxes

 

$

(165

)

 

$

117

 

 

$

1,926

 

 

$

4,778

 

 

Page 29 of 77


 

The following table presents a reconciliation of statutory federal income tax (provision) benefit to consolidated actual income tax (provision) benefit reported in net loss/net decrease in net assets for the three and nine months ended September 30, 2019 and 2018.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Statutory Federal income tax (provision) benefit at 21%

 

$

(1,616

)

 

$

877

 

 

$

(332

)

 

$

8,106

 

State and local income taxes, net of federal income

   tax benefit

 

 

(547

)

 

 

(107

)

 

 

(113

)

 

 

994

 

Revaluation of net operating losses

 

 

876

 

 

 

 

 

 

380

 

 

 

 

Appreciation of Medallion Bank

 

 

 

 

 

 

 

 

 

 

 

(1,974

)

Utilization of carry forwards

 

 

 

 

 

(247

)

 

 

 

 

 

(910

)

Change in state income tax accruals

 

 

 

 

 

 

 

 

600

 

 

 

 

Change in effective state income tax rate

 

 

608

 

 

 

 

 

 

916

 

 

 

(1,358

)

Income attributable to non-controlling interest

 

 

451

 

 

 

 

 

 

451

 

 

 

 

Non deductible expenses

 

 

 

 

 

(215

)

 

 

 

 

 

(403

)

Other

 

 

63

 

 

 

(191

)

 

 

24

 

 

 

323

 

Total income tax (provision) benefit

 

$

(165

)

 

$

117

 

 

$

1,926

 

 

$

4,778

 

 

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

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible pursuant to ASC 740. The Company considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company’s evaluation of the realizability of deferred tax assets must consider both positive and negative evidence. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. Based upon these considerations, the Company determined the necessary valuation allowance as of September 30, 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 2016 through the present are the more significant filings that are open for examination.

(10) STOCK OPTIONS AND RESTRICTED STOCK

The Company’s Board of Directors approved the 2018 Equity Incentive Plan (2018 Plan), which was approved by the Company’s stockholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to the Company’s employees and non-employee directors, including options, restricted stock, stock appreciation rights, etc. A total of 1,500,253 shares of the Company’s common stock are issuable under the 2018 Plan, and 882,219 remained issuable as of September 30, 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 occurs first.

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 provided for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock which, at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 700,000 shares of the Company’s common stock were issuable under the 2015 Restricted Stock Plan, and 241,919 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 occurs first.

Page 30 of 77


 

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 2015 Non-Employee Director Stock Option Plan (2015 Director Plan) on March 12, 2015, which was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on February 29, 2016. A total of 300,000 shares of the Company’s common stock were 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 granted options to purchase 12,000 shares of the Company’s common stock to a non-employee director upon election to the Board of Directors, with an adjustment for directors who were elected to serve less than a full term. 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. Options granted under the 2015 Director Plan are exercisable annually, as defined in the 2015 Director Plan. The term of the options could 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 would 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 were elected to serve less than a full term. 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. Options granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options could not exceed ten years.

Additional shares are only available for future issuance under the 2018 Plan. At September 30, 2019, 497,721 options on the Company’s common stock were outstanding under the Company’s plans, of which 81,667 options were exercisable, and there were 247,616 unvested shares of the Company’s common stock outstanding under the 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 and $1.06 per share for the nine months ended September 30, 2019 and 2018. The following assumption categories are used to determine the value of any option grants.

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Risk free interest rate

 

 

2.39

%

 

 

2.82

%

Expected dividend yield

 

 

0.79

 

 

 

4.86

 

Expected life of option in years(1)

 

 

6.25

 

 

 

6.00

 

Expected volatility(2)

 

 

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 77


 

The following table presents the activity for the stock option programs for the 2019 quarters and the 2018 full year.

 

 

 

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

 

 

498,714

 

 

 

2.14-13.84

 

 

 

6.62

 

Granted

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(993

)

 

 

 

6.55

 

 

 

6.55

 

Exercised(1)

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2019(2)

 

 

497,721

 

 

$

2.14-13.84

 

 

$

6.62

 

Options exercisable at September 30, 2019(2)

 

 

81,667

 

 

$

2.14-13.84

 

 

$

8.35

 

 

(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 2018 three and nine months ended September 30.

(2)

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2019 and the related exercise price of the underlying options, was $180,000 for outstanding options and $78,000 for exercisable options as of September 30, 2019. The remaining contractual life was 8.81 years for outstanding options and 5.95 years for exercisable options at September 30, 2019.

The following table presents the activity for the restricted stock programs for the 2019 quarters and the 2018 full year.

 

 

 

Number of

Shares

 

 

 

Grant

Price Per

Share

 

 

Weighted

Average

Exercise Price

 

Outstanding at December 31, 2017

 

 

408,582

 

 

$

2.06-10.38

 

 

$

3.45

 

Granted

 

 

101,010

 

 

 

3.93-5.27

 

 

 

4.41

 

Cancelled

 

 

(9,737

)

 

 

3.93-9.08

 

 

 

4.66

 

Vested(1)

 

 

(308,940

)

 

 

2.06-10.38

 

 

 

3.35

 

Outstanding at December 31, 2018

 

 

190,915

 

 

 

2.14-5.27

 

 

 

4.06

 

Granted

 

 

163,098

 

 

 

 

6.55

 

 

 

6.55

 

Cancelled

 

 

(1,699

)

 

 

3.93-3.95

 

 

 

3.94

 

Vested(1)

 

 

(101,832

)

 

 

3.93-4.39

 

 

 

4.07

 

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

 

 

237,878

 

 

 

3.95-6.55

 

 

 

5.86

 

Granted

 

 

10,417

 

 

 

 

4.80

 

 

 

4.80

 

Cancelled

 

 

(679

)

 

 

3.95-6.55

 

 

 

5.90

 

Vested(1)

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2019(2)

 

 

247,616

 

 

$

3.95-6.55

��

 

$

5.82

 

 

(1)

The aggregate fair value of the restricted stock vested was $0 and $736,000 for the three and nine months ended September 30, 2019, and was $32,000 and $1,241,000 for the comparable 2018 periods.

Page 32 of 77


 

(2)

The aggregate fair value of the restricted stock was $1,585,000 as of September 30, 2019. The remaining vesting period was 2.67 years at September 30, 2019.

In addition, during the 2019 third quarter, the Company granted and has outstanding, 26,040 restricted stock units that vest in one year with a grant price of $4.80. These units have the option of deferring vesting until a future date if the employee makes a formal election under the guidelines of IRC Section 409A.

The following table presents the activity for the unvested options outstanding under the plans for the 2019 quarters.

 

 

 

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

 

Granted

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(993

)

 

 

 

6.55

 

 

 

6.55

 

Vested

 

 

(3,778

)

 

 

 

2.61

 

 

 

2.61

 

Outstanding at September 30, 2019

 

 

416,054

 

 

$

2.14-6.55

 

 

$

6.28

 

 

The intrinsic value of the options vested was $8,000 and $34,000 for the three and nine months ended September 30, 2019.

(11) SEGMENT REPORTING (Bank Holding Company Accounting)

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

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

The four lending segments reflect the main types of lending performed at the Company, which are recreation, home improvement, commercial, and medallion. The recreation and home improvement lending segments are conducted by the Bank in all fifty states, with the highest concentrations in Texas, Florida, and California at 16%, 10%, and 10% of loans outstanding and with no other states over 10% as of September 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, of which RVs, boats, and trailers make up 62%, 18%, and 12% of the segment portfolio as of September 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 windows, at 25%, 20%, 13%, and 13% of total home improvement loans outstanding, and with no other product lines over 10% as of September 30, 2019. The commercial lending segment focuses on enterprise wide industries, including manufacturing services, and various other industries, in which 57% 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 September 30, 2019.

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

As 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 nine months ended September 30, 2019. In addition, beginning in fiscal year 2019, 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 77


 

The following tables present segment data as of September 30, 2019 and for the three and nine months then ended, and as of September 30, 2018, and for the three and six months then ended.

 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Three Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

26,147

 

 

$

5,184

 

 

$

1,842

 

 

$

975

 

 

$

 

 

$

492

 

 

$

34,640

 

Total interest expense

 

 

3,578

 

 

 

1,309

 

 

 

741

 

 

 

1,935

 

 

 

47

 

 

 

1,615

 

 

 

9,225

 

Net interest income (loss)

 

 

22,569

 

 

 

3,875

 

 

 

1,101

 

 

 

(960

)

 

 

(47

)

 

 

(1,123

)

 

 

25,415

 

Provision for loan losses

 

 

6,744

 

 

 

(629

)

 

 

364

 

 

 

1,858

 

 

 

 

 

 

 

 

 

8,337

 

Net interest income (loss)

   after loss provision

 

 

15,825

 

 

 

4,504

 

 

 

737

 

 

 

(2,818

)

 

 

(47

)

 

 

(1,123

)

 

 

17,078

 

Sponsorship and race winnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,940

 

 

 

 

 

 

7,940

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,663

)

 

 

 

 

 

(2,663

)

Other income (expense)

 

 

(6,181

)

 

 

(2,000

)

 

 

563

 

 

 

(2,762

)

 

 

(1,784

)

 

 

(2,591

)

 

 

(14,755

)

Net income (loss) before taxes

 

 

9,644

 

 

 

2,504

 

 

 

1,300

 

 

 

(5,580

)

 

 

3,446

 

 

 

(3,714

)

 

 

7,600

 

Income tax benefit (provision)

 

 

(2,497

)

 

 

(648

)

 

 

(314

)

 

 

1,345

 

 

 

(831

)

 

 

2,780

 

 

 

(165

)

Net income (loss)

 

$

7,147

 

 

$

1,856

 

 

$

986

 

 

$

(4,235

)

 

$

2,615

 

 

$

(934

)

 

$

7,435

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

690,466

 

 

$

228,491

 

 

$

64,646

 

 

$

112,003

 

 

$

 

 

$

3,563

 

 

$

1,099,169

 

Total assets

 

 

702,541

 

 

 

239,991

 

 

 

87,486

 

 

 

226,868

 

 

 

33,134

 

 

 

229,734

 

 

 

1,519,754

 

Total funds borrowed

 

 

559,995

 

 

 

190,871

 

 

 

69,658

 

 

 

180,040

 

 

 

7,758

 

 

 

178,793

 

 

 

1,187,115

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

4.14

%

 

 

3.22

%

 

 

4.49

%

 

 

(7.26

)%

 

 

31.13

%

 

 

(1.54

)%

 

 

1.31

%

Return on average equity

 

 

20.69

 

 

 

16.09

 

 

 

22.45

 

 

 

(36.30

)

 

NM

 

 

 

(7.81

)

 

 

6.81

 

Interest yield

 

 

15.35

 

 

 

9.46

 

 

 

11.09

 

 

 

3.30

 

 

N/A

 

 

N/A

 

 

 

11.87

 

Net interest margin

 

 

13.25

 

 

 

7.07

 

 

 

6.63

 

 

 

(3.25

)

 

N/A

 

 

N/A

 

 

 

8.71

 

Reserve coverage

 

 

2.25

 

 

 

0.97

 

 

 

0.00

 

(1)

 

18.22

 

 

N/A

 

 

N/A

 

 

 

3.77

 

Delinquency status(2)

 

 

0.69

 

 

 

0.11

 

 

 

0.40

 

(1)

 

2.41

 

 

N/A

 

 

N/A

 

 

 

0.73

 

Charge-off ratio

 

 

2.05

 

 

 

0.09

 

 

 

4.93

 

(3)

 

5.20

 

 

N/A

 

 

N/A

 

 

 

2.17

 

 

(1)

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

(2)

Loans 90 days or more past due.

(3)

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

Page 34 of 77


 

 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Nine Months Ended September 30, 2019

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

72,996

 

 

$

14,187

 

 

$

5,359

 

 

$

2,482

 

 

$

 

 

$

1,674

 

 

$

96,698

 

Total interest expense

 

 

9,541

 

 

 

3,252

 

 

 

2,108

 

 

 

5,435

 

 

 

119

 

 

 

5,313

 

 

 

25,768

 

Net interest income (loss)

 

 

63,455

 

 

 

10,935

 

 

 

3,251

 

 

 

(2,953

)

 

 

(119

)

 

 

(3,639

)

 

 

70,930

 

Provision for loan losses

 

 

19,925

 

 

 

733

 

 

 

364

 

 

 

15,374

 

 

 

 

 

 

455

 

 

 

36,851

 

Net interest income (loss)

   after loss provision

 

 

43,530

 

 

 

10,202

 

 

 

2,887

 

 

 

(18,327

)

 

 

(119

)

 

 

(4,094

)

 

 

34,079

 

Sponsorship and race winnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,008

 

 

 

 

 

 

16,008

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,211

)

 

 

 

 

 

(7,211

)

Other (expense)

 

 

(17,501

)

 

 

(5,356

)

 

 

(532

)

 

 

(8,106

)

 

 

(5,298

)

 

 

(5,822

)

 

 

(42,615

)

Net income (loss) before taxes

 

 

26,029

 

 

 

4,846

 

 

 

2,355

 

 

 

(26,433

)

 

 

3,380

 

 

 

(9,916

)

 

 

261

 

Income tax benefit (provision)

 

 

(6,741

)

 

 

(1,255

)

 

 

(568

)

 

 

6,375

 

 

 

(815

)

 

 

4,930

 

 

 

1,926

 

Net income (loss)

 

$

19,288

 

 

$

3,591

 

 

$

1,787

 

 

$

(20,058

)

 

$

2,565

 

 

$

(4,986

)

 

$

2,187

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

690,466

 

 

$

228,491

 

 

$

64,646

 

 

$

112,003

 

 

$

 

 

$

3,563

 

 

$

1,099,169

 

Total assets

 

 

702,541

 

 

 

239,991

 

 

 

87,486

 

 

 

226,868

 

 

 

33,134

 

 

 

229,734

 

 

 

1,519,754

 

Total funds borrowed

 

 

559,995

 

 

 

190,871

 

 

 

69,658

 

 

 

180,040

 

 

 

7,758

 

 

 

178,793

 

 

 

1,187,115

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

4.01

%

 

 

2.50

%

 

 

2.69

%

 

 

(10.82

)%

 

 

10.76

%

 

 

(2.90

)%

 

 

(0.12

)%

Return on average equity

 

 

17.42

 

 

 

11.34

 

 

 

13.43

 

 

 

(54.12

)

 

NM

 

 

 

(11.52

)

 

 

(0.60

)

Interest yield

 

 

15.45

 

 

 

9.44

 

 

 

11.59

 

 

 

2.50

 

 

N/A

 

 

N/A

 

 

 

11.68

 

Net interest margin

 

 

13.43

 

 

 

7.27

 

 

 

7.03

 

 

 

(2.97

)

 

N/A

 

 

N/A

 

 

 

8.57

 

Reserve coverage

 

 

2.25

 

 

 

0.97

 

 

 

0.00

 

(1)

 

18.22

 

 

N/A

 

 

N/A

 

 

 

3.77

 

Delinquency status(2)

 

 

0.69

 

 

 

0.11

 

 

 

0.40

 

(1)

 

2.41

 

 

N/A

 

 

N/A

 

 

 

0.73

 

Charge-off ratio

 

 

2.30

 

 

 

0.20

 

 

 

1.77

 

(3)

 

18.29

 

 

N/A

 

 

N/A

 

 

 

3.92

 

 

(1)

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

(2)

Loans 90 days or more past due.

(3)

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

Page 35 of 77


 

 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Three Months Ended September 30, 2018

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

24,001

 

 

$

3,968

 

 

$

2,370

 

 

$

2,126

 

 

$

 

 

$

687

 

 

$

33,152

 

Total interest expense

 

 

2,306

 

 

 

709

 

 

 

500

 

 

 

3,672

 

 

 

40

 

 

 

1,660

 

 

 

8,887

 

Net interest income (loss)

 

 

21,695

 

 

 

3,259

 

 

 

1,870

 

 

 

(1,546

)

 

 

(40

)

 

 

(973

)

 

 

24,265

 

Provision for loan losses

 

 

4,423

 

 

 

598

 

 

 

(75

)

 

 

13,259

 

 

 

 

 

 

 

 

 

18,205

 

Net interest income (loss) after loss

   provision

 

 

17,272

 

 

 

2,661

 

 

 

1,945

 

 

 

(14,805

)

 

 

(40

)

 

 

(973

)

 

 

6,060

 

Sponsorship and race winning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,371

 

 

 

 

 

 

5,371

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,876

)

 

 

 

 

 

(2,876

)

Other income (expense)

 

 

(3,160

)

 

 

400

 

 

 

(945

)

 

 

(4,077

)

 

 

(1,887

)

 

 

(2,849

)

 

 

(12,518

)

Net income (loss) before taxes

 

 

14,112

 

 

 

3,061

 

 

 

1,000

 

 

 

(18,882

)

 

 

568

 

 

 

(3,822

)

 

 

(3,963

)

Income tax benefit (provision)

 

 

(3,979

)

 

 

(863

)

 

 

(232

)

 

 

4,371

 

 

 

(107

)

 

 

927

 

 

 

117

 

Net income (loss)

 

$

10,133

 

 

$

2,198

 

 

$

768

 

 

$

(14,511

)

 

$

461

 

 

$

(2,895

)

 

$

(3,846

)

Balance Sheet Data as of

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

572,995

 

 

$

168,781

 

 

$

77,886

 

 

$

235,827

 

 

$

 

 

$

4,572

 

 

$

1,060,061

 

Total assets

 

 

582,610

 

 

 

175,333

 

 

 

88,035

 

 

 

369,763

 

 

 

36,237

 

 

 

319,429

 

 

 

1,571,407

 

Total funds borrowed

 

 

431,868

 

 

 

132,914

 

 

 

53,323

 

 

 

399,750

 

 

 

7,614

 

 

 

239,605

 

 

 

1,265,074

 

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

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

6.80

%

 

 

4.57

%

 

 

3.50

%

 

 

(15.23

)%

 

 

4.94

%

 

 

(4.29

)%

 

 

(1.19

)%

Return on average equity

 

 

27.77

 

 

 

19.99

 

 

 

7.47

 

 

NM

 

 

 

42.83

 

 

 

(15.05

)

 

 

(6.59

)

Interest yield

 

 

15.87

 

 

 

8.10

 

 

 

12.33

 

 

 

3.41

 

 

N/A

 

 

N/A

 

 

 

10.75

 

Net interest margin

 

 

14.34

 

 

 

6.65

 

 

 

9.73

 

 

 

(2.48

)

 

N/A

 

 

N/A

 

 

 

7.94

 

Reserve coverage

 

 

0.50

 

 

 

0.51

 

 

 

0.13

 

 

 

9.81

 

 

N/A

 

 

N/A

 

 

 

2.71

 

Delinquency status(2)

 

 

0.55

 

 

 

0.10

 

 

0.51

 

(1)

 

4.06

 

 

N/A

 

 

N/A

 

 

 

1.29

 

Charge-off ratio

 

 

3.19

 

 

 

1.34

 

 

0.00

 

(1)

 

10.35

 

 

N/A

 

 

N/A

 

 

 

3.69

 

 

(1)

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

(2)

Loans 90 days or more past due.

Page 36 of 77


 

 

 

 

Consumer Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp.

 

 

 

 

 

Six Months Ended September 30, 2018

(Dollars in thousands)

 

Recreation

 

 

Home

Improvement

 

 

Commercial

Lending

 

 

Medallion

Lending

 

 

RPAC

 

 

and

Other

Investments

 

 

Consolidated

 

Total interest income

 

$

46,133

 

 

$

8,605

 

 

$

4,587

 

 

$

5,315

 

 

$

 

 

$

1,156

 

 

$

65,796

 

Total interest expense

 

 

4,442

 

 

 

1,448

 

 

 

985

 

 

 

7,045

 

 

 

81

 

 

 

2,811

 

 

 

16,812

 

Net interest income (loss)

 

 

41,691

 

 

 

7,157

 

 

 

3,602

 

 

 

(1,730

)

 

 

(81

)

 

 

(1,655

)

 

 

48,984

 

Provision for loan losses

 

 

9,133

 

 

 

1,475

 

 

 

100

 

 

 

38,073

 

 

 

 

 

 

 

 

 

48,781

 

Net interest income (loss) after loss

   provision

 

 

32,558

 

 

 

5,682

 

 

 

3,502

 

 

 

(39,803

)

 

 

(81

)

 

 

(1,655

)

 

 

203

 

Sponsorship and race winning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,599

 

 

 

 

 

 

10,599

 

Race team related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,416

)

 

 

 

 

 

(5,416

)

Other (expense)

 

 

(8,680

)

 

 

(1,285

)

 

 

(1,887

)

 

 

(6,888

)

 

 

(4,124

)

 

 

(4,390

)

 

 

(27,254

)

Net income (loss) before taxes

 

 

23,878

 

 

 

4,397

 

 

 

1,615

 

 

 

(46,691

)

 

 

978

 

 

 

(6,045

)

 

 

(21,868

)

Income tax benefit (provision)

 

 

(6,141

)

 

 

(1,159

)

 

 

(368

)

 

 

10,528

 

 

 

(150

)

 

 

1,428

 

 

 

4,138

 

Net income (loss)

 

$

17,737

 

 

$

3,238

 

 

$

1,247

 

 

$

(36,163

)

 

$

828

 

 

$

(4,617

)

 

$

(17,730

)

Balance Sheet Data as of

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

572,995

 

 

$

168,781

 

 

$

77,886

 

 

$

235,827

 

 

$

 

 

$

4,572

 

 

$

1,060,061

 

Total assets

 

 

582,610

 

 

 

175,333

 

 

 

88,035

 

 

 

369,763

 

 

 

36,237

 

 

 

319,429

 

 

 

1,571,407

 

Total funds borrowed

 

 

431,868

 

 

 

132,914

 

 

 

53,323

 

 

 

399,750

 

 

 

7,614

 

 

 

239,605

 

 

 

1,265,074

 

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

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

6.14

%

 

 

3.42

%

 

 

2.81

%

 

 

(18.49

)%

 

 

4.46

%

 

 

(3.55

)%

 

 

(2.51

)%

Return on average equity

 

 

25.84

 

 

 

15.22

 

 

 

6.05

 

 

NM

 

 

 

38.67

 

 

 

(11.16

)

 

 

(13.34

)

Interest yield

 

 

15.88

 

 

 

8.94

 

 

 

13.48

 

 

 

4.03

 

 

N/A

 

 

N/A

 

 

 

10.91

 

Net interest margin

 

 

14.35

 

 

 

7.44

 

 

 

10.58

 

 

 

(1.31

)

 

N/A

 

 

N/A

 

 

 

8.17

 

Reserve coverage

 

 

0.50

 

 

 

0.51

 

 

 

0.13

 

 

 

9.81

 

 

N/A

 

 

N/A

 

 

 

2.71

 

Delinquency status(2)

 

 

0.55

 

 

 

0.10

 

 

0.51

 

(1)

 

4.06

 

 

N/A

 

 

N/A

 

 

 

1.29

 

Charge-off ratio

 

 

3.26

 

 

 

1.27

 

 

0.00

 

(1)

 

9.66

 

 

N/A

 

 

N/A

 

 

 

3.53

 

 

(1)

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

(2)

Loans 90 days or more past due.

 

(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

 

Directors’ fees

 

$

89

 

Miscellaneous taxes

 

 

120

 

Computer expenses

 

 

74

 

Depreciation and amortization

 

 

23

 

Other expenses

 

 

161

 

Total other operating expenses

 

$

467

 

 

Page 37 of 77


 

(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 under Investment Company Accounting.

 

(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

)%

 

(1)

Includes $0 of undistributed net investment income per share and $0 of undistributed net realized gains per share as of March 31, 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 operating expenses of $1,150, which formerly were the Company’s, were MSC’s for the three months ended March 31, 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%, 7.51%, and (4.49%) in the March 31, 2018 quarter.

(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 38 of 77


 

Employment agreements expire at various dates through 2024, with future minimum payments under these agreements of approximately $6,061,000.

(B) OTHER COMMITMENTS

Except as described in the following paragraph, the Company had no commitments to extend credit or make investments outstanding at September 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 November 30, 2027. At September 30, 2019, minimal rental commitments for non-cancelable leases were $15,698,000.

(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 stockholders of the Company are also directors and officers of its main subsidiaries, MFC, MCI, FSVC, and the 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 $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-end bonus. In addition, Mr. Rudnick provides consulting services to the Company directly for a monthly retainer of $4,200.

The Company’s subsidiary RPAC, has an agreement with minority shareholder Richard Petty, in which it 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 $7,258,000 that earns interest at an annual rate of 2% as of September 30, 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 of sponsorship payments to RPAC during the remaining 2019 race car season, of which $5,200,000 was earned and received in 2019.

The Company and MSC serviced $308,346,000 of loans for the Bank at March 31, 2018. Under Investment Company Accounting, included in net investment income were amounts as described in the table below that were received from the 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 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 the Bank by MSC. As a result, in the three months ended March 31, 2018, $1,290,000 of servicing fee income was earned by MSC.

Page 39 of 77


 

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

 

(Dollars in thousands)

 

Three Months

Ended

March 31, 2018

 

Reimbursement of operating expenses

 

$

250

 

Loan origination and servicing fees

 

 

6

 

Total other income

 

$

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. Additionally, the Company recognized $10,000 of interest income not eliminated for the three months ended March 31, 2018 with respect to this loan.

The Company and MCI have loans to RPAC which have been eliminated in consolidation 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 with respect to these loans.

(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, or off-balance-sheet commitments, if practicable. The following methods and assumptions were used to estimate the fair value of each class of financial instrument. Fair value estimates that were derived from broker quotes cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

(a) Cash—Book value equals fair value.

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

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

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

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

(f) Commitments to extend credit—The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At September 30, 2019 and December 31, 2018, the estimated fair value of these off-balance-sheet instruments was not material.

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

 

 

 

September 30, 2019

 

 

December 31, 2018

 

(Dollars in thousands)

 

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and federal funds sold(1)

 

$

55,015

 

 

$

55,015

 

 

$

57,713

 

 

$

57,713

 

Equity investments

 

 

9,880

 

 

 

9,880

 

 

 

9,197

 

 

 

9,197

 

Investment securities

 

 

47,422

 

 

 

47,422

 

 

 

45,324

 

 

 

45,324

 

Loans receivable

 

 

1,099,169

 

 

 

1,099,169

 

 

 

981,487

 

 

 

981,487

 

Accrued interest receivable(2)

 

 

8,040

 

 

 

8,040

 

 

 

7,413

 

 

 

7,413

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds borrowed(3)

 

 

1,187,115

 

 

 

1,188,850

 

 

 

1,062,028

 

 

 

1,062,297

 

Accrued interest payable(2)

 

 

3,511

 

 

 

3,511

 

 

 

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 September 30, 2019 and December 31, 2018, publicly traded retail notes traded at a premium to par of $1,735 and $269.

Page 40 of 77


 

(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 (levels 1 and 2) and unobservable (level 3). Therefore gains and losses for such assets and liabilities categorized within the level 3 table below may include changes in fair value that are attributable to both observable inputs (level 1 and 2) and unobservable inputs (level 3).

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

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

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

 

A)

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

 

B)

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

 

C)

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

 

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 paragraph describes the sensitivity of the various level 3 valuations to the factors that are relevant in their valuation analysis under 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).

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

Page 41 of 77


 

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 September 30, 2019 and December 31, 2018.

 

September 30, 2019

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

$

 

 

$

 

 

$

9,880

 

 

$

9,880

 

Available for sale investment securities(1)

 

 

 

 

 

47,422

 

 

 

 

 

 

47,422

 

Total

 

$

 

 

$

47,422

 

 

$

9,880

 

 

$

57,302

 

 

(1)

Total unrealized income of $1,322, net of tax, was included in accumulated other comprehensive income (loss) for the nine months ended September 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.

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

 

(Dollars in thousands)

 

Equity

Investments

 

June 30, 2019

 

$

9,797

 

Gains included in earnings

 

 

414

 

Purchases, investments, and issuances

 

 

1,077

 

Sales, maturities, settlements, and distributions

 

 

(1,408

)

September 30, 2019

 

$

9,880

 

Amounts related to held assets(1)

 

$

(998

)

 

(1)

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

 

(Dollars in thousands)

 

Equity

Investments

 

December 31, 2018

 

$

9,197

 

Gains included in earnings

 

 

510

 

Purchases, investments, and issuances

 

 

2,727

 

Sales, maturities, settlements, and distributions

 

 

(2,554

)

September 30, 2019

 

$

9,880

 

Amounts related to held assets(1)

 

$

(1,300

)

 

(1)

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

Page 42 of 77


 

 

(Dollars in thousands)

 

Equity

Investments

 

June 30, 2018

 

$

10,773

 

Losses included in earnings

 

 

(400

)

Purchases, investments, and issuances

 

 

631

 

Sales, maturities, settlements, and distributions

 

 

(252

)

September 30, 2018

 

$

10,752

 

Amounts related to held assets(1)

 

$

(400

)

 

(1)

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

 

(Dollars in thousands)

 

Equity

Investments

 

March 31, 2018

 

$

9,458

 

Losses included in earnings

 

 

(774

)

Purchases, investments, and issuances

 

 

1,160

 

Sales, maturities, settlements, and distributions

 

 

(469

)

Transfers in(1)

 

 

1,377

 

September 30, 2018

 

$

10,752

 

Amounts related to held assets(2)

 

$

(774

)

 

(1)

Represents the removal of RPAC 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 September 30, 2018.

 

(Dollars in thousands)

 

Medallion

Loans

 

 

Commercial

Loans

 

 

Investments

in Medallion

Bank &

Other

Controlled

Subsidiaries

 

 

Equity

Investments

 

 

Investments

Other Than

Securities

 

 

Other

Assets

 

December 31, 2017

 

$

208,279

 

 

$

90,188

 

 

$

302,147

 

 

$

9,521

 

 

$

7,450

 

 

$

339

 

Gains (losses) included in earnings

 

 

(38,190

)

 

 

(8

)

 

 

29,143

 

 

 

(993

)

 

 

(1,915

)

 

 

 

Purchases, investments, and issuances

 

 

7

 

 

 

7,252

 

 

 

462

 

 

 

935

 

 

 

 

 

 

 

Sales, maturities, settlements, and

   distributions

 

 

(8,941

)

 

 

(3,812

)

 

 

(583

)

 

 

(5

)

 

 

 

 

 

 

March 31, 2018

 

$

161,155

 

 

$

93,620

 

 

$

331,169

 

 

$

9,458

 

 

$

5,535

 

 

$

339

 

Amounts related to held assets(1)

 

$

(38,190

)

 

$

(10

)

 

$

29,143

 

 

$

(993

)

 

$

(1,915

)

 

$

 

 

(1)

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

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2019 and December 31, 2018 under Bank Holding Company Accounting.

 

September 30, 2019

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

27,078

 

 

$

27,078

 

Loan collateral in process of foreclosure

 

 

 

 

 

 

 

 

53,539

 

 

 

53,539

 

Total

 

$

 

 

$

 

 

$

80,617

 

 

$

80,617

 

Page 43 of 77


 

 

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 be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.

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

 

(Dollars in thousands) 

 

Fair Value

at 9/30/19

 

Valuation Techniques 

 

Unobservable Inputs 

 

Range

(Weighted Average)

Equity investments

$

7,038

 

Investee financial analysis

 

Financial condition and

operating performance of the

borrower

 

N/A

 

 

 

 

 

 

Collateral support

 

N/A

 

 

1,387

 

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

 

 

 

 

 

 

Discount for lack of

marketability

 

25%

 

 

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

 

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

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

Page 44 of 77


 

(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 was considered a variable interest because, pursuant to the guaranty, MFC absorbed variability as a result of the on-going performance of the loans in Trust III. As of October 31, 2018, the Company determined that MFC was no longer the primary beneficiary of Trust III and accordingly deconsolidated the VIE, leading to a net gain of $25,325,000 recorded as well as a new promissory note payable by MFC of $1,400,000 issued in settlement of the limited guaranty (see Note 7 for more details). In addition, the Company remains the servicer of the assets of Trust III for a fee.

(20) SUBSEQUENT EVENTS

We have evaluated subsequent events that have occurred through the date of financial statement issuance. As of such date, there were no subsequent events that required disclosure.

 

Page 45 of 77


 

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

GENERAL

We are a finance company that has historically had a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. Recently, our strategic growth has been through Medallion Bank (a wholly-owned subsidiary), which originates consumer loans for the purchase of 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% (19% if there had been no loan sales during 2016, 2017, and 2018). We have transitioned away from medallion lending and have placed our strategic focus on our growing consumer finance portfolio. As a result of our change in strategy, as of September 30, 2019, our consumer loans represented 84% of our net loan portfolio, with medallion loans representing 10% and commercial loans representing 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 $1,649,000,000 as of September 30, 2019, and were $1,522,000,000 and $1,598,000,000 as of December 31, 2018 and September 30, 2018, and have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996.

Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, privately placed notes, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities.

We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. 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.

Beginning in the current year, the Bank began the process to build-out a strategic partnership program with financial technology (Fintech) companies. Although no partnerships have been finalized, the Bank is actively exploring this opportunity with a number of Fintech companies with a plan to begin operations in 2020.

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 business development company (BDC) under the Investment Company Act of 1940, 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 has de-elected BDC status, it operates so as to fall outside the definition of an “investment company” or within an applicable exception.

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

 

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

 

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

As we made this change to our financial reporting prospectively, in this report we refer to both accounting in accordance with 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.

Our wholly-owned subsidiary, Medallion Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions that originates consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we have referred a portion of our taxicab medallion and commercial loans to Medallion Bank, which originated these loans, and have been serviced by 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 September 30, 2019. MSC earns referral and servicing fees for these activities.

Page 46 of 77


 

The assets of Taxi Medallion Loan Trust III (Trust III) are not available to pay obligations of its affiliates or any other party. Trust III’s loans are serviced by Medallion Funding LLC (MFC). On November 8, 2018, a limited guaranty in favor of DZ Bank was terminated in exchange for a $1.4 million note, payable in quarterly installments over five years. As a result of such restructuring, effective as of such date, Trust III is no longer consolidated in our financial statements.

Average Balances and Rates (Bank Holding Company Accounting)

The following tables show the Company’s consolidated average balance sheet, interest income and expense and the average interest earning/bearing assets and liabilities, and which reflect the average yield on assets and average costs on liabilities for the three months ended September 30, 2019 and 2018, and for the nine months ended September 30, 2019 and for the six months ended September 30, 2018.

 

 

 

Three Months Ended September 30,

 

 

 

2019

 

 

2018

 

(Dollars in thousands)

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Cost

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Cost

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning cash and cash equivalents

 

$

36,070

 

 

$

145

 

 

 

1.59

%

 

$

54,777

 

 

$

128

 

 

 

0.93

%

Investment securities

 

 

44,896

 

 

 

303

 

 

 

2.68

 

 

 

45,835

 

 

 

292

 

 

 

2.53

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recreation

 

 

675,973

 

 

 

26,147

 

 

 

15.35

 

 

 

600,160

 

 

 

24,001

 

 

 

15.87

 

Home improvement

 

 

217,510

 

 

 

5,184

 

 

 

9.46

 

 

 

194,466

 

 

 

3,968

 

 

 

8.10

 

Commercial

 

 

65,896

 

 

 

1,886

 

 

 

11.36

 

 

 

81,312

 

 

 

2,637

 

 

 

12.87

 

Medallion

 

 

117,160

 

 

 

975

 

 

 

3.30

 

 

 

247,409

 

 

 

2,126

 

 

 

3.41

 

Total loans

 

 

1,076,539

 

 

 

34,192

 

 

 

12.60

 

 

 

1,123,347

 

 

 

32,732

 

 

 

11.56

 

Total interest-earning assets

 

 

1,157,505

 

 

 

34,640

 

 

 

11.87

 

 

 

1,223,959

 

 

 

33,152

 

 

 

10.75

 

Non-interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

27,380

 

 

 

 

 

 

 

 

 

 

 

10,347

 

 

 

 

 

 

 

 

 

Equity investments

 

 

9,960

 

 

 

 

 

 

 

 

 

 

 

10,888

 

 

 

 

 

 

 

 

 

Loan collateral in process of foreclosure(1)

 

 

52,962

 

 

 

 

 

 

 

 

 

 

 

60,871

 

 

 

 

 

 

 

 

 

Goodwill and intangible assets

 

 

203,882

 

 

 

 

 

 

 

 

 

 

 

210,972

 

 

 

 

 

 

 

 

 

Deferred tax asset

 

 

 

 

 

 

 

 

 

 

 

 

 

1,243

 

 

 

 

 

 

 

 

 

Other assets

 

 

50,026

 

 

 

 

 

 

 

 

 

 

 

40,148

 

 

 

 

 

 

 

 

 

Total non-interest-earning assets

 

 

344,210

 

 

 

 

 

 

 

 

 

 

 

334,469

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,501,715

 

 

 

 

 

 

 

 

 

 

$

1,558,428

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

947,521

 

 

$

6,003

 

 

 

2.51

%

 

$

936,724

 

 

$

5,064

 

 

 

2.14

%

DZ loan

 

 

 

 

 

 

 

 

0.00

 

 

 

96,585

 

 

 

1,001

 

 

 

4.11

 

SBA debentures and borrowings

 

 

75,073

 

 

 

741

 

 

 

3.92

 

 

 

78,786

 

 

 

769

 

 

 

3.87

 

Notes payable to banks

 

 

38,259

 

 

 

436

 

 

 

4.52

 

 

 

69,629

 

 

 

762

 

 

 

4.34

 

Retail and privately placed notes

 

 

66,592

 

 

 

1,618

 

 

 

9.64

 

 

 

33,625

 

 

 

875

 

 

 

10.32

 

Preferred securities

 

 

33,000

 

 

 

380

 

 

 

4.57

 

 

 

33,000

 

 

 

375

 

 

 

4.51

 

Other borrowings

 

 

8,737

 

 

 

47

 

 

 

2.13

 

 

 

7,596

 

 

 

41

 

 

 

2.14

 

Total interest-bearing liabilities

 

 

1,169,182

 

 

 

9,225

 

 

 

3.13

 

 

 

1,255,945

 

 

 

8,887

 

 

 

2.81

 

Non-interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

6,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

36,760

 

 

 

 

 

 

 

 

 

 

 

19,586

 

 

 

 

 

 

 

 

 

Total non-interest-bearing liabilities

 

 

42,874

 

 

 

 

 

 

 

 

 

 

 

19,586

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,212,056

 

 

 

 

 

 

 

 

 

 

 

1,275,531

 

 

 

 

 

 

 

 

 

Non controlling interest

 

 

28,423

 

 

 

 

 

 

 

 

 

 

 

27,246

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

261,236

 

 

 

 

 

 

 

 

 

 

 

255,651

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

1,501,715

 

 

 

 

 

 

 

 

 

 

$

1,558,428

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

25,415

 

 

 

 

 

 

 

 

 

 

$

24,265

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

 

 

8.71

%

 

 

 

 

 

 

 

 

 

 

7.94

%

 

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