MEDALLION FINANCIAL CORP, 10-Q filed on 10 May 19
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
May 08, 2019
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Trading Symbol MFIN  
Entity Registrant Name MEDALLION FINANCIAL CORP  
Entity Central Index Key 0001000209  
Current Fiscal Year End Date --12-31  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   24,599,299
Entity Emerging Growth Company false  
Entity Small Business true  
v3.19.1
Consolidated Balance Sheet - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Assets    
Cash [1] $ 53,505 $ 23,842
Federal funds sold 32,616 33,871
Equity investments 8,699 9,197
Investment securities 44,682 45,324
Loans 1,024,200 1,017,882
Allowance for losses (36,862) [2] (36,395)
Net loans receivable 987,338 981,487
Accrued interest receivable 7,108 7,413
Property, equipment, and right-of-use lease asset, net 13,296 1,222
Loan collateral in process of foreclosure [3] 49,808 49,495
Goodwill 150,803 150,803
Intangible assets, net 53,620 53,982
Other assets 27,253 25,210
Total assets 1,428,728 1,381,846
Liabilities    
Accounts payable and accrued expenses [4] 16,279 18,789
Accrued interest payable 3,131 3,852
Deposits 864,131 848,040
Short-term borrowings 81,872 55,178
Deferred tax liabilities and other tax payables 7,037 6,973
Operating lease liabilities 11,724  
Long-term debt 152,713 158,810
Total liabilities 1,136,887 1,091,642
Commitments and contingencies [5]
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- 27,546,999 shares at March 31, 2019 and 27,385,600 shares at December 31, 2018 issued) 275 274
Additional paid in capital 274,456 274,292
Treasury stock (2,951,243 shares at March 31, 2019 and December 31, 2018) (24,919) (24,919)
Accumulated other comprehensive income (loss) 587 (82)
Retained earnings 14,271 13,043
Total stockholders' equity 264,670 262,608
Non-controlling interest in consolidated subsidiaries 27,171 27,596
Total equity 291,841 290,204
Total liabilities and equity $ 1,428,728 $ 1,381,846
Number of shares outstanding 24,595,756 24,434,357
Book value per share $ 10.76 $ 10.75
[1] Includes restricted cash of $2,475 as of March 31, 2019.
[2] Includes $6,173 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 17% of the total allowance, and 3.96% of the loans in question. This figure excludes the general reserve for the Bank, which was netted against loan balances at consolidation on April 2, 2018.
[3] Includes financed sales of this collateral to third parties that are reported separately from the loan portfolio, and that are conducted by the Bank of $3,930 as of March 31, 2019 and $3,134 as of December 31, 2018.
[4] Includes the short-term portion of lease liabilities of $1,846 as of March 31, 2019. Refer to Note 8 for more details.
[5] Refer to Note 14 for details.
v3.19.1
Consolidated Balance Sheet (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Preferred stock, shares authorized 1,000,000 1,000,000
Preferred stock, par value $ 0.01 $ 0.01
Preferred stock, shares outstanding 0 0
Common stock, shares authorized 50,000,000 50,000,000
Common stock, par value $ 0.01 $ 0.01
Common stock, shares issued 27,546,999 27,385,600
Treasury stock,shares 2,951,243 2,951,243
Restricted cash $ 2,475  
Loan collateral in process of foreclosure, financed sales collateral to third parties 3,930 $ 3,134
Short term lease liabilities $ 1,846  
v3.19.1
Consolidated Statement of Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Interest and fees on loans $ 29,439 $ 85
Interest income on investments   $ 244
Interest and dividends on investment securities 566  
Interest income 30,043  
Medallion lease income 38  
Total interest income/total investment income [1] 30,043  
Interest on deposits 4,921  
Interest on short-term borrowings 982  
Interest on long-term debt 1,819  
Total interest expense [2] 7,722  
Net interest income (loss) 22,321  
Provision for loan losses [3] 13,343  
Net interest income after provision for loan losses 8,978  
Other income (loss)    
Gain on the extinguishment of debt 4,145  
Sponsorship and race winnings 3,179  
Change in collateral value on loans in process of foreclosure (2,119)  
Other income 1,658  
Total other income 6,863  
Other expenses    
Salaries and employee benefits 5,341  
Race team related expenses 1,998  
Professional fees 1,636  
Loan servicing fees 1,194  
Collection costs 638  
Rent expense 600  
Regulatory fees 447  
Amortization of intangible assets 361  
Travel, meals and entertainment 265  
Other expenses [4] 2,222  
Total other expenses 14,702  
Income before income taxes/net investment loss before taxes [5] 1,139  
Income tax benefit 256  
Net income after taxes/net investment loss after taxes 1,395  
Net income after taxes/net decrease on net assets resulting from operations 1,395  
Less: income attributable to the non-controlling interest 167  
Total net income attributable to Medallion Financial Corp./net (decrease) on net assets resulting from operations $ 1,228  
Basic net income (loss) per share $ 0.05 $ (0.62)
Diluted net income (loss) per share 0.05 $ (0.62)
Distributions declared per share $ 0  
Weighted average common shares outstanding    
Basic 24,288,263 24,154,879
Diluted 24,616,890 24,154,879
Investment Company Accounting [Member]    
Interest income on investments   $ 3,287
Interest and dividends on investment securities   14
Medallion lease income   40
Total interest income/total investment income [1]   4,033
Interest expense   3,551
Total interest expense [2]   3,551
Net interest income (loss)   482
Net interest income after provision for loan losses   482
Other income (loss)    
Other income   60
Total other income   60
Other expenses    
Salaries and employee benefits   2,349
Professional fees   723
Collection costs   120
Rent expense   243
Travel, meals and entertainment   206
Other expenses [4]   467
Total other expenses   4,108
Income before income taxes/net investment loss before taxes [5]   (3,566)
Income tax benefit   336
Net income after taxes/net investment loss after taxes   (3,230)
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 after taxes/net decrease on net assets resulting from operations   (14,874)
Total net income attributable to Medallion Financial Corp./net (decrease) on net assets resulting from operations   $ (14,874)
Basic net income (loss) per share   $ (0.62)
Diluted net income (loss) per share   (0.62)
Distributions declared per share   $ 0
Weighted average common shares outstanding    
Basic   24,154,879
Diluted   24,154,879
Investment Company Accounting [Member] | Controlled Subsidiary Investment [Member]    
Dividend income from controlled subsidiaries   $ 28
Interest income   10
Investment Company Accounting [Member] | Affiliate Investment [Member]    
Interest income   $ 654
[1] Included in interest and investment income is $237 and $491 of paid in kind interest for the three months ended March 31, 2019 and 2018.
[2] Average borrowings outstanding were $1,067,075 and $324,322, and the related average borrowing costs were 2.93% and 4.44% for the three months ended March 31, 2019 and 2018.
[3] As of March 31, 2019, cumulative net charge-offs of loans and loans in process of foreclosure in the medallion portfolio were $228,508, representing collection opportunities for the Company.
[4] See Note 12 for the components of other operating expenses as of March 31, 2018.
[5] Includes $256 of net revenues received from Medallion Bank for the three months ended March 31, 2018, primarily for expense reimbursements. See Notes 6 and 15 for additional information.
[6] There were no net losses on investment securities of affiliated issuers for the three months ended March 31, 2018.
v3.19.1
Consolidated Statement of Income (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Interest paid in kind $ 237 $ 491
Average borrowings outstanding $ 1,067,075 $ 324,322
Average borrowing costs rate 2.93% 4.44%
Affiliated Entity [Member]    
Net Gain/losses on investment securities of affiliated $ 0  
Medallion Bank [Member]    
Revenue $ 256  
v3.19.1
Consolidated Statements of Other Comprehensive Income/Loss - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Net income after taxes/net decrease on net assets resulting from operations $ 1,395  
Other comprehensive income, net of tax 669  
Total comprehensive income (loss) 2,064  
Less: comprehensive income attributable to the non-controlling interest 167  
Total comprehensive income (loss) attributable to Medallion Financial Corp. $ 1,897  
Investment Company Accounting [Member]    
Net income after taxes/net decrease on net assets resulting from operations   $ (14,874)
Total comprehensive income (loss)   (14,874)
Total comprehensive income (loss) attributable to Medallion Financial Corp.   $ (14,874)
v3.19.1
Consolidated Statement of Changes in Stockholders' Equity and Changes in Net Assets - USD ($)
$ in Thousands
Total
Common Stock [Member]
Preferred Stock [Member]
Capital in Excess of Par [Member]
Treasury Stock [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income [Member]
Parent [Member]
Noncontrolling Interest [Member]
Accumulated Undistributed Net Investment Loss [Member]
Accumulated Undistributed Net Realized Gains on Investments [Member]
Net Unrealized Appreciation on Investment Net of Tax [Member]
Balance at Dec. 31, 2017 $ 287,159                      
Balance (Investment Company Accounting [Member]) at Dec. 31, 2017   $ 273   $ 273,716 $ (24,919)         $ (65,592)   $ 103,681
Balance, shares (Investment Company Accounting [Member]) at Dec. 31, 2017   27,294,327     (2,951,243)              
Net income | Investment Company Accounting [Member] (14,874)                      
Net increase (decrease) in net assets resulting from operations (14,874)                      
Net increase (decrease) in net assets resulting from operations | Investment Company Accounting [Member]                   (38,299)   23,425
Stock-based compensation 152                      
Stock-based compensation | Investment Company Accounting [Member]   $ 1   151                
Issuance of restricted stock, net 0               $ 0      
Issuance of restricted stock, net | Investment Company Accounting [Member]   $ 0 $ 0 0 $ 0         0 $ 0 0
Issuance of restricted stock, net, shares | Investment Company Accounting [Member]   95,726                    
Forfeiture of restricted stock, net 0               0      
Forfeiture of restricted stock, net | Investment Company Accounting [Member]   $ 0 0 0 0         0 $ 0 0
Ending balance at Mar. 31, 2018 272,437                      
Ending balance (Investment Company Accounting [Member]) at Mar. 31, 2018   $ 274   273,867 $ (24,919)         (103,891)   127,106
Ending balance, shares (Investment Company Accounting [Member]) at Mar. 31, 2018   27,390,053     (2,951,243)              
Balance at Dec. 31, 2017 287,159                      
Balance (Investment Company Accounting [Member]) at Dec. 31, 2017   $ 273   273,716 $ (24,919)         $ (65,592)   $ 103,681
Balance, shares (Investment Company Accounting [Member]) at Dec. 31, 2017   27,294,327     (2,951,243)              
Net change in unrealized gains on investments, net of tax (82)                      
Ending balance at Dec. 31, 2018 $ 290,204 $ 274   274,292 $ (24,919) $ 13,043 $ (82) $ 262,608 27,596      
Ending balance, shares at Dec. 31, 2018 24,434,357 27,385,600     (2,951,243)              
Net income $ 1,395         1,228   1,228 167      
Distributions to non-controlling interest (592)               (592)      
Stock-based compensation 165 $ 1   164       165        
Issuance of restricted stock, net 0 $ 0 0 0 $ 0 0 0 0 0      
Issuance of restricted stock, net, shares   163,098                    
Forfeiture of restricted stock, net 0 $ 0 $ 0 0 0 0 0 0 0      
Forfeiture of restricted stock, net, shares   (1,699)                    
Net change in unrealized gains on investments, net of tax 669           669 669        
Ending balance at Mar. 31, 2019 $ 291,841 $ 275   $ 274,456 $ (24,919) $ 14,271 $ 587 $ 264,670 $ 27,171      
Ending balance, shares at Mar. 31, 2019 24,595,756 27,546,999     (2,951,243)              
v3.19.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Dec. 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income/net (decrease) in net assets resulting from operations $ 1,395    
Adjustments to reconcile net income/net decrease in net assets resulting from operations to net cash provided by operating activities:      
Provision for loan losses 13,343    
Paid-in-kind interest (237)    
Depreciation and amortization 2,046    
Increase in deferred and other tax liabilities 65    
Amortization of origination fees, net 1,151   $ (13)
Proceeds from the sale and for principal payments on loan collateral in process of foreclosure 5,026    
Net change in loan collateral in process of foreclosure 3,757    
Net change in unrealized (appreciation) depreciation on investments (598)    
Stock-based compensation expense 165    
Gain on the extinguishment of debt (4,145)    
Decrease in accrued interest receivable 305    
(Increase) decrease in other assets (2,144)    
Decrease in accounts payable and accrued expenses (3,355)    
Decrease in accrued interest payable (687)    
Net cash provided by operating activities 16,087    
CASH FLOWS FROM INVESTING ACTIVITIES      
Loans originated (92,533)    
Proceeds from principal receipts, sales, and maturities of loans 62,239    
Purchases of investments (50)    
Proceeds from principal receipts, sales, and maturities of investments 2,456    
Net cash used for investing activities (27,888)    
CASH FLOWS FROM FINANCING ACTIVITIES      
Proceeds from time deposits and funds borrowed 118,586    
Repayments of time deposits and funds borrowed (77,785)    
Distributions to non-controlling interests (592)    
Net cash provided by (used for) financing activities 40,209    
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH 28,408    
Cash and cash equivalents and restricted cash, beginning of period [1] 57,713    
Cash and cash equivalents and restricted cash, end of period [1] 86,121   57,713
SUPPLEMENTAL INFORMATION      
Cash paid during the period for interest 7,887    
Cash paid during the period for income taxes $ 14    
Investment Company Accounting [Member]      
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income/net (decrease) in net assets resulting from operations   $ (14,874)  
Adjustments to reconcile net income/net decrease in net assets resulting from operations to net cash provided by operating activities:      
Loans originated   (8,193)  
Proceeds from principal receipts, sales, and maturities of loans   13,279  
Paid-in-kind interest   (491)  
Depreciation and amortization   246  
Increase in deferred and other tax liabilities   3,858  
Amortization of origination fees, net   13  
Capital returned by Medallion Bank and other controlled subsidiaries, net   93  
Net change in unrealized (appreciation) depreciation on investments   4,403  
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 gains on investments [2]   34,745  
Stock-based compensation expense   152  
Decrease in accrued interest receivable   130  
(Increase) decrease in other assets   54  
Decrease in accounts payable and accrued expenses   (675)  
Decrease in accrued interest payable   (249)  
Net cash provided by operating activities   5,291  
CASH FLOWS FROM FINANCING ACTIVITIES      
Repayments of time deposits and funds borrowed   (6,961)  
Payments of declared distributions   (64)  
Net cash provided by (used for) financing activities   (7,025)  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH   (1,734)  
Cash and cash equivalents and restricted cash, beginning of period [1]   12,690 $ 12,690
Cash and cash equivalents and restricted cash, end of period [1]   10,956  
SUPPLEMENTAL INFORMATION      
Cash paid during the period for interest   $ 3,577  
[1] Includes federal funds sold for the three months ended March 31, 2019.
[2] There were no net losses on investment securities of affiliated issuers for the three months ended March 31, 2018.
v3.19.1
Organization of Medallion Financial Corp. and its Subsidiaries
3 Months Ended
Mar. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization of Medallion Financial Corp. and its Subsidiaries

(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. Medallion Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and undergoes examinations by those agencies. Medallion Bank was initially formed for the primary purpose of originating commercial loans in three categories: 1) loans to finance the purchase of taxicab medallions, 2) asset-based commercial loans, and 3) SBA 7(a) loans. The loans are marketed and serviced by Medallion Bank’s affiliates that have extensive prior experience in these asset groups. Subsequent to its formation, Medallion Bank began originating consumer loans to finance the purchases of 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 originates and services taxicab medallion and commercial loans. MFC, MCI, and FSVC, as SBICs, are regulated by the Small Business Administration (SBA). MCI and FSVC are financed in part by the SBA.

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

The Company formed a wholly-owned subsidiary, Medallion Servicing Corporation (MSC), to provide loan services to Medallion Bank. The Company has assigned all of its loan servicing rights for Medallion Bank, which consists of servicing taxi medallion loans originated by Medallion Bank, to MSC, which bills and collects the related service fee income from Medallion Bank, 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 18. 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 $36,141,000 at March 31, 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, which are leased to fleet operators while being held for sale. The 159 medallions are carried at a net realizable value of $4,676,000 in other assets on the Company’s consolidated balance sheet at March 31, 2019, compared to a net realizable value of $4,305,000 at December 31, 2018 and a fair value of $5,535,000 at March 31, 2018.

v3.19.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

(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 Medallion Bank and its other subsidiaries) reports in accordance with Bank Holding Company Accounting; periods prior to such change in status are reported in accordance with Investment Company Accounting. Significant accounting policies that differ between such periods are described in more detail below.

 

Use of Estimates

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

The consolidated financial statements have been prepared in accordance with GAAP. The Company consolidates all entities it controls through a majority voting interest, a controlling interest through other contractual rights, or as being identified as the primary beneficiary of VIEs. The primary beneficiary is the party who has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (2) an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third-party’s holding is recorded as non-controlling interest.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that exceed the federally insured limits. Cash includes $2,475,000 of an interest reserve associated with the private placement of debt in March 2019, which cannot be used for any other purpose until March 2022.

Fair Value of Assets and Liabilities

The Company follows FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (FASB ASC 820), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e. a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entity’s own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 16 and 17 to the consolidated financial statements.

Equity Investments

Equity investments of $8,699,000 and $9,197,000 at March 31, 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 $142,000, and $12,000 was amortized to interest income for the three months ended March 31, 2019. Medallion Bank, a previously unconsolidated subsidiary under Investment Company Accounting, for the period, had net premium on investment securities of $244,000 as of March 31, 2018, and $21,000 was amortized to interest income for the three months ended March 31, 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 shareholders’ 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 shareholders’ equity, which were recorded net of the income tax effect, will be reversed.

Other Investment Valuation (Investment Company Accounting)

Prior to April 2, 2018, under the 1940 Act, the Company’s investment in Medallion Bank, as a wholly owned portfolio investment, was subject to quarterly assessments of fair value. The Company conducted a thorough valuation analysis, and also received an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank on at least an annual basis. The Company’s analysis included factors such as various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013 and the lack of any new charter issuances since the moratorium’s expiration. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the 2015 second quarter, the Company first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the 2016 third quarter there was a court ruling involving a marketplace lender that the Company believes heightened the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and 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 March 31, 2019 and December 31, 2018, net loan origination costs were $15,086,000 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 (accretion) to income for the three months ended March 31, 2019 and 2018 was $1,151,000 and ($13,000) ($852,000 when combined with Medallion Bank).

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 $8,102,000 at March 31, 2019, or 0.81% of the total loan portfolio, compared to $20,154,000, or 2.03% at December 31, 2018.

 

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 $34,732,000 and $40,500,000 of net loans and loans in process of foreclosure pledged as collateral under borrowing arrangements at March 31, 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 $135,807,000 at March 31, 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 March 31, 2019 and December 31, 2018. The Company assigned its servicing rights of the Medallion Bank portfolio to MSC. The costs of servicing were allocated to MSC by the Company, and the servicing fee income was billed to and collected from Medallion Bank by MSC.

Allowance for Loan Losses (Bank Holding Company Accounting)

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. In analyzing the adequacy of the allowance for loan losses, the Company uses historical delinquency and actual loss rates with a one year lookback period for consumer loans. For commercial loans deemed nonperforming, the historical loss experience and other projections are looked at, and for medallion loans, 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 $6,173,000 were recorded by the Company as a general reserve on medallion loans as an additional buffer against future losses, not including the Bank general reserve of $17,351,000 which was netted against loan balances at consolidation on April 2, 2018. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.

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

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

Under Investment Company Accounting, the Company recognized unrealized appreciation (depreciation) on investments as the amount by which the fair value estimated by the Company is greater (less) than the cost basis of the investment portfolio. Realized gains or losses on investments are generated through sales of investments, foreclosure on specific collateral, and writeoffs of loans or assets acquired in satisfaction of loans, net of recoveries. 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 impairment testing on an annual basis. Intangible assets are amortized over their useful life of approximately 20 years. As of March 31, 2019 and December 31, 2018, the Company had goodwill of $150,803,000, which all related to the Bank, and intangible assets of $53,620,000 and $53,982,000, respectively, and the Company recognized $361,000 of amortization expense on the intangible assets for the three months ended March 31, 2019. Additionally, loan portfolio premiums of $12,387,000 were determined as of April 2, 2018, of which $7,956,000 and $9,048,000 were outstanding at March 31, 2019 and December 31, 2018, and of which $1,092,000 was amortized to interest income for the three months ended March 31, 2019. The Company engaged an expert to assess the goodwill and intangibles for impairment at December 31, 2018, who concluded there was no impairment on Medallion 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)

   March 31, 2019      December 31, 2018  

Brand-related intellectual property

   $ 20,900      $ 21,176  

Home improvement contractor relationships

     6,555        6,641  

Race organization

     26,165        26,165  
  

 

 

    

 

 

 

Total intangible assets

   $ 53,620      $ 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 $100,000 and $23,000 ($67,000 had Medallion Bank been consolidated) for the quarters ended March 31, 2019 and 2018.

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 $520,000 and $223,000 ($528,000 had Medallion Bank been consolidated) for the quarters ended March 31, 2019 and 2018. 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 $4,411,000, $4,461,000, and $2,862,000 ($4,884,000 had Medallion Bank been consolidated) as of March 31, 2019, December 31, 2018, and March 31, 2018.

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 the sponsorship and race winnings revenue under FASB ASC Topic 606, Revenue from Contracts with Customers. Sponsorship revenue is recognized based upon the contract terms of the sponsorship contract. Race winnings revenue is recognized after each race during the season based upon terms provided by NASCAR and the placement of the driver.

 

Earnings (Loss) Per Share (EPS)

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

 

     Three Months Ended March 31,  

(Dollars in thousands, except per share data)

   2019      2018  

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

   $ 1,228      $ (14,874
  

 

 

    

 

 

 

Weighted average common shares outstanding applicable to basic EPS

     24,288,263        24,154,879  

Effect of dilutive stock options

     17,423        —    

Effect of restricted stock grants

     311,204        —    
  

 

 

    

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted EPS

     24,616,890        24,154,879  
  

 

 

    

 

 

 

Basic earnings (loss) per share

   $ 0.05      $ (0.62

Diluted earnings (loss) per share

     0.05        (0.62
  

 

 

    

 

 

 

Potentially dilutive common shares excluded from the above calculations aggregated 471,000 and 290,960 shares as of March 31, 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.

During the three months ended March 31, 2019 and 2018, the Company issued 163,098 and 97,952 of restricted shares of stock-based compensation awards, and 374,377 and 0 shares of stock options, and recognized $165,000 and $152,000, or $0.01 and $0.01 per share for each period, of non-cash stock-based compensation expense related to the grants. As of March 31, 2019, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $2,169,000, which is expected to be recognized over the next 16 quarters (see Note 10).

Regulatory Capital

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for federal deposit insurance, the FDIC ordered that the Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%, which would preclude their ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As of March 31, 2019, the Bank’s Tier 1 leverage ratio was 16.56%. 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     March 31, 2019     December 31, 2018  

Common equity Tier 1 capital

     —         —       $ 143,409     $ 141,608  

Tier 1 capital

     —         —         169,712       167,911  

Total capital

     —         —         182,858       180,917  

Average assets

     —         —         1,025,114       1,059,461  

Risk-weighted assets

     —         —         1,005,656       993,374  

Leverage ratio(1)

     4.0     5.0     16.6     15.8

Common equity Tier 1 capital ratio(2)

     7.0       6.5       14.3       14.3  

Tier 1 capital ratio(3)

     8.5       8.0       16.9       16.9  

Total capital ratio(3)

     10.5       10.0       18.2       18.2  

 

(1)

Calculated by dividing Tier 1 capital by average assets.

(2)

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

(3)

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

In addition, the Bank is subject to a Common Equity Tier 1 capital conservation buffer on top of the minimum risk-based capital ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and 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.

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. The aftermath of the global economic crisis and the delayed recognition of credit losses associated with loans (and other financial instruments) were identified as weaknesses in the application of existing accounting standards. Specifically, because the existing “incurred” loss model delays recognition until it is probable a credit loss was incurred, the FASB explored alternatives that would use more forward-looking information. Under the FASB’s new standard, the concepts used by entities to account for credit losses on financial instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is removed. Loss estimates are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 2019 for public entities and is effective for fiscal years beginning after December 15, 2020 for all other entities, with early adoption permitted. The Company is assessing the impact the update will have on its financial statements, and expects the update to have a significant impact on how the Company will account for estimated credit losses on its loans.

v3.19.1
Investment Securities (Bank Holding Company Accounting)
3 Months Ended
Mar. 31, 2019
Investments Schedule [Abstract]  
Investment Securities (Bank Holding Company Accounting)

(3) INVESTMENT SECURITIES (Bank Holding Company Accounting)

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

 

March 31, 2019

(Dollars in thousands)

   Amortized Cost      Gross
Unrealized
Gains
     Gross Unrealized
Losses
     Fair Value  

Mortgage-backed securities, principally obligations of US federal agencies

   $ 31,710      $ 154      $ (239    $ 31,625  

State and municipalities

     13,155        130        (228      13,057  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,865      $ 284      $ (467    $ 44,682  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 March 31, 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

   $ 20      $ 20  

Due after one year through five years

     8,936        8,870  

Due after five years through ten years

     12,366        12,330  

Due after ten years

     23,543        23,462  
  

 

 

    

 

 

 

Total

   $ 44,865      $ 44,682  
  

 

 

    

 

 

 

Information pertaining to securities with gross unrealized losses at March 31, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows.

 

     Less than Twelve Months      Twelve Months and Over  

March 31, 2019

(Dollars in thousands)

   Gross Unrealized
Losses
     Fair Value      Gross Unrealized
Losses
     Fair Value  

Mortgage-backed securities, principally obligations of US federal agencies

   $ —      $ —      $ (239    $ 19,106  

State and municipalities

     (50      2,950        (178      7,683  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (50    $ 2,950      $ (417    $ 26,789  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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.

v3.19.1
Loans and Allowance for Loan Losses
3 Months Ended
Mar. 31, 2019
Text Block [Abstract]  
Loans and Allowance for Loan Losses

(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 March 31, 2019 and December 31, 2018.

 

     As of March 31, 2019     As of December 31, 2018  

(Dollars in thousands)

   Amount      As a Percent of
Gross Loans
    Amount      As a Percent of
Gross Loans
 

Recreation

   $ 609,999        60   $ 587,038        58

Home improvement

     193,275        19       183,155        18  

Commercial

     55,211        5       64,083        6  

Medallion

     165,715        16       183,606        18  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total gross loans

     1,024,200        100     1,017,882        100
     

 

 

      

 

 

 

Allowance for loan losses

     (36,862        (36,395   
  

 

 

      

 

 

    

Total net loans

   $ 987,338        $ 981,487     
  

 

 

      

 

 

    

The following table shows the activity of the gross loans for the three months ended March 31, 2019.

 

(Dollars in thousands)

   Recreation     Home Improvement     Commercial     Medallions     Total  

Gross loans- December 31, 2018

   $ 587,038     $ 183,155     $ 64,083     $ 183,606     $ 1,017,882  

Loan originations

     65,757       26,296       442       —         92,495  

Principal payments

     (33,373     (15,849     (9,344     (3,438     (62,004

Charge-offs

     (4,929     (159     —         (7,788     (12,876

Transfer to loans in process of foreclosure, net

     (3,391     —         —         (5,705     (9,096

Other

     (1,103     (168     30       (960     (2,201
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans- March 31, 2019

   $ 609,999     $ 193,275     $ 55,211     $ 165,715     $ 1,024,200  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the activity in the allowance for loan losses for the three months ended March 31, 2019.

 

(Dollars in thousands)

   Three Months Ended
March 31, 2019
 

Allowance for loan losses – beginning balance

   $ 36,395  

Charge-offs

  

Recreation

     (6,525

Home improvement

     (549

Commercial

     —    

Medallion

     (8,788
  

 

 

 

Total charge-offs

     (15,862
  

 

 

 

Recoveries

  

Recreation

     1,596  

Home improvement

     390  

Commercial

     —    

Medallion

     1,000  
  

 

 

 

Total recoveries

     2,986  
  

 

 

 

Net charge-offs

     (12,876 ) (1) 
  

 

 

 

Provision for loan losses

     13,343  
  

 

 

 

Allowance for loan losses – ending balance(2)

   $ 36,862  
  

 

 

 

 

(1)

As of March 31, 2019, cumulative net charge-offs of loans and loans in process of foreclosure in the medallion portfolio were $228,508, representing collection opportunities for the Company.

(2)

Includes $6,173 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 17% of the total allowance, and 3.96% of the loans in question. This figure excludes the general reserve on loans at the bank which existed prior to April 2, 2018, which was netted against loan balances at consolidation on April 2, 2018.

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

 

March 31, 2019

(Dollars in thousands)

   Amount      Percentage of
Allowance
    Allowance as a
Percent of Loan
Category
 

Recreation

   $ 8,932        24     1.46

Home Improvement

     2,186        6       1.13  

Commercial

     455      1       0.82  

Medallion

     25,289        69       15.26  
  

 

 

    

 

 

   

Total

   $ 36,862        100     3.60
  

 

 

    

 

 

   

 

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.

 

     Bank Holding
Company Accounting
    Investment
Company
Accounting
 

(Dollars in thousands)

   March 31, 2019     December 31, 2018     March 31, 2018 (1)  

Total nonaccrual loans

   $ 21,549     $ 34,877     $ 77,998  

Interest foregone quarter to date

     403       487       1,642  

Amount of foregone interest applied to principal in the quarter

     115       166       792  

Interest foregone life to date

     1,634       1,952       14,127  

Amount of foregone interest applied to principal life to date

     819       1,214       4,287  

Percentage of nonaccrual loans to gross loan portfolio

     2     3     28

 

(1)

Does not include Medallion Bank nonaccrual loans of $35,920, interest income foregone for the quarter of $213 and foregone interest paid and applied to principal for the quarter of $153, interest income foregone life-to-dateof $1,118 and foregone interest paid and applied to principal life-to-date of $1,005.

 

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

 

March 31, 2019

(Dollars in  thousands)

   Performing      Nonperforming      Total      Percentage of
Nonperforming
to Total
 

Recreation

   $ 604,862      $ 5,137      $ 609,999        0.84

Home improvement

     193,117        158        193,275        0.08  

Commercial

     50,946        4,265        55,211        7.72  

Medallion

     153,726        11,989        165,715        7.23  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,002,651      $ 21,549      $ 1,024,200        2.10
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 March 31, 2019 and December 31, 2018, all of which had an allowance recorded against the principal balance.

 

     March 31, 2019      Three Months Ended
March 31, 2019
 

(Dollars in  thousands)

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

With an allowance recorded

 

        

Recreation

   $ 5,137      $ 5,137      $ 183      $ 5,173      $ 132  

Home improvement

     158        158        3        158        —    

Commercial

     4,265        4,360        455        4,233        —    

Medallion

     11,989        12,712        19,116        16,307        54  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming loans with an allowance

   $ 21,549      $ 22,367      $ 19,757      $ 25,871      $ 186  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2018  

(Dollars in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With an allowance recorded

 

  

Recreation

   $ 5,788      $ 5,788      $ 204  

Home improvement

     137        137        3  

Commercial

     3,834        3,929        —    

Medallion

     25,118        26,237        22,035  
  

 

 

    

 

 

    

 

 

 

Total with allowance

   $ 34,877      $ 36,091      $ 22,242  
  

 

 

    

 

 

    

 

 

 

Total nonperforming loans

   $ 34,877      $ 36,091      $ 22,242  
  

 

 

    

 

 

    

 

 

 

The following table provides additional information on attributes of the nonperforming loan portfolio as of March 31, 2018 under Investment Company Accounting.

 

(Dollars in  thousands)

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

March 31, 2018

        

Medallion(3)

   $ 59,394      $ 62,519      $ 142,364  

Commercial(3)

     18,604        20,880        19,151  

 

(1)

As of March 31, 2018, $24,256 of unrealized depreciation was recorded as a valuation allowance on these loans.

(2)

Interest income of $85 was recognized on loans for the three months ended March 31, 2018.

(3)

Included in the unpaid principal balance is unearned paid-in-kind interest on nonaccrual loans of $5,401 as of March 31, 2018, which is included in the nonaccrual disclosures on page 21.

The following tables show the aging of all loans as of March 31, 2019 and December 31, 2018:

 

     Days Past Due                    Recorded
Investment >
90 Days and
Accruing
 

March 31, 2019

(Dollars in thousands)

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

Recreation

   $ 13,186      $ 4,019      $ 3,282      $ 20,487      $ 569,065      $ 589,552      $ —  

Home improvement

     436        183        156        775        195,120        195,895        —    

Commercial

     —          —          710        710        54,501        55,211        —    

Medallion

     47,655        3,309        3,954        54,918        104,939        159,857        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 61,277      $ 7,511      $ 8,102      $ 76,890      $ 923,625      $ 1,000,515      $ —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Excludes loan premiums of $7,956 resulting from purchase price accounting and $15,729 of capitalized loan origination costs.

 

     Days Past Due                    Recorded
Investment >
90 Days and
Accruing
 

December 31, 2018

(Dollars in thousands)

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

Recreation

   $ 18,483      $ 5,655      $ 4,020      $ 28,158      $ 539,051      $ 567,209      $ —  

Home improvement

     715        283        135        1,133        184,528        185,661        —    

Commercial

     —          454        279        733        63,350        64,083        —    

Medallion

     8,689        3,652        15,720        28,061        148,774        176,835        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 213%, 220%, and 209% as of March 31, 2019, December 31, 2018, and March 31, 2018.

The following table shows the troubled debt restructurings which the Company entered into during the three months ended March 31, 2019 under Bank Holding Company Accounting.

 

(Dollars in  thousands)

   Number of Loans      Pre-
Modification
Investment
     Post-
Modification
Investment
 

Medallion loans

     7      $ 2,895      $ 2,895  
  

 

 

    

 

 

    

 

 

 

During the twelve months ended March 31, 2019, four loans modified as troubled debt restructurings were in default and had an investment value of $1,396,000 as of March 31, 2019, net of $938,000 of an allowance for loan losses under Bank Holding Company Accounting.

The Company did not enter into any troubled debt restructurings for the quarter ended March 31, 2018.

During the twelve months ended March 31, 2018, eight loans modified as troubled debt restructurings were in default and had an investment value of $1,334,000 as of March 31, 2018, net of $1,630,000 of unrealized depreciation under Investment Company Accounting.

The following table shows the activity of the loans in process of foreclosure, which relates only to the recreation and medallion loans, for the three months ended March 31, 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

     3,391        5,705        9,096  

Sales

     (2,076      (377      (2,453

Cash payments received

     —          (2,573      (2,573

Collateral valuation adjustments

     (1,638      (2,119      (3,757
  

 

 

    

 

 

    

 

 

 

Loans in process of foreclosure – March 31, 2019

   $ 1,180      $ 48,628      $ 49,808  
  

 

 

    

 

 

    

 

 

 
v3.19.1
Unrealized Appreciation (Depreciation) and Realized Gains (Losses) on Investments
3 Months Ended
Mar. 31, 2019
Schedule of Investments [Abstract]  
Unrealized Appreciation (Depreciation) and Realized Gains (Losses) on Investments

(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
  

 

 

 
v3.19.1
Investments in Medallion Bank and Other Controlled Subsidiaries
3 Months Ended
Mar. 31, 2019
Text Block [Abstract]  
Investments in Medallion Bank and Other Controlled Subsidiaries

(6) INVESTMENTS IN MEDALLION BANK AND OTHER CONTROLLED SUBSIDIARIES

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

The following table presents information derived from Medallion Bank’s statement of comprehensive income and other valuation adjustments on other controlled subsidiaries for the 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  

 

(Dollars in thousands)

   Three Months
Ended
March 31,
2018
 

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 Medallion 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 Medallion Bank.

v3.19.1
Funds Borrowed
3 Months Ended
Mar. 31, 2019
Debt Disclosure [Abstract]  
Funds Borrowed

(7) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows:

 

    Payments Due for the Fiscal Year Ending March 31,     March 31,     December 31,     Interest  

(Dollars in  thousands)

  2020     2021     2022     2023     2024     Thereafter     2019     2018     Rate (1)  

Deposits

  $ 286,501     $ 193,929     $ 192,309     $ 128,236     $ 63,156     $ —     $ 864,131     $ 848,040       2.24

SBA debentures and borrowings

    28,380       8,500       —         5,000       2,500       35,000       79,380       80,099       3.40

Retail and privately placed notes

    —         —         33,625       —         30,000     —         63,625       33,625       8.65

Notes payable to banks

    45,811       4,318       280       280     210       —         50,899       59,615       4.70

Preferred securities

    —         —         —         —         —         33,000       33,000       33,000       4.73

Other borrowings

    7,681       —         —         —         —         —         7,681       7,649       2.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

  $ 368,373     $ 206,747     $ 226,214     $ 133,516     $ 95,866     $ 68,000     $ 1,098,716     $ 1,062,028       2.89
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1)

Weighted average contractual rate as of March 31, 2019.

(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)

   March 31, 2019  

Three months or less

   $ 110,012  

Over three months through six months

     108,138  

Over six months through one year

     68,351  

Over one year

     577,630  
  

 

 

 

Total deposits

   $ 864,131  
  

 

 

 

 

(B) DZ LOAN

In December 2008, Trust III entered into the DZ loan agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC (DZ loan), which was extended in December 2013 until December 2016 through an amended and restated credit agreement, which has been further extended several times and currently terminates in September 2019. The line was reduced to $150,000,000, and was further reduced in stages to $125,000,000 on July 1, 2016, remained as an amortizing facility and was restructured during the fourth quarter of 2018.

Borrowings under Trust III’s DZ loan are collateralized by Trust III’s assets. MFC is the servicer of the loans owned by Trust III. 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 March 31, 2019, $172,485,000 of commitments had been fully utilized, there were $3,000,000 of commitments available, and $79,380,000 was outstanding, including $28,380,000 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.

The table below summarizes the key attributes of the Company’s various borrowing arrangements with these lenders as of March 31, 2019.

 

(Dollars in thousands)

 

Borrower

  # of Lenders/
Notes
    Note
Dates
    Maturity
Dates
    Type     Note
Amounts
    Balance
Outstanding at
March 31,
2019
    Monthly Payment     Average Interest
Rate at
March 31,
2019
    Interest Rate
Index(1)
 

The Company

    6/6       4/11 - 8/14       4/19 - 9/20      



Term loans
and demand
notes secured
by pledged
loans (2)
 
 
 
 
 
  $ 37,741 (2)    $ 37,741      
Interest
only(3)
 
 
    5.10     Various (3) 

Medallion Chicago

    2/23       11/11 - 12/11       6/19    



Term loans
secured by
owned
Chicago
medallions(4)
 
 
 
 
 
    18,449       11,828      

$134 of
principal &
interest
 
 
 
    3.50     N/A  

Medallion Funding

    1/1       11/18       12/23         1,330       1,330      



$70
principal &
interest
paid
quarterly
 
 
 
 
 
    4.00     N/A  
         

 

 

   

 

 

       
          $ 57,520     $ 50,899        
         

 

 

   

 

 

       

 

(1)

At March 31, 2019, 30 day LIBOR was 2.49%, 360 day LIBOR was 2.71%, and the prime rate was 5.50%.

(2)

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

(3)

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

(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 quarter.

In November 2018, MFC entered into a note to the benefit of DZ Bank for $1,400,000 at a 4.00% interest rate due December 2023, as part of the restructuring of the DZ loan. See Note 19 for more information.

 

(E) RETAIL AND PRIVATELY PLACED NOTES

In March 2019, the Company completed a private placement to certain institutional investors of $30,000,000 aggregate principal amount of 8.25% unsecured senior notes due 2024, with interest payable semiannually. The Company used the net proceeds from the offering for general corporate purposes, including repaying certain borrowings under its notes payable to banks at a discount which led to a gain of $4,145,000 in the 2019 first quarter.

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

(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 (2.60% at March 31, 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 March 31, 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 13 for more details). At December 31, 2017, the total outstanding on these notes was $7,007,894 at a 2.00% annual interest rate compounded monthly and due March 31, 2020. As of March 31, 2019, $7,181,000 was outstanding on these notes. Additionally, RPAC has a short term promissory note to Travis Burt, an unrelated party, for $500,000 due on December 31, 2019.

(H) COVENANT COMPLIANCE

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

v3.19.1
Leases
3 Months Ended
Mar. 31, 2019
Leases [Abstract]  
Leases

8) LEASES

The Company has leased premises that expire at various dates through April 30, 2027 that are operating leases. The Company has implemented ASC Topic 842 under a modified retrospective approach in 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 months ended March 31, 2019.

 

(Dollars in  thousands)

   March 31, 2019  

Operating lease costs

   $ 531  
  

 

 

 

Other information

  

Cash paid for amounts included in the measurement of lease liabilities:

  

Operating cash flows from operating leases

     587  

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

     (16
  

 

 

 

 

The following table presents the breakout of the operating leases as of March 31, 2019.

 

(Dollars in thousands)

   March 31, 2019  

Operating lease right-of-use assets

   $ 12,165  
  

 

 

 

Other current liabilities

     1,846  

Operating lease liabilities

     11,724  
  

 

 

 

Total operating lease liabilities

     13,570  
  

 

 

 

Weighted average remaining lease term

     4 years  

Weighted average discount rate

     4.29  
  

 

 

 

At March 31, 2019, maturities of the lease liabilities were as follows.

 

(Dollars in thousands)

      

2019 (excluding the three months ended March 31, 2019)

   $ 1,772  

2020

     2,380  

2021

     2,278  

2022

     2,216  

2023

     2,136  

Thereafter

     6,048  
  

 

 

 

Total lease payments

     16,830  
  

 

 

 

Less imputed interest

     3,260  
  

 

 

 

Total operating lease liabilities

   $ 13,570  
  

 

 

 

v3.19.1
Income Taxes
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

(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 March 31, 2019 and December 31, 2018.

 

(Dollars in thousands)

   March 31, 2019      December 31,
2018
 

Goodwill and other intangibles

   $ (44,922    $ (45,272

Provision for loan losses

     21,592        25,790  

Net operating loss carryforwards(1)

     17,296        11,132  

Accrued expenses, compensation, and other assets

     1,098        1,844  

Unrealized gains on other investments

     (3,659      (2,024
  

 

 

    

 

 

 

Total deferred tax liability

     (8,595      (8,530

Valuation allowance

     (124      (255
  

 

 

    

 

 

 

Deferred tax liability, net

     (8,719      (8,785

Taxes receivable

     1,682        1,812  
  

 

 

    

 

 

 

Net deferred and other tax liabilities

   $ (7,037    $ (6,973
  

 

 

    

 

 

 

 

(1)

As of March 31, 2019, the Company and its subsidiaries had an estimated $67,837 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 $17,172 as of the balance sheet date.

The components of our tax benefit for the three months ended March 31, 2019 and 2018 were as follows.

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2019      2018  

Current

     

Federal

   $ (869    $ 5,895  

State

     (823      1,182  

Deferred

     

Federal

     610        (3,891

State

     1,338        (2,546
  

 

 

    

 

 

 

Net (provision) benefit for income taxes

   $ 256      $ 640  
  

 

 

    

 

 

 

 

The following table presents a reconciliation of statutory federal income tax benefit to consolidated actual income tax benefit reported in net income/net increase in net assets for the three months ended March 31, 2019 and 2018.

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2019      2018  

Statutory Federal income tax (provision) benefit at 21%

   ($ 379    $ 3,258  

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

     (107      504  

Appreciation of Medallion Bank

     —          (1,974

Change in state income tax accruals

     686        —    

Change in effective state income tax rate

     —          (1,358

Other

     56        210  
  

 

 

    

 

 

 

Total income tax benefit

   $ 256      $ 640  
  

 

 

    

 

 

 

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 March 31, 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 2015 through the present are the more significant filings that are open for examination. Currently, the Company and the Bank are undergoing various state exams covering the years 2015 to 2017.

v3.19.1
Stock Options and Restricted Stock
3 Months Ended
Mar. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock Options and Restricted Stock

(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 shareholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to the Company’s employees and non-employee directors, including options, restricted stock, stock appreciation rights, etc. A total of 1,500,253 shares of the Company’s common stock are issuable under the 2018 Plan, and 920,932 remained issuable as of March 31, 2019. Awards under the 2018 Plan are subject to certain limitations as set forth in the 2018 Plan, which will terminate when all shares of common stock authorized for delivery have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2018 Plan, whichever first occurs.

The Company 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 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 first occurs.

 

The Company’s Board of Directors approved the 2015 Non-Employee Director Stock Option Plan (2015 Director Plan) on March 12, 2015, which was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on February 29, 2016. A total of 300,000 shares of the Company’s common stock 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 March 31, 2019, 501,043 options on the Company’s common stock were outstanding under the Company’s plans, of which 63,889 options were exercisable, and there were 250,482 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 for the three months ended March 31, 2019, and there were no options granted during the three months ended March 31, 2018. The following assumption categories are used to determine the value of any option grants.

 

     Three Months Ended March 31,  
     2019     2018  

Risk free interest rate

     2.39     NA  

Expected dividend yield

     0.79       NA  

Expected life of option in years(1)

     6.25       NA  

Expected volatility(2)

     48.45       NA  

 

(1)

Expected life is calculated using the simplified method.

(2)

We determine our expected volatility based on our historical volatility.

 

The following table presents the activity for the stock option programs for the three months ended March 31, 2019 and December 31, 2018.

 

     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)

     —          —          —