MEDALLION FINANCIAL CORP - Quarter Report: 2019 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2019

OR

 

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

For the transition period from                  to                 

Commission file number 001-37747

 

 

MEDALLION FINANCIAL CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

DELAWARE		04-3291176
(State of Incorporation)		(IRS Employer Identification No.)

437 MADISON AVENUE, 38^th Floor

NEW YORK, NEW YORK 10022

(Address of Principal Executive Offices) (Zip Code)

(212) 328-2100

(Registrant’s Telephone Number, Including Area Code)

 

 

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

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

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

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☒

Emerging growth company  ☐

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

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbols		Name of each exchange on which registered
Common Stock, par value $0.01 per share 9.000% Senior Notes due 2021		MFIN MFINL		NASDAQ Global Select Market NASDAQ Global Select Market

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of May 8, 2019 was 24,599,299.

 

 

 

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			65
ITEM 4. CONTROLS AND PROCEDURES			65
PART II—OTHER INFORMATION			66
ITEM 1. LEGAL PROCEEDINGS			66
ITEM 1A. RISK FACTORS			66
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			66
ITEM 6. EXHIBITS			67
SIGNATURES			68
CERTIFICATIONS

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

This report contains forward-looking statements relating to future events and future performance applicable to us within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words expects, anticipates, intends, believes, or similar language. In connection with certain forward-looking statements contained in this Form 10-Q and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward-looking statements contained in this Form 10-Q were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict, and many of which are beyond control of the Company. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statements. The statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form 10-Q should consider these facts in evaluating the information contained herein. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-Q. The inclusion of the forward-looking statements contained in this Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-Q will be achieved. In light of the foregoing, readers of this Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein. You should consider these risks and those described under Risk Factors in the Company’s Annual Report on Form 10-K and others that are detailed in the other reports that the Company files from time to time with the Securities and Exchange Commission.

 

Page 2 of 68

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASIS OF PREPARATION

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

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

 

•

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

 

•

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

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

We historically have had a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. Recently, our strategic growth has been through Medallion Bank which originates consumer loans for the purchase of recreational vehicles, boats, and trailers and to finance small-scale home improvements. Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 16% (19% if there had been no loan sales during 2016, 2017, and 2018). In January 2017, we announced our plans to transform our overall strategy. We are transitioning away from medallion lending and placing our strategic focus on our growing consumer finance portfolio. Total assets under management and management of our wholly-owned subsidiaries, which includes our managed net investment portfolio, as well as assets serviced for third party investors, were $1,565,000,000 as of March 31, 2019, and were $1,522,000,000 as of December 31, 2018, and have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid/declared distributions in excess of $263,060,000 or $14.66 per share.

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

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

Our consolidated balance sheet as of March 31, 2019, and the related consolidated statements of operations, consolidated statements of other comprehensive loss, consolidated statements of stockholders’ equity and cash flows for the quarter then ended included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the US have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the quarter ended March 31, 2019 may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Page 3 of 68

MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except share and per share data)		UNAUDITED March 31, 2019				December 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	)			(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 (2)			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 (3)		$	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 (4)
Stockholders’ equity
Preferred stock (1,000,000 shares of $0.01 par value stock authorized-none outstanding)			—				—
Common stock (50,000,000 shares of $0.01 par value stock authorized- 27,546,999 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 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.

(3)	Includes the short-term portion of lease liabilities of $1,846 as of March 31, 2019. Refer to Note 8 for more details.

(4)	Refer to Note 14 for details.

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

 

Page 4 of 68

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Bank Holding Company Accounting				Investment Company Accounting
(Dollars in thousands, except per share data)		For the Three Months Ended March 31, 2019				For the Three Months Ended March 31, 2018
Interest and fees on loans		$	29,439			$	—
Interest income on investments			—				3,287
Interest and dividends on investment securities			566				14
Dividend income from controlled subsidiaries			—				28
Interest income from affiliated investments			—				654
Interest income from controlled subsidiaries			—				10
Medallion lease income			38				40
Total interest income(1)/total investment income(1)			30,043				4,033
Interest on deposits			4,921				—
Interest on short-term borrowings			982				—
Interest on long-term debt			1,819				—
Interest expense			—				3,551
Total interest expense(2)			7,722				3,551
Net interest income/net investment income			22,321				482
Provision for loan losses			13,343				—
Net interest income after provision for loan losses			8,978				482
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				60
Total other income			6,863				60
Other expenses
Salaries and employee benefits			5,341				2,349
Race team related expenses			1,998				—
Professional fees			1,636				723
Loan servicing fees			1,194				—
Collection costs			638				120
Rent expense			600				243
Regulatory fees			447				—
Amortization of intangible assets			361				—
Travel, meals and entertainment			265				206
Other expenses(3)			2,222				467
Total other expenses			14,702				4,108
Income before income taxes/net investment loss before taxes(4)			1,139				(3,566	)
Income tax benefit			256				336

 

Page 5 of 68

		Bank Holding Company Accounting				Investment Company Accounting
(Dollars in thousands, except per share data)		For the Three Months Ended March 31, 2019				For the Three Months Ended March 31, 2018
Net income after taxes/net investment loss after taxes			1,395				(3,230	)
Net realized losses on investments(5)			—				(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			1,395				(14,874	)
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			$	(14,874	)
Basic net income (loss) per share		$	0.05			$	(0.62	)
Diluted net income (loss) per share		$	0.05			$	(0.62	)
Distributions declared per share		$	—			$	—
Weighted average common shares outstanding
Basic			24,288,263				24,154,879
Diluted			24,616,890				24,154,879

 

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

(4)	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.

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

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

 

Page 6 of 68

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME/LOSS

(UNAUDITED)

 

		Bank Holding Company Accounting				Investment Company Accounting
(Dollars in thousands)		For the Three Months Ended March 31, 2019				For the Three Months Ended March 31, 2018
Net income after taxes/net decrease on net assets resulting from operations		$	1,395			$	(14,874	)
Other comprehensive income, net of tax			669				—
Total comprehensive income (loss)			2,064				(14,874	)
Less: comprehensive income attributable to the non-controlling interest			167				—
Total comprehensive income (loss) attributable to Medallion Financial Corp.		$	1,897			$	(14,874	)

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

 

Page 7 of 68

MEDALLION FINANCIAL CORP.

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

(UNAUDITED)

 

		Bank Holding Company Accounting
(Dollars in thousands)		Common Stock Shares				Common Stock				Preferred Stock				Capital in Excess of Par				Treasury Stock Shares				Treasury Stock				Retained Earnings				Accumulated Other Comprehensive Income				Total Stockholders’ Equity				Non-controlling Interest				Total Equity
Balance at December 31, 2018			27,385,600			$	274				—			$	274,292				(2,951,243	)		$	(24,919	)		$	13,043			$	(82	)		$	262,608			$	27,596			$	290,204
Net income			—				—				—				—				—				—				1,228				—				1,228				167				1,395
Distributions to non-controlling interest			—				—				—				—				—				—				—				—				—				(592	)			(592	)
Stock-based compensation			—				1				—				164				—				—				—				—				165				—				165
Issuance of restricted stock, net			163,098				—				—				—				—				—				—				—				—				—				—
Forfeiture of restricted stock, net			(1,699	)			—				—				—				—				—				—				—				—				—				—
Net change in unrealized gains on investments, net of tax			—				—				—				—				—				—				—				669				669				—				669
Balance at March 31, 2019			27,546,999			$	275				—			$	274,456				(2,951,243	)		$	(24,919	)		$	14,271			$	587			$	264,670			$	27,171			$	291,841

 

Page 8 of 68

		Investment Company Accounting
(Dollars in thousands)		Common Stock Shares				Common Stock				Preferred Stock				Capital in Excess of Par				Treasury Stock Shares				Treasury Stock				Accumulated undistributed net investment loss				Accumulated undistributed net realized gains on investments				Net unrealized appreciation on investments, net of tax				Non-controlling Interest				Total Equity
Balance at December 31, 2017			27,294,327			$	273				—			$	273,716				(2,951,243	)		($	24,919	)		($	65,592	)			—			$	103,681			$	—			$	287,159
Net increase (decrease) in net assets resulting from operations			—				—				—				—				—				—				( 38,299	)			—				23,425				—				(14,874	)
Stock-based compensation			—				1				—				151				—				—				—				—				—				—				152
Issuance of restricted stock, net			95,726				—				—				—				—				—				—								—				—				—
Balance at March 31, 2018			27,390,053			$	274				—			$	273,867				(2,951,243	)		$	(24,919	)		($	103,891	)		$	—			$	127,106			$	—			$	272,437

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

 

Page 9 of 68

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Bank Holding Company Accounting				Investment Company Accounting
(Dollars in  thousands)		For the Three Months Ended March 31, 2019				For the Three Months Ended March 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/net (decrease) in net assets resulting from operations		$	1,395			$	(14,874	)
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				—
Loans originated			—				(8,193	)
Proceeds from principal receipts, sales, and maturities of loans			—				13,279
Paid-in-kind interest			(237	)			(491	)
Depreciation and amortization			2,046				246
Increase in deferred and other tax liabilities			65				3,858
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				—
Capital returned by Medallion Bank and other controlled subsidiaries, net			—				93
Net change in unrealized (appreciation) depreciation on investments			(598	)			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			—				34,745
Stock-based compensation expense			165				152
Gain on the extinguishment of debt			(4,145	)			—
Decrease in accrued interest receivable			305				130
(Increase) decrease in other assets			(2,144	)			54
Decrease in accounts payable and accrued expenses			(3,355	)			(675	)
Decrease in accrued interest payable			(687	)			(249	)
Net cash provided by operating activities			16,087				5,291
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	)			(6,961	)
Distributions to non-controlling interests			(592	)			—
Payments of declared distributions			—				(64	)
Net cash provided by (used for) financing activities			40,209				(7,025	)

 

Page 10 of 68

		Bank Holding Company Accounting				Investment Company Accounting
(Dollars in  thousands)		For the Three Months Ended March 31, 2019				For the Three Months Ended March 31, 2018
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH			28,408				(1,734	)
Cash and cash equivalents and restricted cash, beginning of period(1)			57,713				12,690
Cash and cash equivalents and restricted cash, end of period(1)		$	86,121			$	10,956
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest		$	7,887			$	3,577
Cash paid during the period for income taxes			14				—

 

(1)	Includes federal funds sold for the three months ended March 31, 2019.

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

 

Page 11 of 68

MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

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

Medallion Financial Corp. (the Company) is a finance company organized as a Delaware corporation that reports as a bank holding company, but is not a bank holding company for regulatory purposes. The Company conducts its business through various wholly-owned subsidiaries including its primary operating company, Medallion Bank (the Bank), a Federal Deposit Insurance Corporation (FDIC) insured industrial bank, that originates consumer loans, raises deposits, and conducts other banking activities. 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.

(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.

 

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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

 

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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.

 

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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

 

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$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.

 

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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.

 

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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.

 

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(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

 

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

(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

 

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(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-date of $1,118 and foregone interest paid and applied to principal life-to-date of $1,005.

 

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