MEDA LLION FIN A NCI A L CORP.
2 0 19 A N N U A L R E P O R T T O S H A R E H O L D E R S
P R O G R ES S & P OT E N T I A L
RECREATIONAL VEHICLE LENDINGHOME IMPROVEMENT LENDINGMEZZANINE LENDINGMEDALLION LENDINGMARINE LENDING MEDALLION FINANCIAL is a publicly traded finance company (NASDAQ: MFIN) with
leading positions in various industries, including consumer and commercial lending.
DEAR SHAREHOLDERS
Alvin Murstein
Chairman and
Chief Executive Officer
Andrew M. Murstein
President and
Chief Operating Officer
WE ARE PLEASED TO REPORT THAT 2019 WAS A SUCCESSFUL YEAR FOR THE COMPANY.
We demonstrated solid progress and delivered strong results from both our consumer and commercial
segments.
The Company was once again able to execute on its 2019 strategy, raising capital to monetize and
grow Medallion Bank and beginning the process of providing loan origination services to the fintech
industry. Our medallion portfolio is at its lowest level since going public in 1996, we completed
successful raises of a private placement investment grade debt at Medallion Financial and an initial
public offering of investment grade perpetual preferred stock at Medallion Bank, raising over $82
million in total. Moving forward, the Bank will now report their earnings in conjunction with filing their
quarterly Call Report. Our third initiative was to expand our activities at Medallion Bank and build out
a fintech strategic partnership program supported by an up-to-date, compliance platform.
Over the last few years, Medallion Financial continued to highlight the consumer and commercial
segments as we shifted away from the medallion segment. At the end of 2019, net medallion loans
comprised 10% of the Company’s net loans receivable compared to 16% at the end of 2018 while the
size of the portfolio was reduced 33% during the same period. At the end of 2019, the net medallion
portfolio represented 7% of total assets, a noteworthy accomplishment given only 5 years ago the
portfolio was 45% of total managed assets.
The consumer segment recorded $29.7 million in net income for the full year. Net consumer loans
grew 23% year over year while net income from our consumer and commercial segments was $31.9
million for the year. Credit quality at Medallion Bank remained strong while charge off ratios continued
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to be low throughout the year. Medallion Bank ended the year with more than $227 million in equity,
a 1.85% return on assets and a 19.35% Tier 1 leverage ratio exemplifying they are well positioned
for asset growth and continued profits.
The commercial segment grew its portfolio 11% year over year and reported net income of $2.2
million for full year 2019. With $91.7 million of total assets, Medallion Capital remains well capitalized
to continue to grow their portfolio and remain focused on expanding targeted industries. They have
been able to grow their client base across multiple geographic areas in 2019, which we hope will
create value over the long-term. Medallion Capital has experienced increased deal flow which will
eventually lead to asset growth and greater profitability. .
When looking back over the past few years, and the progress we have made given the obstacles
we endured from the challenging taxi medallion landscape, we successfully focused on growing and
monetizing our more profitable segments and executing on our strategies.
Achieving these results was made possible by the hard work of all our wonderful employees spread
across the U.S. With all that our country and the world has gone through so far in 2020, we will
continue to pull together as a team and do our best in the coming year. We look forward to the
challenges and opportunities of advancement that lie ahead for the Company. We want to thank our
shareholders for the past and future trust and confidence they have in Medallion Financial.
Sincerely yours,
Alvin Murstein
Chairman and
Chief Executive Officer
Andrew M. Murstein
President and
Chief Operating Officer
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 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
(State of
Incorporation)
04-3291176
(IRS Employer
Identification No.)
437 MADISON AVENUE, 38th Floor, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 328-2100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
9.000% Senior Notes due 2021
Trading symbols
MFIN
MFINL
Name of each exchange on which registered
NASDAQ Global Select Market
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒
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
☐
Non-accelerated filer
Emerging growth company ☐
Accelerated filer
☒
Smaller reporting company ☒
If an emerging growth company, indicate by checkmark 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 Act). YES ☐ NO ☒
The aggregate market value of the voting common equity held by non-affiliates of the registrant, computed by reference to the last reported
price at which the stock was sold on June 28, 2019, was $137,883,018.
The number of outstanding shares of registrant’s common stock, par value $0.01, as of March 27, 2020 was 24,806,656.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for its 2020 Annual Meeting of Shareholders, which Definitive Proxy Statement will
be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year-end of December 31, 2019, are
incorporated by reference into Part III of this Form 10-K.
MEDALLION FINANCIAL CORP.
2019 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART I ..........................................................................................................................................................................................
OUR BUSINESS .............................................................................................................................................
RISK FACTORS .............................................................................................................................................
UNRESOLVED STAFF COMMENTS ..........................................................................................................
PROPERTIES ..................................................................................................................................................
LEGAL PROCEEDINGS ................................................................................................................................
MINE SAFETY DISCLOSURES ...................................................................................................................
PART II .........................................................................................................................................................................................
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES .......................................................................................
SELECTED FINANCIAL DATA ....................................................................................................................
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ..........................................................................................................................................
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................................
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................................................................
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ..........................................................................................................................
CONTROLS AND PROCEDURES ................................................................................................................
OTHER INFORMATION ................................................................................................................................
PART III ........................................................................................................................................................................................
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .........................................
EXECUTIVE COMPENSATION ...................................................................................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS ......................................................................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ............................................................................................................................................
PRINCIPAL ACCOUNTANT FEES AND SERVICES .................................................................................
PART IV .......................................................................................................................................................................................
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .......................................................................
FORM 10-K SUMMARY ................................................................................................................................
SIGNATURES ..............................................................................................................................................................................
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 9A.
ITEM 9B.
ITEM 15.
ITEM 16.
ITEM 14.
ITEM 13.
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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, or the Exchange Act,
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-K 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-K 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,
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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-K 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-K. The inclusion of the forward-looking statements contained in this Form 10-K should not be
regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-K will
be achieved.
In light of the foregoing, readers of this Form 10-K 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 below and others that are detailed in this
Form 10-K and other documents that the Company files from time to time with the Securities and Exchange Commission, including
quarterly reports on Form 10-Q and any current reports on Form 8-K.
PART I
ITEM 1. OUR BUSINESS
We, Medallion Financial Corp. or the Company, are a finance company, organized as a Delaware corporation that includes
Medallion Bank, our primary operating subsidiary. In recent years, 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.
We historically have had a leading position in originating, acquiring, and servicing loans that finance taxi medallions and various
types of commercial businesses.
Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its
consumer loan portfolio at a compound annual growth rate of 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 have transitioned away from medallion lending and
have placed our strategic focus on our growing consumer finance portfolio. Total assets under management, which includes assets
serviced for third party investors, were $1,660,000,000 as of December 31, 2019 and $1,522,000,000 as of December 31, 2018, and
have grown at a compound annual growth rate of 9% from $215,000,000 at the end of 1996. Since our initial public offering in 1996,
we have paid distributions in excess of $263,060,000, or $14.66 per share.
We conduct our business through various wholly-owned subsidiaries, including:
• Medallion Bank, or the Bank, a Federal Deposit Insurance Corporation, or 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 taxi
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 taxi 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 Holding, 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.
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 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.
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In accordance with the Financial Accounting Standards Board, or 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.
Our Market
We provide loans to individuals and small to mid-size businesses, through our subsidiaries, in four segments:
•
loans that finance consumer purchases of recreational vehicles, boats, and trailers;
•
•
•
loans that finance consumer small scale home improvements;
loans that finance commercial businesses; and
loans that finance taxi medallions.
The following chart shows the details of our loans receivable as of December 31, 2019:
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
Consumer Loans
$
Loans
713,332 $
247,324
69,767
130,432
$ 1,160,855 $
Allowance for
Loan Loss
Net Loans
Receivable
695,257
18,075 $
244,716
2,608
—
69,767
25,410
105,022
46,093 $ 1,114,762
Consumer loans are originated by the Bank, and consist of loans for the purchase of recreational vehicles, boats, and trailers, or
recreation lending; and to finance home improvements such as replacement windows and roofs, or home improvement lending.
Combined consumer loans outstanding were $939,973,000 at December 31, 2019 and comprised 84% of our net loans receivable,
compared to $761,541,000 comprising 77% of our net loans receivable as of December 31, 2018. We believe that the consumer loan
portfolio is of acceptable credit quality given the high interest rates earned on the loans, which compensate for the higher degree of
credit risk in the loan portfolio.
Recreation Lending. Recreation lending is a high-growth business focused on originating prime and non-prime recreation loans.
The segment is a significant source of income, accounting for 75% of our interest income for the twelve months ended December 31,
2019. All of our recreation loans are serviced by a third-party loan servicer, and we have used the same loan servicer since the
business’s inception.
Through the Bank, we maintain non-exclusive relationships with approximately 3,200 dealers and financial service providers, or
FSPs, not all of which are active at any one time. FSPs are entities that provide finance and insurance, or F&I, services to small
dealers that do not have the desire or ability to provide F&I services themselves. The ability of FSPs to aggregate the financing and
relationship management for many small dealers makes them valuable to the Bank. We receive approximately half of our loan volume
from dealers and the other half from FSPs. Approximately 43% of recreation lending’s new loan originations for the twelve months
ended December 31, 2019 were from our top ten dealer and FSP relationships.
The recreation lending portfolio consists of thousands of geographically distributed loans with an average loan size of
approximately $13,800 as of December 31, 2019. The loans are fixed rate loans with an average term at origination of approximately
10 years. The weighted average remaining term of our loans outstanding at December 31, 2019 is 8.7 years, and the average payoff
time is 3.1 years. The size, geographic dispersion, source and collateral variety of the loans reduces risk to the Company. As of
December 31, 2019, recreation loans are primarily secured by recreational vehicle, or RV, loans, which make up 61% of the portfolio,
and boat loans, which make up 19% of the portfolio. Recreation loans reside in all fifty states, with the highest concentrations in
Texas, California, and Florida, at 18%, 11%, and 10% of loans outstanding at December 31, 2019 and with no other states over 10%.
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Home Improvement Lending. Through the Bank, we work directly with contractors and an FSP to offer flexible customer
financing for window, siding, and roof replacement; swimming pool and solar system installation; and other home improvement
projects. Our core product is a standard installment loan, which features affordable monthly payments and competitive interest rates
for prime credit customers at no cost to the contractor. We also offer a variety of promotional loan options to help contractors close a
challenging sale. Promotional loan options include same-as-cash, no interest, and deferred payment features, which allow borrowers to
reduce the total cost of financing, or start repayments when it is most convenient.
Home improvement lending operates in a manner similar to recreation lending, with a few key differences. Through the Bank,
we maintain a smaller number of non-exclusive relationships, currently with approximately 700 contractors and FSPs. Most of our
home improvement-financed sales take place in the borrower’s home instead of a store, with the contractor presenting the borrower
with a bid that includes a financing option.
A large proportion of our home improvement-financed sales are facilitated by contractor salespeople with limited financing
backgrounds rather than by contractor employees who provide F&I services. The result is contractor demand for financing services
that facilitate an in-home transaction (e.g., information technology and extended operating hours), and additional support for the
salesperson throughout the financing process. Approximately 42% of home improvement lending’s new loan originations for the
twelve months ended December 31, 2019 were from our top ten contractors and FSP relationships.
We offer home improvement loans with only fixed rates, with an average term at origination of approximately 11 years. The
weighted average remaining term of our loans outstanding is 10.2 years as of December 31, 2019, and the average payoff term is 2.7
years. The average size of the loans in our home improvement portfolio is approximately $14,500, and geographic dispersion and
source and collateral variety of home improvement loans reduces risk to the Company. As of December 31, 2019, home improvement
loans are concentrated in swimming pools, roofs, windows, and solar panels at 23%, 21%, 14%, and 12%. Home improvement loans
are made to borrowers residing in all fifty states, with the highest concentrations in Texas, Ohio, and Florida at 12%, 11%, and 10% of
loans outstanding at December 31, 2019 and with no other states over 10%.
Commercial Loans
Mainly through our subsidiary Medallion Capital, we originate both senior and subordinated loans nationwide to businesses to
finance either the purchase of the equipment and related assets necessary to open a new business or the purchase or improvement of an
existing business. From the inception of the commercial loan business in 1987 through December 31, 2019, we have originated more
than $989,150,000 of commercial loans. Commercial loans of $69,767,000 comprised 6% of our net loans receivable as of
December 31, 2019, compared to $64,083,000, or 7% of our net loans receivable, as of December 31, 2018.
We have worked to increase our commercial loan activity in recent years, primarily because of the attractive higher yielding
nature of most of this business. We focus our marketing efforts on the manufacturing, professional, scientific, and technical services,
more than 69% of which are located in the Midwest and Northeast regions, with the rest scattered across the country. These
commercial loans are primarily secured by a second position on all assets of the businesses and generally range in amount from
$2,000,000 to $5,000,000 at origination. As a component of most of the transactions, a portion of the investment is an equity or
partnership stake, and occasionally, we also receive warrants to purchase an equity interest in the borrowers or some other form of
success fee or profit participation. We plan to continue expanding our commercial loan activities by developing a more diverse
borrower base, with a wider geographic area of coverage, and by expanding the targeted industries.
Commercial loans are generally secured by equipment, accounts receivable, real estate, or other assets, and have interest rates
averaging 855 basis points over the prevailing prime rate at the end of 2019, up from 806 basis points over prime at the end of 2018.
Medallion Loans
Medallion loans of $105,022,000 comprised 10% of our net loans receivable as of December 31, 2019, down from
$155,863,000, or 16% of our net loans receivable, as of December 31, 2018. Including loans to unaffiliated investors and
unconsolidated subsidiaries, the total amount of medallion loans under our management was $218,603,000 as of December 31, 2019,
compared to $323,786,000 as of December 31, 2018. Since 1979, we have originated approximately $3.6 billion in medallion loans in
New York City, Chicago, Boston, Newark, Cambridge, and other cities within the United States. In addition, our management has a
long history of owning, managing, and financing taxi fleets, taxi medallions, and corporate car services, dating back to 1956.
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Medallion loans collateralized by New York City taxi medallions and related assets comprised 88% and 87% of the medallion
loan portfolio as of December 31, 2019 and 2018. Based on taxi medallion values published by the New York City Taxi and
Limousine Commission, or the TLC, we estimate that the total value of all of New York City active taxi medallions and related assets
such as the vehicle, taximeter, and roof lights exceeded $2.1 billion and exceeded $2.5 billion as it related to all taxi medallions
limited by law and related assets as of December 31, 2019. We estimate that the total value of all taxi medallions and related assets in
our major US markets exceeded $2.9 billion as of December 31, 2019.
While medallion loans do become delinquent or in default, all of our medallion loans are secured by the taxi medallion and
enhanced with personal guarantees of the owners, shareholders or equity members. When a borrower defaults on a loan, we have the
ability to restructure the underlying loan or repossess the taxi medallion collateralizing that loan and sell it in the market or through a
foreclosure auction and pursue the personal guarantees, all of which we have done. We have recorded an allowance for loan losses
against performing and nonperforming loans to mitigate potential future losses.
New York City Market. A New York City taxi medallion is the only permitted license to operate a taxi and accept street hails in
New York City, except as discussed below. As reported by the TLC, taxi medallions sold for a wide variety of prices during 2019. Our
analysis of transaction activity supported our estimated value of $167,000, net of liquidation costs, as of December 31, 2019. We also
assessed the cash flow analysis of owners and operators. The number of taxi medallions is limited by law to 13,630 medallions
outstanding, which 11,478 were active as of December 31, 2019. A New York State law permits cars for hire to pick up street hails in
the boroughs outside Manhattan. Pursuant to such law, the TLC began issuing street hail livery licenses in June 2013.
A prospective taxi medallion owner must qualify under the taxi medallion ownership standards set and enforced by the TLC.
These standards prohibit individuals with criminal records from owning taxi medallions, require that the funds used to purchase taxi
medallions be derived from legitimate sources, and mandate that taxi vehicles and meters meet TLC specifications. In addition, before
the TLC will approve a taxi medallion transfer, the TLC requires a letter from the seller’s insurer stating that there are no outstanding
claims for personal injuries in excess of insurance coverage. After the transfer is approved, the owner’s taxi is subject to quarterly
TLC inspections.
Most New York City taxi medallion transfers are handled through approximately 20 taxi medallion brokers licensed by the
TLC. In addition to brokering taxi medallions, these brokers also arrange for TLC documentation insurance, vehicles, meters, and
financing. We have excellent relations with many of the most active brokers, and previously had received referrals from them
regularly.
Newark Market. We estimate that Newark taxi medallions sold for approximately $149,500, net of liquidation costs, as of
December 31, 2019. The number of Newark taxi medallions has been limited to 600 since 1950 by local law. We estimate that the
total value of all Newark taxi medallions and related assets is over $94,800,000 as of December 31, 2019.
Chicago Market. We estimate that Chicago taxi medallions sold for approximately $19,500, net of liquidation costs, as of
December 31, 2019. Pursuant to a municipal ordinance, the number of outstanding taxi medallions is capped at 6,995 as of
December 31, 2019. We estimate that the total value of all Chicago taxi medallions and related assets is over $209,850,000 as of
December 31, 2019.
Other Markets. We estimated that Boston and Cambridge taxi medallions sold for approximately $24,500 and $4,000, net of
liquidation costs, as of December 31, 2019. These other markets make up 0.2% of our total medallion loans receivable.
Our Strategy
Our core philosophy has been “In niches there are riches.” We try to identify markets that are profitable and where we can be an
industry leader. The key elements of our strategy include:
Capitalize on our relationships with brokers and dealers. We are committed to establishing, building, and maintaining our
relationships with our brokers and dealers. Our marketing efforts are focused on building relationships with dealers in the consumer
markets as we work directly with dealerships, contractors and FSPs to offer quality financing for their customers, including those with
past credit challenges. We believe that our relationships with dealers and brokers provide us with, in addition to potential investment
opportunities, significant benefits, including an additional layer of due diligence and additional monitoring capabilities. We have
assembled a management team that has developed an extensive network of dealer and broker relationships in our target markets over
the last 50 years. We believe that our management team’s relationships with these dealers and brokers have provided and will continue
to provide us with significant investment opportunities. In 2019, 100% of our consumer loans were generated by brokers and dealers.
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Focus on niche industries and our expertise in these niche fields. We specialize in providing consumer loans for the purchase of
RVs, boats, and trailers, and to finance home improvements through contractors and suppliers in the home improvement sector. We
believe our focus on these niche areas provides us with an opportunity to realize favorable returns, with less competition.
Employ disciplined underwriting policies and maintain rigorous portfolio monitoring. We have an extensive loan underwriting
and monitoring process. We conduct a thorough analysis of each potential loan and its prospects, competitive position, financial
performance, and industry dynamics. We stress the importance of credit and risk analysis in our underwriting process. We believe that
our continued adherence to this disciplined process will permit us to continue to generate a stable, diversified and increasing revenue
stream of current income from our earning assets to enable us to make distributions to our stockholders.
Leverage the skills of our experienced management team. Our management team is led by our Chief Executive Officer,
Mr. Alvin Murstein, and our President, Mr. Andrew M. Murstein. Alvin Murstein has over 60 years of experience in the ownership,
management, and financing of taxi medallions and other commercial businesses, and Andrew M. Murstein is the third generation in
his family to participate in the business and has over 30 years of experience in the ownership, management, and financing of taxi
medallions and other commercial businesses. The other members of our management team including the Bank have broad investment
backgrounds, with prior experience in banking and non-bank consumer lending, at specialty finance companies, middle market
commercial banks, and other financial services companies. We believe that the experience and contacts of our management team will
continue to allow us to effectively implement the key aspects of our business strategy.
Perform Strategic Acquisitions. In addition to increasing market share in existing lending markets and identifying new niches,
we seek to acquire taxi medallion financing businesses and related portfolios, and specialty finance companies that make secured
loans to small businesses which have experienced historically low loan losses similar to our own. Since our initial public offering in
May 1996, we have acquired eight specialty finance companies, five loan portfolios, and three taxi rooftop advertising companies.
Implement a Strategic Partnership program. We currently expect to launch an initial partnership during 2020. These activities
are expected to include originating loans or other receivables marketed by our partners, and selling those loans or receivables to our
partners without recourse within two to four business days as contractually agreed. Revenues are expected to be derived primarily
from contracted program fees paid to us by our partners, and interest income earned while the loans or receivables are on our books,
offset by transaction fees paid to our partners for processing loan applications. Our partners will be non-banks offering loans and other
financial services to their customers.
Loan/Investment Activity
The following table sets forth the components of loan/investment activity in the consolidated/managed investment portfolio for
the years indicated.
(Dollars in thousands)
Net loans receivable/investments at beginning of year
Loans/investments originated (1)
Repayments of loans/investments (1)
Consumer loans sold to third parties
Net realized losses on loans/investments (2)
Provision for loan losses
Net increase in unrealized appreciation (3)
Transfers to loans in process of foreclosure
Investment transfers excluded from loans in process of
foreclosure (4)
Deconsolidation of Trust III (5)
Amortization of origination costs
Paid-in-kind interest
Amortization of loan premium
Other, net
Net increase (decrease) in loans/investments
Net loans receivable/investments at end of year
7
$
December 31,
2018
2017
2019
981,487 $ 1,380,054 $ 1,517,592
475,465
471,069
(270,133)
(251,653)
—
(221,447)
—
(79,264)
—
(47,386)
—
6,390
(44,968)
(31,398)
428,510
(261,383 )
(100,920 )
(42,305 )
(59,008 )
29,864
(53,756 )
—
—
(4,952)
834
(3,289)
50
133,275
$ 1,114,762 $
—
(262,064 )
—
(71,409 )
(3,950 )
(3,581)
—
—
—
—
—
(2,146 )
(137,538)
(398,567 )
981,487 $ 1,380,054
Includes refinancings.
(1)
(2) Excludes net realized losses of $7,736 for the year ended December 31, 2017 related to investments other than securities and
other assets.
(3) Excludes net unrealized depreciation of $1,915 for the three months ended March 31, 2018 and $2,076 for the year ended
December 31, 2017 related to investments other than securities and other assets.
(4) Represents portfolio investments transferred to other asset categories and excluded from net loans receivable.
(5) Represents the Taxi Medallion Loan Trust III, or Trust III, gross loans of $53,546 and loans in process of foreclosure that had
been transferred to other assets of $17,863 as a result of the Company no longer considered the primary beneficiary of, and thus
not consolidating, Trust III.
Loan/Investment Characteristics
Consumer Loans. Consumer loans generally require equal monthly payments covering accrued interest and amortization of
principal over a negotiated term, generally around ten to twelve years. Interest rates offered are fixed. Borrowers may prepay
consumer loans without any prepayment penalty. In general, the Bank has established relationships with dealers, FSPs, and contractors
in the industry, who are the sources for consumer loan volumes. The loans are made up of recreation loans and home improvement
loans which were 74% and 26% of total consumer loans at December 31, 2019.
Our recreation loans are secured primarily by RVs, boats and trailers with a small proportion of loans secured by other collateral
such as autos, motorcycles and boat motors. These loans, which together make up our largest and most profitable loan portfolio, have
a weighted average yield of 15.39% at December 31, 2019. Our home improvement loans are secured by the personal property
installed, and the security interest for a majority of these loans is perfected with a UCC fixture filing. As of December 31, 2019, these
loans had a weighted average yield of 9.50%.
Commercial Loans. We have typically originated commercial loans in principal amounts generally ranging from $2,000,000 to
$5,000,000, and occasionally have originated loans under or in excess of that amount. These loans are generally retained and typically
have maturities ranging from three to ten years and require monthly payments ranging from full amortization over the loan term to
fully deferred interest and principal at maturity, with multiple payment options in between. Substantially all loans may be prepaid, and
in the first five years, a prepayment fee may be owed to us. The term of, and interest rate charged on, certain of our outstanding loans
are subject to the regulations of the Small Business Administration, or the SBA. Under SBA regulations, the maximum rate of interest
permitted on loans originated by us is 19%; however, terms and interest rates are subject to market competition for all loans. Unlike
medallion loans, for which competition and market conditions preclude us from charging the maximum rate of interest permitted
under SBA regulations, we are able to charge the maximum rate on certain commercial loans.
Medallion Loans. Our medallion loan portfolio consists of mostly fixed-rate loans, collateralized by first security interests in
taxi medallions and related assets (vehicles, meters, and the like). We estimate that the weighted average loan-to-value ratio of all of
the medallion loans was 190% as of December 31, 2019, compared to 220% as of December 31, 2018. These ratios do not factor in
the reserve on these loans of $25,410,000 and $27,743,000 as of December 31, 2019 and 2018 and also include loans in process of
foreclosure, held at the lower of amortized cost or collateral value. In addition, we have recourse against the vast majority of the
owners of the taxi medallions and related assets through personal guarantees.
Medallion loans generally require equal monthly payments covering accrued interest and amortization of principal over a five to
twenty-five year schedule, subject to a balloon payment of all outstanding principal at maturity. Historically, we have originated loans
with one to five year maturities where interest rates are adjusted and a new maturity period set.
Generally, we retained the medallion loans we originated; however, from time to time, we participated or sold shares of some
loans or portfolios to interested third-party financial institutions. In these cases, we retained the borrower relationships and serviced
the sold loans.
8
Marketing, Origination, and Loan Approval Process
We employ 97 personnel to originate, manage, service, and collect on the consumer, commercial, and medallion loans. Each
loan application is individually reviewed through analysis of a number of factors, including loan-to-value ratios, the borrower’s credit
history, public records, personal interviews, trade references, personal inspection of the premises, and approval from the TLC, SBA,
or other regulatory body, if applicable. Each medallion and commercial loan applicant is required to provide personal or corporate tax
returns, premises leases, and/or property deeds. The Company’s senior management establishes loan origination criteria. Loans that
conform to such criteria may be processed by a loan officer with the proper credit authority, and non-conforming loans (other than
those by the Bank) must be approved by the Company’s Chief Executive Officer, President, and/or the Chief Credit Officer and the
Investment Oversight Committee of the Company’s board of directors. Loan criteria for loans originated with the Bank is established
by the Bank’s board of directors and senior management. The Bank’s policies identify specific approval authorities for its recreation,
home improvement, medallion, and real estate loans. Policy exceptions are reported to the Bank’s board of directors. Both medallion
and commercial loans are sourced from brokers with extensive networks of applicants, and commercial loans are also referred by
contacts with banks, attorneys, and accounting firms. Consumer loans are primarily sourced through relationships which have been
established with RV and boat dealers, and home improvement contractors throughout our market area.
Sources of Funds
We have historically funded our lending operations primarily through credit facilities with banks and, to a lesser degree, through
equity or debt offerings or private placements, and fixed-rate, senior secured notes and long-term subordinated debentures issued to or
guaranteed by the SBA. Since the inception of the Bank, substantially all of the Bank’s funding has been provided by FDIC insured
brokered certificates of deposit. The determination of funding sources is established by our management, based upon an analysis of
the respective financial and other costs and burdens associated with funding sources. Our funding strategy and interest rate risk
management strategy is to have the proper structuring of debt to minimize both rate and maturity risk, while maximizing returns with
the lowest cost of funding over an intermediate period of time.
The table below summarizes our sources of available funds and amounts outstanding under credit facilities, exclusive of
deferred financing costs of $5,105,000 and their respective end of period weighted average interest rates at December 31, 2019. See
Note 7 to the consolidated financial statements for additional information about each credit facility.
(Dollars in thousands)
Cash and cash equivalents
Brokered CDs & other funds borrowed
Average interest rate
Maturity
SBA debentures and borrowings
Amounts undisbursed
Amounts outstanding
Average interest rate
Maturity
Retail and privately placed notes
Average interest rate
Maturity
Bank loans
Average interest rate
Maturity
Preferred securities
Average interest rate
Maturity
Other borrowings
Average interest rate
Maturity
Total cash
Total debt outstanding
9
$
Total
67,821
954,245
2.35 %
1/20-9/24
74,746
3,000
71,746
3.42 %
2/20-3/29
69,625
8.61 %
4/21-3/24
33,183
4.11 %
9/20-12/23
33,000
4.01 %
9/37
7,794
2.00 %
3/20-12/20
$
67,821
$ 1,169,593
We fund our fixed-rate loans with variable-rate credit lines and bank debt, and with fixed-rate SBA debentures and borrowings.
The mismatch between maturities and interest-rate sensitivities of these balance sheet items results in interest rate risk. We seek to
manage our exposure to increases in market rates of interest to an acceptable level by:
• Originating adjustable rate loans; and
•
Incurring fixed-rate debt.
Nevertheless, we accept varying degrees of interest rate risk depending on market conditions. For additional discussion of our
funding sources and asset liability management strategy, see Asset/Liability Management on page 62.
Competition
Banks, credit unions, and finance companies, some of which are SBICs, compete with us in originating consumer, commercial
and medallion loans. Many of these competitors have greater resources than we have, and certain competitors are subject to less
restrictive regulations than we are. As a result, we cannot assure you that we will be able to identify and complete the financing
transactions that will permit us to compete successfully.
Employees
As of December 31, 2019, we employed 191 persons, including 82 at our Medallion Bank subsidiary. We believe that relations
with our employees are good.
MATERIAL US FEDERAL INCOME TAX CONSIDERATIONS
For our tax years ended December 31, 2019 and 2018, we have been taxed as a corporation and must pay corporate-level federal
and state income taxes on our taxable income. Because we were taxed as a corporation under Subchapter C of the Internal Revenue
Code, or the Code, for the tax year ended December 31, 2019 and December 31, 2018, we are able to carry forward any net operating
losses incurred to succeeding years. In addition, distributions will generally be taxable to our stockholders to the extent of our current
and accumulated earnings and profits for US federal tax purposes. Distributions in excess of our current and accumulated earnings and
profits would be treated first as a return of capital to the extent of a stockholder’s tax basis, and any remaining distributions would be
treated as a capital gain. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends
received deduction.
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.
REGULATION
Exemption from the 1940 Act
In order to maintain our status as a non-investment company, we operate so as to fall outside the definition of an “investment
company” or within an applicable exception. We expect to continue to fall within the exception from the definition of an “investment
company” provided under Section 3(c)(6) of the 1940 Act as a company primarily engaged, directly or through majority-owned
subsidiaries, in the business of, among other things, (i) banking, (ii) purchasing and otherwise acquiring notes, drafts, acceptances,
open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance and services, and
(iii) making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance,
and services. We monitor our continued compliance with this exception, which we have met since April 2, 2018, and were compliant
with as of December 31, 2019.
Regulation of Medallion Bank as an Industrial Bank
In May 2002, we formed the Bank, which received approval from the FDIC, for federal deposit insurance in October 2003. The
Bank is subject to extensive federal and state banking laws, regulations, and policies that are intended primarily for the protection of
depositors, the Deposit Insurance Fund, and the banking system as a whole; not for the protection of our other creditors and
stockholders.
10
Under the banking charter, the Bank is authorized to make consumer and commercial loans, and may accept all FDIC-insured
deposits other than demand deposits (checking accounts). As a state-charted non-member bank with FDIC-insured deposits, the Bank
is examined, supervised and regulated by the FDIC and the Utah Department of Financial Institutions, or the Utah DFI. The statutes
enforced by, and regulations and policies of, these agencies affect almost all aspects of its business, including by prescribing
permissible types of loans and investments, the amount of required capital, the permissible scope of its activities and various other
requirements. If the Bank’s regulators were to determine that we have violated banking laws and regulations, including by engaging in
unsafe and unsound practices, the Bank could be subject to enforcement and other regulatory actions, which could have an adverse
effect on its business, results of operations and financial condition.
Capital Standards
The Bank is subject to risk-based and leverage-based capital ratio requirements under the US Basel III capital rules adopted by
the federal banking regulators.
Under the risk-based capital standards, the Bank’s assets, exposures and certain off-balance sheet items are assigned to broad
risk categories, each with designated weights, and the resulting capital ratios represent capital as a percentage of total risk-weighted
assets. The minimum capital ratios applicable to us are as follows:
• CET1 Risk-Based Capital Ratio, equal to the ratio of Common Equity Tier 1, or CET1, capital to risk-weighted assets.
CET1 capital primarily includes common shareholders’ equity subject to certain regulatory adjustments and deductions,
including with respect to goodwill, intangible assets, certain deferred tax assets and accumulated other comprehensive
income. Certain of these adjustments and deductions are subject to phase-in periods that began on January 1, 2015 and,
for non-advanced approaches banking organizations such as the Bank, will end upon effectiveness of the simplifications
rule described below in 2020. The minimum CET1 risk-based capital ratio requirement is 4.5%.
• Tier 1 Risk-Based Capital Ratio, equal to the ratio of Tier 1 capital to risk-weighted assets. Tier 1 capital primarily
consists of CET1 capital and perpetual preferred stock. The minimum Tier 1 risk-based capital ratio requirement is 6%.
• Total Risk-Based Capital Ratio, equal to the ratio of total capital, including CET1 capital, additional Tier 1 capital and
Tier 2 capital, to risk-weighted assets. The Bank’s Tier 2 capital primarily includes allowance for loan and lease losses
up to 1.25% of the Bank’s risk-weighted assets. The minimum total risk-based capital ratio requirement is 8%.
• Tier 1 Leverage Ratio, equal to the ratio of Tier 1 capital to quarterly average assets (net of goodwill, certain other
intangible assets and certain other deductions). The minimum Tier 1 leverage ratio requirement is 4%.
The prompt corrective action framework, which generally applies to FDIC-insured depository institutions, including the Bank,
also includes capital requirements the Bank must satisfy in order to, among other things, be able to accept brokered deposits without
limitations. See “Prompt Corrective Action” and “Brokered Deposits” below.
In addition to meeting the minimum capital requirements, under the US Basel III capital rules, the Bank must also maintain the
required capital conservation buffer of 2.5% to avoid becoming subject to restrictions on capital distributions (including dividends on
the Bank’s preferred stock) and certain discretionary bonus payments to management. The capital conservation buffer is calculated as
a ratio of CET1 capital to risk-weighted assets, and it effectively increases the required minimum risk-based capital ratios.
The table below shows the capital requirements the Bank is required to maintain:
CET1 risk-based capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Minimum US Basel III Regulatory Capital
Ratio Plus Capital Conservation Buffer
7.0%
8.5%
10.5%
For purposes of calculating the denominator of the three risk-based capital ratios, the assets of covered banking organizations
are given risk weights that, under the US Basel III capital rules, range from 0% to 1,250%, depending on the nature of the asset. Most
of the Bank’s loans are assigned a 100% risk weight, with loans that are 90 days or more past due or on nonaccrual assigned a 150%
risk weight. In addition, direct obligations of the US Department of the Treasury, or the US Treasury, or obligations unconditionally
guaranteed by the US government have a 0% risk weight, while general obligation claims on states or other political subdivisions of
the United States are assigned a 20% risk weight, except for municipal or state revenue bonds, which have a 50% risk weight.
11
The US Basel III capital rules provide for limited recognition in CET1 capital, and deduction from CET1 capital above certain
thresholds, of three categories of assets: (i) deferred tax assets arising from temporary differences that cannot be realized through net
operating loss carrybacks (net of related valuation allowances and of deferred tax liabilities), (ii) mortgage servicing assets (net of
associated deferred tax liabilities) and (iii) investments in more than 10% of the issued and outstanding common stock of
unconsolidated financial institutions (net of associated deferred tax liabilities). In July 2019, the federal banking regulators issued a
final rule designed to simplify the capital treatment of those categories of assets for banking organizations, such as the Bank, that are
not subject to the advanced approaches in the US Basel III capital rules. The provisions of the final rule relating to the threshold
deductions will become effective for the Bank on April 1, 2020. Various technical amendments in the rule became effective as of
October 1, 2019.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis
regulatory reforms. Among other things, these standards revise the Basel Committee’s standardized approach for credit risk and
provide a new standardized approach for operational risk capital. The Basel Committee’s standards will generally be effective on
January 1, 2022. As with all standards proposed by the Basel Committee, the December 2017 standards are not effective in any
jurisdiction until rules implementing such standards have been implemented by the relevant regulators in such jurisdiction. Following
the release of these standards, the federal banking regulators stated that the standards are intended to achieve various objectives with
regard to internationally active banks and that the regulators will consider how to apply the standards in the United States.
Federal banking regulators published a final rule, effective April 1, 2019, permitting banking organizations to phase in any
adverse day-one regulatory capital effects of the adoption of ASU 2016-13 (referred to as the current expected credit loss model, or
CECL), over a period of three years.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, or EGRRCPA, required federal bank
regulators to adopt regulations to implement an exemption from the US Basel III capital rules for smaller banking organizations,
including the Bank, that maintain a “Community Bank Leverage Ratio” of at least 8% to 10%. Specifically, the EGRRCPA provides
that if any depository institution or depository institution holding company with less than $10 billion in total consolidated assets
maintains tangible equity in excess of this leverage ratio, as implemented by the federal bank regulators, it would be deemed to be in
compliance with (i) the leverage and risk-based capital requirements promulgated by the federal banking agencies; (ii) in the case of a
depository institution, the capital ratio requirements to be considered “well-capitalized” under the federal banking agencies’ “prompt
corrective action” regime; and (iii) “any other capital or leverage requirements” to which the depository institution or holding
company is subject, unless the appropriate federal banking agency determines otherwise based on the particular institution’s risk
profile.
The FDIC adopted a final rule, effective January 1, 2020, implementing the Community Bank Leverage Ratio. Under the rule,
the Community Bank Leverage Ratio is the same as the Tier 1 Leverage Ratio under the Basel III capital rules and a qualifying small
banking organization, such as the Bank, that has less than $10 billion in total consolidated assets and meets certain risk-based criteria
can choose to apply the Community Bank Leverage Ratio framework if its Community Bank Leverage Ratio is greater than 9%. The
Bank currently has not elected and currently does not expect to elect to apply the Community Bank Leverage Ratio framework, but
will continue to assess the framework and may choose to apply it in the future.
As a condition to receipt of FDIC insurance, the Bank entered into the 2003 capital maintenance agreement with the FDIC
requiring it to maintain a 15% leverage ratio (Tier 1 capital to average assets) and an adequate allowance for loan and lease losses and
restricting the amount of medallion loans that the Bank may finance to three times the Bank’s Tier 1 capital.
Prompt Corrective Action
The Bank is subject to FDIC regulations that apply to every FDIC-insured depository institution, a system of mandatory and
discretionary supervisory actions that generally become more severe as the capital levels of an individual institution decline. Pursuant
to provisions of the Federal Deposit Insurance Act, or FDIA, and related regulations with respect to prompt corrective action, the
federal banking regulators must take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet
minimum capital requirements. The FDIA sets forth the following five capital categories: “well-capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An insured depository institution’s capital
category depends upon how its capital levels compare with various relevant capital measures and certain other factors that are
established by regulation.
CET1 risk-based capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio
“Well-capitalized”
6.5%
8.0%
10.0%
5.0%
“Adequately capitalized”
4.5%
6.0%
8.0%
4.0%
12
If a bank meets the quantitative thresholds for well-capitalized status provided above and is not subject to any written
agreement, order or directive from the appropriate regulatory agency to meet and maintain a specific capital level, it will qualify as
well-capitalized. Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and
possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on the Bank’s
operations or financial condition. See “Brokered Deposits” below for additional information. Failure to be well-capitalized or to meet
minimum capital requirements could also result in restrictions on the Bank’s ability to pay dividends or otherwise distribute capital or
to receive regulatory approval of applications. Pursuant to the 2003 capital maintenance agreement, the Bank has agreed that the
Bank’s capital levels will at all times meet or exceed the levels required for the Bank to be considered well-capitalized under FDIC
rules.
Brokered Deposits
The Bank uses “brokered deposits” to fund a substantial portion of the Bank’s activities. Under the FDIA and related
regulations, FDIC-insured institutions such as the Bank may only accept brokered deposits without FDIC permission if they meet
specified capital standards and are not subject to any written agreement, order or directive to meet and maintain a specific capital
level, and are subject to restrictions with respect to the interest they may pay on deposits unless they are well-capitalized. In particular,
the FDIA and the FDIC’s regulations prohibit an insured depository institution from accepting brokered deposits or offering interest
rates on any deposits significantly higher than the prevailing rate in the bank’s normal market area or nationally (depending upon
where the deposits are solicited), unless it is well-capitalized or is adequately capitalized and receives a waiver from the FDIC.
Pursuant to the 2003 capital maintenance agreement, the Bank agreed that the its capital levels will at all times meet or exceed the
level required for the Bank to be considered well-capitalized under FDIC rules. A depository institution that is adequately capitalized
and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points
over certain prevailing market rates.
Pursuant to the 2003 capital maintenance agreement, the Bank has agreed that our capital levels will at all times meet or exceed
the level required for the Bank to be considered well-capitalized under FDIC rules. If the Bank was no longer able to accept or renew
brokered deposits as a result of failing to meet the requisite capital standards or as a result of being subject to a written agreement,
order or directive to meet and maintain a specific capital level, there would be a material adverse effect on the Bank’s business,
financial condition, liquidity and results of operations.
Payment of Dividends
The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with
respect to capital is subject to statutory and regulatory restrictions that limit the amount available for such distribution depending upon
earnings, financial condition and cash needs of the institution, as well as general business conditions. Insured depository institutions
are also prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if after such transaction the institution would be less than adequately capitalized.
Under Utah law, the Bank may only declare dividends to the Bank’s shareholders out of the Bank’s net profits, after providing
for all expenses, losses, interest and taxes accrued or due. Further, the Bank is required to transfer to a surplus fund at least 10% of the
Bank’s net profits before dividends for the period covered by the dividend until the surplus fund reaches 100% of the Bank’s capital
stock. Any amount paid from the Bank’s net earnings into a fund for the retirement of outstanding debt capital instruments or
preferred stock for the period covered by the dividend will be considered an addition to the Bank’s surplus fund if, upon the retirement
of such instruments, the amount paid into the retirement fund for the period may be properly carried to the Bank’s surplus fund.
The federal banking agencies also have authority to prohibit depository institutions from engaging in business practices that are
considered unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such
payments are not expressly prohibited by statute.
In addition, as discussed under “Capital Standards,” if the Bank’s risk-based capital ratios do not satisfy the minimum risk-based
requirements plus the capital conservation buffer, the Bank will face graduated constraints on, among other things, capital
distributions (including dividends on the Bank’s preferred stock) based on the amount of the shortfall and the amount of the Bank’s
eligible retained income (that is, four quarters trailing net income, net of distributions and tax effects not reflected in net income).
13
Safety and Soundness
The FDIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt
overall safety and soundness standards for depository institutions related to internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and
compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines
adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and
benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk
and exposures specified in the guidelines. These guidelines also prohibit excessive compensation as an unsafe and unsound practice
and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal shareholder. The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the
specific circumstances and severity of an institution’s noncompliance with one or more standards. The FDIC may also terminate
deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Among other things, in addition to the restrictions on brokered deposits discussed above, the FDIA limits the interest rates paid
on deposits by undercapitalized institutions and limits the aggregate extensions of credit by a depository institution to an executive
officer, director, principal shareholder or related interest.
Consumer Financial Protection
The Bank is subject to a number of federal and state consumer protection laws that extensively govern the Bank’s consumer
lending businesses. These laws include, but are not limited to, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the
Truth in Lending Act, the Electronic Fund Transfer Act and these laws’ respective state-law counterparts, as well as laws regarding
unfair and deceptive acts and practices. These federal and state laws, among other things, require disclosures of the cost of credit and
terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit
report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices and subject the Bank to
substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from
litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys
general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these
and other remedies, including regulatory sanctions, customer rescission rights, and civil money penalties. Failure to comply with
consumer protection requirements may also result in substantial reputational harm that could adversely affect our business.
Community Reinvestment Act of 1977
The Bank is subject to certain requirements and reporting obligations under the Community Reinvestment Act, or CRA. Under
the CRA, the Bank has an obligation, consistent with safe and sound operations, to help meet the credit needs of the market areas
where we operate, which include low- and moderate-income individuals and communities. In connection with its examination of the
Bank, the FDIC is required to assess our CRA performance in the areas of lending, investments and services. The FDIC may take
compliance with the CRA into account when regulating and supervising our other activities. The CRA also requires the agencies to
take into account banks’ records of meeting community credit needs when evaluating applications for, among other things, new
branches or mergers. The Bank received a rating of “Outstanding” in its most recently completed CRA examination.
In December 2019, the OCC and the FDIC issued a notice of proposed rulemaking intended to (i) clarify which activities qualify
for CRA credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring
CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and
reporting. The Bank will continue to evaluate any changes to the CRA regulations and their impact to the Bank’s financial condition,
results of operations or liquidity.
14
Transactions with Affiliates and Insiders
The Bank is subject to certain federal laws that restrict and control our ability to extend credit and provide to or receive services
from its affiliates under Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. An affiliate of
a bank is any company or entity that controls, is controlled by or is under common control with the bank. These restrictions include
quantitative and qualitative limits on the amounts and types of transactions that may take place, including the transfer of funds by the
Bank to certain of its affiliates in the form of loans, extensions of credit, investments, or purchases of assets. These restrictions also
require that credit transactions with affiliates be collateralized and that its transactions with affiliates be on terms no less favorable to
the Bank than comparable transactions with unrelated third parties. Generally, the Bank’s covered transactions with any affiliate are
limited to 10% of our capital stock and surplus, and covered transactions with all affiliates are limited to 20% of our capital stock and
surplus.
The Bank is also subject to limits under federal law on its ability to extend credit to its directors, executive officers and principal
shareholders (persons that beneficially own or control more than 10% of any class of our voting stock), as well as to entities owned or
controlled by such persons. Among other things, extensions of credit to such insiders are required to be made on terms that are
substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable
transactions with non-insiders. Also, the terms of such extensions of credit may not involve more than the normal risk of non-
repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such
persons individually and in the aggregate. Certain extensions of credit also require the approval of the Bank’s board of directors.
Financial Privacy and Cybersecurity
Federal and state law contains extensive consumer privacy protection provisions. The Gramm-Leach-Bliley Act requires
financial institutions to periodically disclose their privacy policies and practices relating to sharing such information and enables retail
customers to opt out of institutions’ ability to share information with unaffiliated third parties under certain circumstances. Other
federal and state laws and regulations impact our ability to share certain information with affiliates and non-affiliates for marketing
and/or non-marketing purposes, or to contact customers with marketing offers. The Gramm-Leach-Bliley Act also requires financial
institutions to implement a comprehensive information security program that includes administrative, technical and physical
safeguards to ensure the security and confidentiality of customer records and information. Federal law also makes it a criminal
offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or
deceptive means.
State regulators have been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently,
several states adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed
requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or
modified their data breach notification and data privacy requirements. For example, the California Consumer Privacy Act, which
became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or
data collection thresholds and imposes privacy compliance obligations with regard to the personal information of California residents.
Anti-Money Laundering and the USA PATRIOT Act
The Bank is subject to the anti-money laundering, or AML, provisions of the Bank Secrecy Act, as amended by the USA
PATRIOT Act, or the PATRIOT Act, and implementing regulations issued by the FDIC and the US Treasury. The PATRIOT Act,
which includes the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, is intended to facilitate the
detection and prosecution of terrorism and international money laundering. The PATRIOT Act establishes standards for verifying
customer identification incidental to the opening of new accounts. Other provisions of the PATRIOT Act provide for special
information sharing procedures governing communications with the government and other financial institutions with respect to
suspected terrorists and money laundering activity, and enhancements to suspicious activity reporting, including electronic filing of
suspicious activity reports over a secure filing network. The Bank Secrecy Act requires all financial institutions, including banks, to,
among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the
financing of terrorism. The Bank Secrecy Act includes a variety of record-keeping and reporting requirements (such as cash and
suspicious activity reporting), as well as due diligence/know-your-customer documentation requirements. In May 2016, the US
Treasury’s Office of the Financial Crimes Enforcement Network, or FinCEN, issued a final rule to clarify and enhance customer due
diligence requirements for financial institutions, which became applicable on May 11, 2018. The rule (among other things) imposes
several new obligations on covered financial institutions with respect to their “legal entity customers,” including corporations, limited
liability companies and other similar entities. For each such customer that opens an account (including an existing customer opening a
new account), the covered financial institution must identify and verify the customer’s “beneficial owners,” who are specifically
defined in the rule. Bank regulators routinely examine institutions for compliance with customer due diligence obligations.
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Regulation by the SBA
Medallion Funding, Medallion Capital, and Freshstart are each licensed by the SBA to operate as SBICs, under the Small
Business Investment Act of 1958, as amended, or the SBIA. The SBIA authorizes the licensing of privately-held investment vehicles
as SBICs in order to provide long term financing to small business concerns. Under the SBIA and the regulations promulgated by the
SBA thereunder, a “small business concern” is a business that is independently owned and operated, which is not dominant in its field
of operation, and which (i) has a tangible net worth, together with any affiliates, of $19.5 million or less and average annual net
income after US federal income taxes for the preceding two fiscal years of $6.5 million or less (average annual net income is
computed without the benefit of any carryover loss), or (ii) satisfies alternative criteria under the Federal government’s North
American Industry Classification System, or the NAICS, that assigns codes to the industry in which a small business is engaged and
provides a small business size standard based either on the number of persons employed by the business or its gross revenues. In
addition, at the end of each fiscal year, at least 25% of the total amount of investments must be made in “smaller enterprises” that have
a net worth of $6.0 million or less, and average net income after federal income taxes for the preceding two years of $2.0 million or
less. A business that meets the NAICS size standards also qualifies as a “smaller enterprise” for purposes of meeting SBA’s size
standard regulations.
Investments by SBICs must generally be in active, primarily domestic businesses. SBIC regulations preclude investment in the
following types of businesses: (1) business whose primary business activity is as a relender or reinvestor (that is, directly or indirectly,
providing funds to others, purchasing debt obligations, factoring, or long term leasing of equipment with no provision for maintenance
or repair); (2) many kinds of real estate projects; (3) single purpose projects that are not continuing businesses; (4) companies located
outside the US intending to use the proceeds of the investment outside of the US or companies that are located in the US that have
more than 49% of their employees or tangible assets located outside of the US; (5) businesses that are passive and do not carry on an
active trade or business; (6) businesses that use 50% or more of the funds to buy goods or services from an associated supplier; and
(7) certain “sin businesses” such as gambling and the like.
Under current SBA regulations, the maximum rate of interest that Medallion Funding, Medallion Capital and Freshstart may
charge may not exceed the higher of (i) 19% or (ii) the sum of (a) the higher of (i) that company’s weighted average cost of qualified
borrowings, as determined under SBA regulations, or (ii) the current SBA debenture rate, plus (b) 11%, rounded to the next lower
eighth of one percent. As of December 31, 2019, the maximum rate of interest permitted on loans originated by Medallion Funding,
Medallion Capital, and Freshstart was 19%. As of December 31, 2019, our outstanding medallion loans had a weighted average rate of
interest of 4.17%, and our outstanding commercial loans had a weighted average rate of interest of 13.30%. Current SBA regulations
also require that each loan originated by an SBIC has a term between one and 20 years.
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In addition, SBICs are subject to periodic examination by the SBA, for which the SBA charges examination fees. SBICs must
maintain certain records and make them available for SBA examination. SBICs also are required to prepare valuations of their
portfolio investments in accordance with prescribed valuation guidelines, maintain certain minimum levels of capital, file annual
reports containing financial, management and other information and file notices of certain material changes in their ownership and
operations. We are typically examined by the SBA for compliance with applicable SBA regulations.
SBICs are precluded from making investments in a small business if it would give rise to a conflict of interest. Generally, a
conflict of interest may arise if an associate of the SBIC has or makes an investment in the small business that the SBIC is financing or
serves as one of its officers or would otherwise benefit from the financing. A conflict of interest would also occur if an SBIC were to
lend money to any of its officers, directors, and employees, or invest in any affiliates thereof. Joint investing with an associate (such as
another fund controlled by affiliates of the general partner of the fund) may be made on identical terms or on terms that are fair to the
SBIC. The SBA also prohibits, without prior SBA approval, a “change of control” or transfers which would result in any person (or
group of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC. A “change of control” is any event
which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through
ownership, contractual arrangements, or otherwise.
Under SBA regulations, without prior SBA approval, loans and other investments by licensees with outstanding SBA leverage
to any single small business concern may not exceed 30% of an SBIC’s “regulatory capital.”
SBICs may invest idle funds that are not being used to make loans or other long-term investments in certain short-term
investments permitted under SBA regulations. These permitted investments include direct obligations of, or obligations guaranteed as
to principal and interest by, the government of the US with a term of 15 months or less and deposits maturing in one year or less
issued by an institution insured by the FDIC. These permitted investments must be maintained in (i) direct obligations of, or
obligations guaranteed as to principal and interest by, the US, which mature within 15 months from the date of the investment;
(ii) repurchase agreements with federally insured institutions with a maturity of seven days or less if the securities underlying the
repurchase agreements are direct obligations of, or obligations guaranteed as to principal and interest by the US, and such securities
must be maintained in a custodial account in a federally insured institution; (iii) mutual funds, securities, or other instruments that
exclusively consist of, or represent pooled assets of, investments described in (i) or (ii) above; (iv) certificates of deposit with a
maturity of one year or less, issued by a federally insured institution; (v) a deposit account in a federally insured institution, subject to
withdrawal restriction of one year or less; (vi) a checking account in a federally insured institution; or (vii) a reasonable petty cash
fund.
SBICs may purchase voting securities of small business concerns in accordance with SBA regulations. Although prior
regulations prohibited an SBIC from controlling a small business concern except in limited circumstances, SBA regulations allow an
SBIC to exercise control over a small business for a period of seven years from the date on which the SBIC initially acquires its
control position. This control period may be extended for an additional period of time with the SBA’s prior written approval.
If an SBIC defaults in its payment obligations to SBA under its outstanding debentures, fails to comply with any terms of its
securities, or violates any law or certain regulations applicable to it, the SBA has the right to accelerate the maturity of all amounts due
under its debentures. Additionally, the SBA may appoint a receiver for the SBIC and for its liquidation in the event of a default on
payment of a SBIC’s debentures or for serious regulatory violations.
Other
Change in Control
Because the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the
Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial
Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly, the
Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of Utah Department of Financial Institutions, as
applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company
acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires
10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable
regulations. Although the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act
and the Change in Bank Control Act, your investment in the Company is not insured or guaranteed by the FDIC, or any other
agency, and is subject to loss. Under the Utah Financial Institutions Act, control is defined as the power directly or indirectly or
through or in concert with one or more persons to (1) direct or exercise a controlling influence over the management or policies of us
or the election of a majority of the directors of us, or (2) to vote 20% or more of any class of our voting securities by an individual or
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to vote more than 10% of any class of our voting securities by a person other than an individual. If any holder of any series of the
Bank’s preferred stock is or becomes entitled to vote for the election of the Bank’s directors, such series will be deemed a class of
voting stock, and any other person will be required to obtain the non-objection of the FDIC under the Change in Bank Control Act to
acquire or maintain 10% or more of that series. Investors are responsible for ensuring that they do not, directly or indirectly, acquire
shares of our common stock in excess of the amount which can be acquired without regulatory approval.
Examination and Supervision
Federal and state banking agencies require the Bank to prepare annual reports on financial condition and to conduct an annual
audit of financial affairs in compliance with minimum standards and procedures. We must undergo regular on-site examinations by
the FDIC and the Utah DFI, which examine for adherence to a range of legal and regulatory compliance responsibilities. A bank
regulator conducting an examination has complete access to the books and records of the examined institution. The results of the
examination are confidential. The cost of examinations may be assessed against the examined institution as the agency deems
necessary or appropriate.
Future Legislation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those
states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in
which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application
thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which we
operate and may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our
regulatory capital and modify our business strategy, and limit our ability to pursue business opportunities in an efficient manner.
AVAILABLE INFORMATION
Our corporate website is located at www.medallion.com. We make copies of our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed with or furnished to the SEC
pursuant to Section 13(a) or 15(d) of the Exchange Act available on or through our website free of charge as soon as reasonably
practicable after we electronically file them with or furnish them to the SEC. Our SEC filings can be found in the Investors Relations
section of our website, the address of which is www.medallion.com/investors.html, or on the SEC website at www.sec.gov. Our Code
of Ethical Conduct and Insider Trading Policy can be located in the Corporate Governance section of our website at
www.medallion.com/investors_corporate_governance.html. These documents, as well as our SEC filings, are available in print free of
charge to any stockholder who requests a copy from our Secretary.
ITEM 1A. RISK FACTORS
Risks Related to Our Loan Portfolios and Business
The ongoing coronavirus pandemic and any other future outbreak of disease or similar public health threat could have a
material adverse impact on our business, operating results and financial condition.
Our business has been adversely impacted by the effects of the current coronavirus (COVID-19) pandemic. In December 2019,
a novel strain of COVID-19 emerged in China, and the virus has now spread to many countries elsewhere around the world, including
the United States. As a result of COVID-19, significant portions of the US economy and population have shut down and slowed down
and have resulted in many people going into social isolation or quarantine. New York State, where our headquarters are located, has
declared a state of emergency.
The current COVID-19 outbreak, its broad impact and preventive measures taken to contain or mitigate the outbreak have
had, and are likely to continue to have, significant negative effects on the US and global economy, employment levels, employee
productivity, and financial market conditions, which, in turn, may increasingly have negative effects the ability of our borrowers to
repay outstanding loans, the value of collateral securing loans, demand for loans and other financial services products and consumer
discretionary spending. As a result of these or other consequences, the outbreak has adversely affected our business, results of
operations and financial condition, likely materially. The effects of the outbreak on us could be exacerbated given that our business
model is largely consumer and small business directed, which are more severely affected by COVID-19, and the outbreak, and
preventative measures taken to contain or mitigate the outbreak, have had and may increasingly have a significant negative effects on
consumer discretionary spending. The extent to which the outbreak will impact our operations will depend on future developments,
which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the
actions taken to contain or mitigate the outbreak.
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Our business is heavily concentrated in consumer lending, which carries a high risk of loss and could be adversely
affected by an economic downturn.
Our business is heavily concentrated in consumer lending. As a result, we are more susceptible to fluctuations and risks
particular to consumer credit than a more diversified company. For example, our business is particularly sensitive to macroeconomic
conditions that affect the US economy, consumer spending and consumer credit. We are also more susceptible to the risks of increased
regulations and legal and other regulatory actions that are targeted at consumer credit or the specific consumer credit products that we
offer (including promotional financing). Our business concentration could have a material adverse effect on our results of operations.
By its nature, lending to consumers carries with it different risks and typically a higher risk of loss than commercial lending.
Although the net interest margins are intended to be higher to compensate us for this increased risk, an economic downturn could
result in higher loss rates and lower returns than expected, and could affect the profitability of our consumer loan portfolios. During
periods of economic slowdown, delinquencies, defaults, repossessions, and losses generally increase, and consumers are likely to
reduce their discretionary spending in areas such as recreation and home improvement, which constitute a significant majority of our
business. These periods have been, and may continue to be, accompanied by increasing unemployment rates and declining values of
consumer products securing outstanding accounts, which weaken collateral coverage and increase the amount of a loss in the event of
default.
Additionally, higher gasoline prices, volatile real estate values and market conditions, reset of adjustable rate mortgages to
higher interest rates, general availability of consumer credit, or other factors that impact consumer confidence or disposable income
could increase loss frequency and decrease consumer demand for RVs, boats, trailers and other consumer products (including in
connection with home improvement projects), as well as weaken collateral values on certain types of consumer products. Any
decrease in consumer demand for those products could have a material adverse effect on our ability to originate new loans and,
accordingly, on our business, financial condition, and results of operations.
Although declines in commodity prices, and more particularly gasoline prices, generally are financially beneficial to the
individual consumer, these declines may also have a negative impact on unemployment rates in geographic areas that are highly
dependent upon the oil and natural gas industry, which could adversely affect the credit quality of consumers in those areas.
Our balance sheet consists of a significant percentage of non-prime consumer loans, which are associated with higher than
average delinquency rates. The actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more
dramatically affected by a general economic downturn. In addition, during an economic slowdown or recession, our servicing costs
may increase without a corresponding increase in our net interest income.
Furthermore, our business is significantly affected by monetary and regulatory policies of the US Federal Government and its
agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control
and could have a material adverse effect on us through interest rate changes, costs of compliance with increased regulation, and other
factors.
The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of
economic conditions and how those economic conditions might impair the ability of our borrowers to repay their loans. The degree of
uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the
reliability of the process and the quality of our assets.
Our financial condition, liquidity and results of operations depend on the credit performance of our loans.
As of December 31, 2019, approximately 63% of our recreation loans are non-prime receivables with obligors who do not
qualify for conventional consumer finance products as a result of, among other things, adverse credit history. While our underwriting
guidelines are designed to confirm that, notwithstanding such factors, the obligor would be a reasonable credit risk, the receivables
nonetheless are expected to experience higher default rates than a portfolio of obligations of prime obligors. The weakening of our
underwriting guidelines for any reason, such as in response to the competitive environment, in an effort to originate higher yielding
loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans or our inability to adequately adapt
policies and procedures to changes in economic or other conditions, may result in loan defaults and charge-offs that may necessitate
increases to our allowance for loan losses, each of which could adversely affect our net income and financial condition. In the event of
a default on a recreation loan, generally the most practical recovery method is repossession of the financed vehicle, although the
collateral value of the vehicle usually does not fully cover the outstanding account balance and costs of recovery. Repossession sales
that do not yield sufficient proceeds to repay the receivables in full typically result in losses on those receivables.
In addition, our prime portfolio has grown in proportion to our overall portfolio over the past several years. While prime
portfolios typically have lower default rates than non-prime portfolios, we have less ability to make risk adjustments to the pricing of
prime loans compared to non-prime loans. As a result, to the extent our prime portfolio continues to grow, a larger proportion of our
business will consist of loans with respect to which we will have less flexibility to adjust pricing to absorb losses. As a result of these
factors, we may sustain higher losses than anticipated in our prime portfolio. Additionally, if our prime loan losses are higher than
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expected then we may also be at risk with regards to our forecasted losses, which could impact our loss reserves and results of
operations.
Changes in the taxi and for-hire vehicle industries have resulted in significantly increased competition and have had a
material adverse effect on our business, financial condition, and operations and have resulted in losses in our medallion loan
portfolio.
There have been recent changes in the taxi and for-hire vehicle industries that have resulted in significantly increased
competition in all of our taxi medallion markets. Ride-sharing applications, or ride-sharing apps, utilized by for-hire vehicles continue
to expand domestically and globally. Many of these for-hire vehicle operators operate outside of the regulatory regime with which we
and our borrowers operate, which poses an increased risk of competition because such operators are able to pass the cost savings of
not having to comply with certain regulations to its passengers. According to the New York City Taxi & Limousine Commission, or
TLC, between January 2019 and January 2020 approximately 5,571 new for-hire vehicle licenses were issued, resulting in the total
number of for-hire vehicles of approximately 114,852 as of January 30, 2020. In addition, the New York law permits cars for-hire to
pick up street hails in boroughs outside of Manhattan. The TLC reported that, as of January 30, 2020 there were 5,629 street hail
livery licenses, of which approximately 2,572 are active.
TLC annualized data through October 2019 has shown a 8.5% reduction in total New York City taxi fares, compared to the
annualized data of November 2018, and a 12.0% reduction in the total number of New York City taxi trips. Such reductions in fare
totals and taxi trips are likely the result of a combination of the congestion pricing surcharge that went into effect in February 2019,
ride-sharing apps, street hail livery licenses, and other forms of public transportation.
We stopped originating new medallion loans in July 2015. However, our medallion loan portfolio continued to represent 7% of
our total assets at December 31, 2019. As discussed in further detail below, there have also been recent decreases in the values of our
medallion loan collateral. Increased competition from ride-sharing apps and street hail livery licenses has reduced the overall market
for taxi services, income from operating medallions, and the value of taxi medallions. If these trends continue and intensify, there
would be a further material increase to our loan-to-value ratios, loan delinquencies, and loan defaults, which could have a material
adverse effect on our business, financial condition, and results of operations.
Decreases in the value of our medallion loan collateral, including the impact on loans in process of foreclosure, and our
Chicago taxi medallions purchased out of foreclosure have had, and may continue to have, a material adverse effect on our
business.
According to TLC data, over the past 20 years New York City taxi medallions appreciated in value from under $200,000 to a
high of $1,320,000 for corporate taxi medallions and $1,050,000 for individual taxi medallions in 2014. However, we estimate that the
market value of taxi medallions declined to $172,500, $167,000 net of liquidation costs, as of December 31, 2019. In March 2017, the
New York City Council made changes to the taxi medallion classes, eliminating the distinction between individual and corporate taxi
medallions. From time to time government entities may also take other actions, which could have adverse effects on the market for
taxi medallions and which could, in turn, affect, potentially materially, our financial condition and results of operations.
We own 159 Chicago taxi medallions that were purchased out of foreclosure in 2003. Additionally, a portion of our loan
revenue is derived from loans collateralized by Chicago taxi medallions. The Chicago taxi medallions had appreciated in value from
$50,000 in 2003 to approximately $370,000 in 2013. Since that time, however, there has been a decline in the value of Chicago taxi
medallions to approximately $25,000, $19,500 net of liquidation costs, as of December 31, 2019.
Decreases in the value of our medallion loan collateral have resulted in an increase in the loan-to-value ratios of our medallion
loans. We estimate that the weighted average loan-to-value ratio of our medallion loans was approximately 190% as of December 31,
2019. If taxi medallion values continue to decline, there is likely to be an increase in medallion loan delinquencies, foreclosures and
borrower bankruptcies. Our ability to recover on defaulted medallion loans by foreclosing on and selling the taxi medallion collateral
would be diminished, which would result in material losses on defaulted medallion loans which could have a material adverse effect
on our business. If we are required to liquidate all or a portion of our medallion loans quickly, we would realize less than the value at
which we had previously recorded such medallions.
Uncertainty relating to the reporting of collateral values for our loans may adversely affect the value of our portfolio.
Medallion loans are primarily collateral-based lending, whereby the collateral value generally exceeds the amount of the loan at
the time of origination, providing sufficient excess collateral to protect us against losses. Collateral values for medallion loans reflect
recent sales prices and are typically obtained from the regulatory agency in a particular local market. We rely on the integrity of the
collateral value benchmarks obtained by the applicable regulatory agencies and other third parties. Any changes or volatility in these
benchmarks could cause us to suffer losses. We have experienced a significant downward movement in medallion collateral values
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which has caused and may continue to cause a negative impact on our valuation analysis and could further significantly lower the fair
market value measurements of our portfolio.
We require an objective benchmark in determining the value of our portfolio. If the benchmarks that we currently use are
deemed to be unreliable, we will need to use other intrinsic factors in determining the collateral values for our loans.
Our allowance for loan losses may prove to be insufficient to cover losses on our loans.
We maintain an allowance for loan losses (a reserve established through a provision for losses that decreases our earnings and
that, accordingly, affects our financial condition) that we believe is appropriate to provide for incurred losses in our loan portfolio.
The process for establishing an allowance for loan losses is critical to our results of operations and financial condition, and
requires complex models and judgments, including forecasts of economic conditions. Changes in economic conditions affecting
borrowers, growth in our loan portfolio, changes in the credit characteristics of our loan portfolio, new information regarding our loans
and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In cases where we
modify a loan, if the modified loans do not perform as anticipated, we may be required to establish additional allowances on these
loans.
We periodically review and update our methodology, models and the underlying assumptions, estimates and assessments we use
to establish our allowance for loan losses to reflect our view of current conditions. Moreover, our regulators, as part of their
supervisory function, periodically review the methodology, models and the underlying assumptions, estimates and assessments we use
for calculating, and the adequacy of, our allowance for loan losses. Our regulators, based on their judgment, may conclude that we
should modify our methodology, models or the underlying assumptions, estimates and assessments, increase our allowance for loan
losses, and/or recognize further losses. We continue to review and evaluate our methodology, models and the underlying assumptions,
estimates, and assessments we use and we will implement further enhancements or changes to them, as needed. We cannot assure you
that our loan loss reserves will be sufficient to cover actual losses. Future increases in the allowance for loan losses or recognized
losses (as a result of any review, update, regulatory guidance, changes in accounting standards or otherwise) will result in a decrease
in net earnings and capital and could have a material adverse effect on our business, results of operations, and financial condition.
Our business, financial condition and results of operations could be negatively impacted if we are unsuccessful in
developing and maintaining our relationships with dealerships, contractors, and FSPs.
We originate loans by working with third-party sellers of consumer products and not working directly with consumers. As a
result, our ability to originate consumer loans depends on our relationships with dealerships, contractors, and FSPs. Although we have
relationships with various dealerships, contractors, and FSPs, none of our relationships are exclusive and each may be terminated at
any time. In particular, there is significant competition for the contractor and FSP relationships we depend on in connection with our
home improvement lending segment. The loss of any of these relationships, our failure to develop additional relationships, and
circumstances in which our existing dealer, contractor, and FSP relationships generate decreased sales and loan volume all may have a
material adverse effect on our business, financial condition and results of operations.
A reduction in demand for our products and failure by us to adapt to such reduction could adversely affect our business,
financial condition and results of operations.
The demand for the products we offer may be reduced due to a variety of factors, such as demographic patterns, changes in
customer preferences or financial conditions, regulatory restrictions that decrease customer access to particular products or the
availability of competing products. If we fail to adapt to significant changes in our customers’ demand for, or access to, our products,
our revenues could decrease and our operations could be adversely affected. Even if we do make changes to our product offerings to
fulfill customer demand, customers may resist such changes or may reject such products. Moreover, the effect of any product change
on the results of our business may not be fully ascertainable until the change has been in effect for some time, and, by that time, it may
be too late to make further modifications to such product without causing further adverse effects to our business, results of operations,
and financial condition.
A decrease in prevailing interest rates may lead to more loan prepayments, which could adversely affect our business.
Our commercial borrowers generally have the right to prepay their loans upon payment of a fee ranging from 1% to 2% for
standard loans, and for higher amounts, as negotiated, for larger more custom loan arrangements. A borrower is likely to exercise
prepayment rights at a time when the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. In a lower
interest rate environment, we will have difficulty re-lending prepaid funds at comparable rates, which may reduce the net interest
income that we receive. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future
investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being
prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company
may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if
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a substantial number of our portfolio companies elect to prepay amounts owed to us and we are not able to reinvest the proceeds for
comparable yields in a timely fashion. Additionally, prepayments could negatively impact our return on equity, which could result in a
decline in the market price of our common stock.
Changes in prevailing interest rates could adversely affect our business.
Our profitability may be directly affected by interest rate levels and fluctuations in interest rates. As interest rates change, our
gross interest rate spread on originations either increases or decreases because the rates charged on the loans originated are limited by
market and competitive conditions, restricting our ability to pass on increased interest costs to the consumer. Additionally, although a
significant percentage of our borrowers are non-prime and are not highly sensitive to interest rate movement, increases in interest rates
may reduce the volume of loans we originate. While we monitor the interest rate environment and seek to mitigate the impact of
increased interest rates, we cannot provide assurance that the impact of changes in interest rates can be successfully mitigated.
In addition, the majority of our loan portfolio is comprised of fixed-rate loans. An abrupt increase in market rates of interest may
have an adverse impact on our earnings until we are able to originate new loans at higher prevailing interest rates.
Financing and Related Risks
We are subject to certain financial covenants and other restrictions under our loan and credit arrangements, which
could affect our ability to finance future operations or capital needs or to engage in other business activities.
Our loan and credit agreements contain financial covenants and other restrictions relating to borrowing base eligibility, tangible
net worth, net income, leverage ratios, stockholders’ equity, and collateral values. Our ability to meet these financial covenants and
restrictions could be affected by events beyond our control, such as a substantial decline in collateral values or a rise in borrower
delinquencies. A breach of these covenants could result in an event of default under the applicable debt instrument. Such a default, if
not cured or waived, may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt that is
subject to an applicable cross-acceleration or cross-default provision. Most of our credit facility debt is subject to cross default
provisions. Certain other events can constitute an event of default. Furthermore, if we were unable to repay the amounts due and
payable under our credit facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the
event our lenders or holders of the related notes accelerate the repayment of our borrowings, we and our subsidiaries may not have
sufficient assets to repay that indebtedness. We have regularly needed waivers and extensions, and there can be no guarantee that we
will be able to continue to get them if requested. Based on the foregoing factors, the operating and financial restrictions and covenants
in our current credit agreements and any future financing agreements could adversely affect our ability to finance future operations or
capital needs or to engage in other business activities.
Failure to obtain an extension of our existing credit facilities, failure to obtain additional revolving credit facilities or
raise additional capital in the future could have a material adverse effect on our results of operations and financial position.
We utilize secured revolving credit facilities and other facilities to fund our investments. We cannot guarantee that our credit
facilities will continue to be available beyond their current maturity dates on reasonable terms or at all, or that we will be able to
otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. Our revolving credit
facilities have converted to term loans. Obtaining additional revolving credit facilities or other alternative sources of financing may be
difficult, and we cannot guarantee that we will be able to do so on terms favorable to us or at all. The availability of revolving credit
facilities depends, in part, on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit,
the financial strength and strategic objectives of the banks that participate in our credit facilities and the availability of bank liquidity
in general. If the credit facilities are not renewed or extended by our lenders by their maturity dates, we will not be able to make
further borrowings under the facilities after they mature and the outstanding principal balances under such facilities will be due and
payable at maturity. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, our financial
condition would be adversely affected and our lenders may foreclose on the property securing such indebtedness. If we are unable to
extend or replace these facilities or arrange new credit facilities or other types of interim financing, we may need to curtail or suspend
loan origination and funding activities which could have a material adverse effect on our results of operations and financial position.
In addition, we may need to raise additional capital in the future to have sufficient capital resources and liquidity to meet our
commitments, including the terms of the 2003 capital maintenance agreement, and fund our business needs and future growth,
particularly if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed,
will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial
condition. We may not be able to obtain capital on acceptable terms or at all. Any occurrence that may limit our access to the capital
markets, such as a decline in the confidence of capital markets investors or other disruptions in capital markets, may adversely affect
our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may
have to do so when other financial institutions are seeking to raise capital and would then have to compete with those institutions for
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investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our
business, financial condition, or results of operations.
Medallion Bank’s use of brokered deposits for its deposit-gathering activities may not be available when needed. The
inability to accept and renew brokered deposits would have a material adverse effect on our business, financial condition,
liquidity, and results of operations.
Medallion Bank relies on the established brokered deposit market to originate deposits to fund its operations. Additionally,
Medallion Bank’s business, strategy and prospects are dependent on its ability to accept and renew brokered deposits without
limitation and, therefore, dependent on its ability to be “well-capitalized” under the FDIC’s regulatory framework.
Medallion Bank’s brokered deposits consist of deposits raised through the brokered deposit market rather than through retail
branches. While Medallion Bank has developed contractual relationships with a diversified group of investment brokers, and the
brokered deposit market is well developed and utilized by many banking institutions, conditions could change that might affect the
availability of brokered deposits. In addition, Medallion Bank’s ability to rely on brokered deposits as a source of funding is subject to
capitalization requirements set forth in the FDIC’s prompt corrective action framework. Medallion Bank may not accept or renew
brokered deposits unless they are “well-capitalized” or they are “adequately capitalized” and they receive a waiver from the FDIC. A
bank that is “adequately capitalized” and that accepts or renews brokered deposits under a waiver from the FDIC is subject to
additional restrictions on the interest rates it may offer.
If the capital levels at Medallion Bank fall below the “well-capitalized” level as defined by the FDIC, Medallion Bank’s ability
to raise brokered deposits would be materially impaired. If Medallion Bank’s capital levels fall below the “adequately-capitalized”
level as defined by the FDIC, it would be unable to raise brokered deposits. Any impairment or inability to raise brokered deposits
would have a material adverse effect on our business, financial condition, liquidity and results of operations. Brokered deposits may
also not be as stable as other types of deposits, and if Medallion Bank experiences a period of sustained operating losses, the cost of
attracting deposits from the brokered deposit market could increase significantly. Medallion Bank’s ability to manage its growth to
stay within the “well-capitalized” level is critical to our ability to retain open access to this funding source.
Changes in interest rates may affect our cost of capital and net interest income.
Because we borrow to fund our loans and investments, a portion of our income is dependent upon the difference between the
interest rate at which we borrow funds and the interest rate at which we invest these funds. A portion of our investments, such as
medallion loans, will have fixed interest rates, while a portion of our borrowings will likely have floating interest rates. As a result, a
significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising
interest rates, our cost of funds could increase, which would reduce our net investment income. We may hedge against interest rate
fluctuations by using standard hedging instruments, subject to applicable legal requirements. These activities may limit our ability to
participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in
interest rates or hedging transactions could have a material adverse effect on our business, financial condition, and results of
operations. Also, we will have to rely on our counterparties to perform their obligations under such hedges.
We depend on cash flow from our subsidiaries to make payments on our indebtedness and fund operations.
We are primarily a holding company, and we derive most of our operating income and cash flow from our subsidiaries. As a
result, we rely heavily upon distributions from our subsidiaries to generate the funds necessary to make payments on our indebtedness
and fund operations. Funds are provided to us by our subsidiaries through dividends and payments on intercompany indebtedness, but
we cannot assure you that our subsidiaries will be in a position to continue to make these dividend or debt payments. The Utah
Department of Financial Institutions and FDIC have the authority to prohibit or to limit the payment of dividends by Medallion Bank.
In addition, as a condition to receipt of FDIC insurance, Medallion Bank entered into a capital maintenance agreement with the FDIC
requiring it to maintain a 15% Tier 1 leverage ratio (Tier 1 capital to average assets). As of December 31, 2019, Medallion Bank’s
Tier 1 leverage ratio was 19.4%. We did not receive dividends from Medallion Bank between April 2016 and December 2019 when
we received a dividend of $1,500,000.
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Legal and Regulatory Risks
We operate in a highly regulated environment, and if we are found to be in violation of any of the federal, state, or local
laws or regulations applicable to us, our business could suffer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted in 2010. The Dodd-
Frank Act significantly changed federal financial services regulation and affects, among other things, the lending, deposit, investment,
trading, and operating activities of financial institutions and their holding companies. In addition to the statutory requirements under
the Dodd-Frank Act, the legislation also delegated authority to US banking, securities, and derivatives regulators to impose additional
restrictions through required rulemaking. The Dodd-Frank Act requires a company that owns an industrial bank to serve as a “source
of strength” to the institution and is also subject to the “Volcker Rule.” Although these requirements have not materially impacted us,
we cannot assure you that they will not in the future.
Other changes in the laws or regulations applicable to us more generally, may negatively impact the profitability of our business
activities, require us to change certain of our business practices, materially affect our business model, limit the activities in which we
may engage, affect retention of key personnel, require us to raise additional regulatory capital, increase the amount of liquid assets that
we hold, or otherwise affect our funding profile or expose us to additional costs (including increased compliance costs). Any such
changes may also require us to invest significant management attention and resources to make any necessary changes and may
adversely affect our ability to conduct our business as previously conducted or our results of operations or financial condition.
We are also subject to a wide range of federal, state, and local laws and regulations, such as local licensing requirements, and
retail financing, debt collection, consumer protection, environmental, health and safety, creditor, wage-hour, anti-discrimination,
whistleblower and other employment practices laws and regulations and we expect these costs to increase going forward. The
violation of these or future requirements or laws and regulations could result in administrative, civil, or criminal sanctions against us,
which may include fines, a cease and desist order against the subject operations or even revocation or suspension of our license to
operate the subject business. As a result, we have incurred and will continue to incur capital and operating expenditures and other
costs to comply with these requirements and laws and regulations.
The banking industry is highly regulated, and the regulatory framework, together with any future legislative or
regulatory changes, may have a significant adverse effect on our operations.
The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended
primarily for the protection of depositors, customers, federal deposit insurance funds, and the banking system as a whole, not for the
protection of our security holders. We are subject to regulation and supervision by the FDIC and the Utah DFI. The laws and
regulations applicable to us govern a variety of matters, including permissible types, amounts, and terms of loans and investments we
may make, the maximum interest rate that may be charged, the amount of reserves we must hold against deposits we take, the types of
deposits we may accept, maintenance of adequate capital and liquidity, changes in the control of Medallion Bank and us, restrictions
on dividends, and establishment of new offices. As long as we remain well-capitalized under federal regulatory standards, there are no
restrictions on the rates we may pay on brokered deposits. We must obtain approval from our regulators before engaging in certain
activities or acquisitions, and there is the risk that such approvals may not be obtained, either in a timely manner or at all. Our
regulators also have the ability to compel us to take, or restrict us from taking, certain actions entirely, such as actions that our
regulators deem to constitute an unsafe or unsound banking practice. Our failure to comply with any applicable laws or regulations, or
regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money
penalties, or damage to our reputation, all of which could have a material adverse effect our business, financial condition or results of
operations.
Since the 2007-2009 recession, federal and state banking laws and regulations, as well as interpretations and implementations of
these laws and regulations, have undergone substantial review and change. In particular, the Dodd-Frank Act drastically revised the
laws and regulations under which we operate. Financial institutions generally have also been subjected to increased scrutiny from
regulatory authorities. These changes and increased scrutiny have resulted and may continue to result in increased costs of doing
business and may in the future result in decreased revenues and net income, reduce our ability to effectively compete to attract and
retain customers, or make it less attractive for us to continue providing certain products and services. Any future changes in federal
and state law and regulations, as well as the interpretations and implementations, or modifications or repeals, of such laws and
regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a
material adverse effect on our business, financial condition or results of operations.
Changes in taxi industry regulations that result in the issuance of additional taxi medallions or increases in the expenses
involved in operating a taxi medallion would decrease the value of our medallion loan collateral and our Chicago taxi
medallions purchased out of foreclosure.
Every city in which we originated medallion loans, and most other major cities in the United States, limits the supply of taxi
medallions. This regulation results in supply restrictions that support the value of taxi medallions. Actions that loosen these
restrictions and result in the issuance of additional taxi medallions into a market could decrease the value of taxi medallions in that
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market. If this were to occur, the value of the collateral securing our then outstanding medallion loans in that market would be
adversely affected. We are unable to forecast with any degree of certainty whether any other potential increases in the supply of taxi
medallions will occur.
In New York City, Chicago, Boston, and other markets where we originated medallion loans, taxi fares are generally set by
government agencies. Expenses associated with operating taxis are largely unregulated. As a result, the ability of taxi operators to
recoup increases in expenses is limited in the short term. Escalating expenses, such as rising gas prices and an increase in interest
rates, can render taxi operations less profitable, could cause borrowers to default on loans from us and would adversely affect the
value of our collateral.
Changes in laws, regulations, or policies may adversely affect our business.
The post-financial crisis era has been marked by an increase in regulation, regulatory intensity, and enforcement. We are unable
to predict the ways in which this change in the regulatory environment could impact our business models or objectives. The laws and
regulations governing our lending, servicing, and debt collection activities or the regulatory or enforcement environment at the federal
level or in any of the states in which we operate may change at any time which may have an adverse effect on our business.
We expect, however, to see an increase over time in regulatory scrutiny and enforcement in the area of consumer financial
products regulation, both as a result of recent regulatory scrutiny and related enforcement actions in the area of consumer protection,
and the establishment of the Consumer Financial Protection Bureau, or the CFPB, by the Dodd-Frank Act. The CFPB is responsible
for interpreting and enforcing a broad range of consumer protection laws that govern the provision of deposit accounts and the making
of loans, including certain loans Medallions Bank provides to its customers. While Medallion Bank’s size currently falls below the
threshold that would give the CFPB direct authority over Medallion Bank, Medallion Bank’s existing bank supervisors may pursue
similar policies and make similar information requests to those of the CFPB with respect to consumer financial products and other
matters within the scope of the CFPB’s authority. Despite recent efforts to alleviate the impact of such regulatory changes, we believe
that regulatory reforms and increased regulatory supervision related to consumer protection, together with provisions of the Dodd-
Frank Act, may increase Medallion Bank’s cost of doing business, impose new restrictions on the way in which they conduct their
business, or add significant operational constraints that might impair our profitability.
We are unable to predict how these or any other future legislative proposals or programs will be administered or implemented or
in what form, or whether any additional or similar changes to statutes or regulations, including the interpretation or implementation
thereof, will occur in the future. Any such action could affect us in substantial and unpredictable ways and could have an adverse
effect on our results of operations and financial condition.
Our inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse
effect on our operations in that market and on our reputation generally. No assurance can be given that applicable laws or regulations
will not be amended or construed differently or that new laws and regulations will not be adopted, either of which could materially
adversely affect our business, financial condition, or results of operations.
Non-compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations could result in fines
or sanctions against us.
The USA PATRIOT Act of 2001 and the Bank Secrecy Act require financial institutions to design and implement programs to
prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial
institutions are obligated to file suspicious activity reports with FinCEN. These rules require financial institutions to establish
procedures for identifying and verifying the identity of customers and beneficial owners of certain legal entity customers seeking to
open new financial accounts. Federal and state bank regulators also have focused on compliance with Bank Secrecy Act and anti-
money laundering regulations. Failure to comply with these regulations could result in fines or sanctions, including restrictions on
conducting acquisitions or expanding activities. During the last several years, a number of banking institutions have received large
fines for non-compliance with these laws and regulations. Although we have policies and procedures designed to assist in compliance
with the Bank Secrecy Act and other anti-money laundering laws and regulations, there can be no assurance that such policies or
procedures will work effectively all of the time or protect us against liability for actions taken by our employees, agents, and
intermediaries with respect to our business or any businesses that we may acquire. Failure to maintain and implement adequate
programs to combat money laundering and terrorist financing could also have serious reputational consequences for us, which could
have a material adverse effect on our business, financial condition or results of operations.
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Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we
collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security, and data protection laws, including requirements concerning security
breach notification, and we could be negatively affected by these laws. For example, our business is subject to the Gramm-Leach-
Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our
customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information
collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with
nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written
comprehensive information security program containing safeguards appropriate based on our size and complexity, the nature and
scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security
breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with
varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security
breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security,
and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection, and
information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information,
and some of our current or planned business activities. This could also increase our costs of compliance and business operations and
could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level,
by the Federal Trade Commission, as well as at the state level.
Compliance with current or future privacy, data protection, and information security laws (including those regarding security
breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology
costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our
business, financial conditions or results of operations. Our failure to comply with privacy, data protection, and information security
laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions, and
damage to our reputation, which could have a material adverse effect on our business, financial condition, or results of operations.
Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing
regulatory requirements and attention.
We regularly use third-party vendors as part of our business. We also have substantial ongoing business relationships with other
third parties. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by
our federal and state bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over
our third-party vendors and other ongoing third-party business relationships. In certain cases, we may be required to renegotiate our
agreements with these vendors to meet these enhanced requirements, which could increase our costs and potentially limit our
competitiveness. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party
relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that
we have not exercised adequate oversight and control over our third-party vendors or other ongoing third-party business relationships
or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money
penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could
have a material adverse effect our business, financial condition or results of operations.
Our SBIC subsidiaries are licensed by the SBA, and are therefore subject to SBA regulations.
Our SBIC subsidiaries are licensed to operate as SBICs and are regulated by the SBA. The SBA also places certain limitations
on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes
or to businesses in a few prohibited industries. Compliance with SBA requirements may cause the SBIC subsidiaries to forego
attractive investment opportunities that are not permitted under SBA regulations.
Further, SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its
compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or
transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of an
SBIC. If the SBIC subsidiaries fail to comply with applicable SBIC regulations, the SBA could, depending on the severity of the
violation, limit or prohibit their use of debentures, declare outstanding debentures immediately due and payable, and/or limit them
from making new investments. In addition, the SBA could revoke or suspend an SBIC license or may appoint a receiver for the SBIC
and for its liquidation for willful or repeated violation of, or willful or repeated failure to observe, any provision of the SBIA or any
rule or regulation promulgated thereunder. Such actions by the SBA would, in turn, negatively affect us.
Our ability to enter into transactions with our affiliates is restricted.
The SBA restricts the ability of SBICs to lend money to any of their officers, directors, and employees, or invest in any affiliates
thereof.
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Medallion Bank is subject to certain federal laws that restrict and control its ability to engage in transactions with its affiliates.
Sections 23A and 23B of the Federal Reserve Act and applicable regulations restrict the transfer of funds by Medallion Bank to
certain of its affiliates, including us, in the form of loans, extensions of credit, investments, or purchases of assets and restrict its
ability to provide services to, or receive services from, its affiliates. Sections 23A and 23B also require generally that Medallion
Bank’s transactions with its affiliates be on terms no less favorable to Medallion Bank than comparable transactions with unrelated
third parties.
We must maintain an exception from registration under the 1940 Act which could limit our ability to take advantage of
attractive investment opportunities, and the failure to maintain that exception could have material adverse consequences on
our business.
A company that meets the definition of an “investment company” under the 1940 Act, in the absence of an exception or
exemption, must either register with the SEC as an investment company or elect BDC status. The Company now operates so as to fall
outside the definition of an “investment company” or within an applicable exception. The Company expects to fall within the
exception from the definition of an “investment company” provided under Section 3(c)(6) of the 1940 Act as a company primarily
engaged, directly or through majority-owned subsidiaries, in the business of, among other things, (i) banking, (ii) purchasing and
otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales
price of merchandise, insurance and services, and (iii) making loans to manufacturers, wholesalers, and retailers of, and to prospective
purchasers of, specified merchandise, insurance, and services. The Company is required to monitor its continued compliance with this
exception, which could limit our ability to take advantage of attractive investment opportunities that would cause us to be out of
compliance with its limitations and could have a material adverse effect on our business. For example, we could be limited in growing
Medallion Capital, Inc., which is currently engaged in a business that generally does not qualify for the exception.
If the SEC or a court were to find that we were required, but failed, to register as an investment company in violation of the
1940 Act, we may have to cease business activities, we would breach representations and warranties and/or be in default as to certain
of our contracts and obligations, civil or criminal actions could be brought against us, our contracts would be unenforceable unless a
court were to require enforcement and a court could appoint a receiver to take control of us and liquidate our business, any or all of
which could have a material adverse effect on our business.
Federal and state law may discourage certain acquisitions of our common stock which could have a material adverse
effect on our stockholders.
Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the
Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial
Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly
Medallion Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of the Utah Department of Financial
Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person
or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company
acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the
applicable regulations. Under the Utah Financial Institutions Act, control is defined as the power to vote 20% or more of any class of
our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an
individual. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess
of the amount which can be acquired without regulatory approval. These provisions could delay or prevent a third party from
acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of our common
stock. Although Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance
Act and the Change in Bank Control Act, your investment in the Company is not insured or guaranteed by the FDIC, or any
other agency, and is subject to loss.
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Risk Relating to Our Growth and Operations
We operate in a highly competitive market for investment opportunities.
The consumer and overall lending market is very competitive and is served by a variety of entities, including banks, savings and
loan associations, credit unions, independent finance companies, financial technology companies, business development companies,
and other investment funds. The recreation lending and home improvement lending markets are also highly fragmented, with a small
number of lenders capturing large shares of each market and many smaller lenders competing for the remaining market share. Our
competitors often seek to provide financing on terms more favorable to consumers or dealers, contractors, and FSPs than we offer.
Many of these competitors also have long-standing relationships with dealers, contractors, and FSPs and may offer other forms of
financing that we do not offer, e.g., credit card lending. We anticipate that we will encounter greater competition as we expand our
operations and if the economy remains stable. Certain of our competitors are not subject to the same regulatory requirements that we
are and, as a result, these competitors may have advantages in conducting certain business and providing certain services and may be
more aggressive in their loan origination activities. Increasing competition could also require us to lower the rates we charge on loans
in order to maintain our desired loan origination volume, which could also have a material adverse effect on our business, financial
condition and results of operations.
Additionally, many of our competitors are substantially larger and have considerably greater financial, technical, and marketing
resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not
available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments. These
characteristics could allow our competitors to consider a wider variety of investments, establish more relationships, and offer better
pricing and more flexible structuring than us. We may be unwilling to match our competitors’ pricing, terms, and structure of certain
loans and investments opportunities due to potential risks, which may result in us earning less income than our competitors. If we are
forced to match our competitors’ pricing, terms, and structure, we may not be able to achieve acceptable returns on our investments or
may bear substantial risk of capital loss.
We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial
condition, and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment
opportunities from time to time.
We have in the past and may in the future pursue new strategies and lines of business, and we may face enhanced risks
as a result of these changes in strategy, including from transacting with a broader array of customers and exposure to new
assets, activities and markets.
For example, in July 2019, we announced a new division that will handle the build-out of a new Strategic Partnership Program,
through which the Bank will partner with third parties to offer consumer loans and other financial services. The Strategic Partnership
Program is in the early stages of development, and its future impact on our financial condition and results of operations is currently
unknown. In addition, potential legal and regulatory risks associated with the entry into this line of business are currently uncertain
and may develop in ways that could affect us adversely, including as a result of legal proceedings brought against us on the basis that
we are the “true lender” of the loans facilitated, held, and serviced by our partners, or on the basis of a determination by the FDIC or
other financial regulators that our Strategic Partnership Program represents an unsafe and unsound practice. We expect to have
increased compliance costs associated with the Strategic Partnership Program, which could have an adverse impact on our results of
operations. Development of the Strategic Partnership Program could change, possibly materially, and Medallion Bank’s exposure to
operational risk events, including failure to comply with applicable legal or regulatory requirements may occur.
We may continue to change our strategy and enter new lines of business, including through the acquisition of another company,
acquisitions of new types of loan portfolios or other asset classes, or otherwise, in the future. Any such new business initiatives may
expose us to new and enhanced risks, including new credit-related, compliance, fraud, market and operational risks, and different and
potentially greater regulatory scrutiny of such new activities and assets. In addition, changes in our strategy and pursuit of new
business lines could bring us into contact, directly or indirectly, with customers that are not within our traditional customer base and
expose us to new asset classes, activities and markets.
Any new business initiatives and strategies we may pursue in the future may be less successful than anticipated and may not
advance our intended business strategy. We may not realize a satisfactory return on investments or acquisitions, we may experience
difficulty in managing new portfolios or integrating operations, and management’s attention from our other businesses could be
diverted. Any of these results could ultimately have an adverse effect on our business, financial condition or results of operations.
Our financial condition and results of operations will depend on our ability to manage growth effectively.
Our ability to achieve our loan and investment objective will depend on our ability to grow, which will depend, in turn, on our
management team’s ability to identify, evaluate, and monitor, and our ability to finance and invest in, companies that meet our
investment criteria.
Accomplishing this result on a cost-effective basis will be largely a function of our management team’s handling of the
investment process, its ability to provide competent, attentive, and efficient services, and our access to financing on acceptable terms.
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In addition to monitoring the performance of our existing investments, members of our management team and our investment
professionals may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time may
distract them or slow the rate of investment. In order to grow, we will need to hire, train, supervise, and manage new employees.
However, we cannot assure you that any such employees will contribute to the success of our business. Any failure to manage our
future growth effectively could have a material adverse effect on our business, financial condition, and results of operations.
Our business depends on our ability to adapt to rapid technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new,
technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to
serve customers better and to reduce costs. Our future success depends, in part, upon our ability to address the needs of customers by
using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may
not be able to effectively implement new, technology-driven products and services or be successful in marketing these products and
services to our customers. In addition, the implementation of technological changes and upgrades to maintain current systems and
integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us
to fail to comply with applicable laws. Failure to successfully keep pace with technological change affecting the financial services
industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition
or results of operations.
We expect that new technologies and business processes applicable to the banking industry will continue to emerge, and these
new technologies and business processes may be better than those we currently use. Because the pace of technological change is high
and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and
applications become obsolete or as better ones become available. A failure to maintain current technology and business processes
could cause disruptions in our operations or cause our products and services to be less competitive, all of which could have a material
adverse effect on our business, financial condition or results of operations.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause
our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and
that of our customers and personally identifiable information of our customers and employees, in third-party data centers, and on our
networks. The secure processing, maintenance, and transmission of this information is critical to our operations. Despite our security
and business continuity measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached
due to employee error, malfeasance, or other disruptions or vulnerable to other disruptions as a result of systems failures, operational
events, employee error, or incidents affecting our third-party service providers (or providers to those third-party service providers).
Any such breach or disruption could compromise our networks and the information stored there could be accessed, publicly disclosed,
destroyed, lost, or stolen. Any such access, disclosure, destruction or other loss of information could result in legal claims or
proceedings, liability under laws that protect the privacy of personal information and regulatory penalties, disrupt our operations and
damage our reputation, which could adversely affect our business. In addition, we may also be required to incur significant costs in
connection with any regulatory investigation or civil litigation resulting from a security breach or other information technology
disruption that affects us.
Terrorist attacks, other acts of violence or war, and natural disasters may affect any market for our securities, impact
the businesses in which we invest, and harm our operations and profitability.
Terrorist attacks and natural disasters may harm our results of operations and your investment. We cannot assure you that there
will not be further terrorist attacks against the US or US businesses or major natural disasters hitting the United States. Such attacks or
natural disasters in the US or elsewhere may impact the businesses in which we directly or indirectly invest by undermining economic
conditions in the United States. In addition, a substantial portion of our business is focused in the New York City metropolitan area,
which suffered a terrorist attack in 2001 and has faced continued threats. Another terrorist attack in New York City or elsewhere could
severely impact our results of operations. Losses resulting from terrorist attacks are generally uninsurable.
We are dependent upon our key investment personnel for our future success.
We depend on the diligence, skill, and network of business contacts of the investment professionals we employ for sourcing,
evaluating, negotiating, structuring, and monitoring our investments. Our future success will also depend, to a significant extent, on
the continued service and coordination of our senior management team, particularly, Alvin Murstein, our Chairman and Chief
Executive Officer, Andrew M. Murstein, our President, Larry D. Hall, our Chief Financial Officer, Donald Poulton and his
management team for Medallion Bank, and Alex Travis and his management team at Medallion Capital. The departure of
29
Messrs. Murstein or Mr. Hall, or any other member of our senior management team, could have a material adverse effect on our
business and financial results.
Our operations could be interrupted if certain external vendors on which we rely experience difficulty, terminate their
services or fail to comply with banking laws and regulations.
We depend to a significant extent on relationships with third parties that provide services, primarily information technology
services critical to our operations. Currently, we obtain services from third parties that include information technology infrastructure
and support, plus loan origination, loan servicing, and accounting systems and support. If any of our third-party service providers
experience difficulties or terminate their services and we are unable to replace our service providers with other service providers, our
operations could be interrupted. It may be difficult for us to replace some of our third-party vendors, particularly vendors providing
our loan origination, loan servicing and accounting services, in a timely manner if they are unwilling or unable to provide us with
these services in the future for any reason. If an interruption were to continue for a significant period of time, it could have a material
adverse effect on our business, financial condition or results of operations. Even if we are able to replace these third parties, it may be
at higher cost to us, which could have a material adverse effect on our business, financial condition, or results of operations. In
addition, if a third-party provider fails to provide the services we require, fails to meet contractual requirements, such as compliance
with applicable laws and regulations, or suffers a cyber-attack or other security breach, our business could suffer economic and
reputational harm that could have a material adverse effect on our business, financial condition or results of operations.
Current or former employee misconduct could expose us to significant legal liability and reputational harm.
We are vulnerable to reputational harm because we operate in an industry in which integrity and the confidence of the
dealerships, contractors, and FSPs that sell our consumer products are of critical importance. Our employees could engage, or our
former directors and employees could have engaged, in misconduct that adversely affects our business. For example, if such a person
were to engage, or previously engaged, in fraudulent, illegal or suspicious activities, we could be subject to regulatory sanctions and
suffer serious harm to our reputation (as a consequence of the negative perception resulting from such activities), financial position,
third-party relationships and ability to forge new relationships with third-party dealers or contractors. Our business often requires that
we deal with confidential information. If our employees were to improperly use or disclose this information, or if former directors and
employees previously improperly used or disclosed this information, even if inadvertently, we could suffer serious harm to our
reputation, financial position and current and future business relationships. It is not always possible to deter employee misconduct, and
the precautions we take to detect and prevent this activity may not always be effective. Misconduct by our employees or former
directors and employees, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our business,
financial condition or results of operations.
Additional Risks Relating to Our Loan Portfolios and Investments
Lending to small businesses involves a high degree of risk and is highly speculative.
Lending to small businesses involves a high degree of business and financial risk, which can result in substantial losses and
should be considered speculative. Historically, our borrower base consists primarily of small business owners that may have limited
resources and that are generally unable to obtain financing from traditional sources. There is generally no publicly available
information about these small business owners, and we must rely on the diligence of our employees and agents to obtain information
in connection with our credit decisions. In addition, these small businesses often do not have audited financial statements. Some
smaller businesses have narrower product lines and market shares than their competition. Therefore, they may be more vulnerable to
customer preferences, market conditions, or economic downturns, which may adversely affect the return on, or the recovery of, our
investment in these businesses.
30
Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, industries and sectors,
which will subject us to a risk of significant loss if any of these companies default on its obligations to us or by a downturn in
the particular industry or sector.
Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, industries and sectors. In
addition, taxi companies that constitute separate issuers may have related management or guarantors and constitute larger business
relationships to us. As of December 31, 2019, New York City medallion loans represented approximately 88% of our medallion loans,
which in turn represented 10% of our net loan portfolio. We do not have fixed guidelines for diversification, and while we are not
targeting any specific industries, our investments are, and could continue to be, concentrated in relatively few industries. As a result,
the aggregate returns we realize may be adversely affected if a small number of loans perform poorly or if we need to write down the
value of any one loan. If our larger borrowers were to significantly reduce their relationships with us and seek financing elsewhere, the
size of our loan portfolio and operating results could decrease. In addition, larger business relationships may also impede our ability to
immediately foreclose on a particular defaulted portfolio company as we may not want to impair an overall business relationship with
either the portfolio company management or any related funding source. Additionally, a downturn in any particular industry or sector
in which we are invested could also negatively impact the aggregate returns we realize.
The lack of liquidity in our investments may adversely affect our business.
We generally make investments in private companies. Substantially all of these securities are subject to legal and other
restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it
difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio
quickly, we may realize significantly less than the value at which we had previously recorded our investments. We may also face other
restrictions on our ability to liquidate an investment in a portfolio company to the extent that we have material non-public information
regarding such portfolio company.
In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times
when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all
of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such
investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference
between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a
significant change in market interest rates will not have a material adverse effect on our interest income. In periods of rising interest
rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use
a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate
investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use
interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include
various interest rate hedging activities.
We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were
to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% increase in
interest rates would result in an increase to the line item “net income” as of December 31, 2019 by approximately $780,000 on an
annualized basis, and the impact of such an immediate increase of 1% over a one year period would have been approximately
($1,116,000) at December 31, 2019. Although management believes that this measure is indicative of our sensitivity to interest rate
changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other
business developments that could affect net increase in net assets resulting from operations in a particular quarter or for the year taken
as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome
simulated by these estimates.
Our business may be further adversely affected if New York City experiences a sustained economic downturn.
Historically, a significant portion of our loan revenue is derived from medallion loans collateralized by New York City taxi
medallions. An economic downturn in New York City could lead to an additional increase in defaults on our medallion loans.
An economic downturn could result in additional commercial and consumer loan customers experiencing declines in business
activities and/or personal resources, which could lead to difficulties in their servicing of their loans with us, and increasing the level of
delinquencies, defaults, and loan losses in our commercial and consumer loan portfolios.
Sales of loans could have an adverse effect on the credit or other characteristics of the loans and portfolios we retain.
From time to time, we have sold portfolios of loans, and those transactions have generally included loans with stronger credit
characteristics than the overall composition of our loan portfolio. Accordingly, following those transactions, the overall credit
characteristics of our loan portfolio declined due to the transfer of the loans with stronger credit characteristics. In the future, the credit
characteristics of our loan portfolio could change as a result of loan sales, and other characteristics could change as well. For example,
31
if we sell loans with less favorable credit characteristics, the net interest income and net interest margin for our loan portfolio could be
adversely affected because loans with less favorable credit characteristics typically generate more net interest income and higher net
interest margin.
We depend on the accuracy and completeness of information about customers.
In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan portfolio on an
ongoing basis, we may rely on information furnished by or on behalf of customers, including financial statements, credit reports and
other financial information. We may also rely on representations of those customers or of other third parties, such as independent
auditors, as to the accuracy and completeness of that information. Reliance on inaccurate, incomplete, fraudulent or misleading
financial statements, credit reports or other financial or business information, or the failure to receive such information on a timely
basis, could result in loan losses, reputational damage or other effects that could have a material adverse effect on our business,
financial condition or results of operations.
Laws and regulations implemented in response to climate change could result in increased operating costs for our
portfolio companies.
Congress and other governmental authorities have either considered or implemented various laws and regulations in response to
climate change and the reduction of greenhouse gases. Existing environmental regulations could be revised or reinterpreted, new laws
and regulations could be adopted, and future changes in environmental laws and regulations could occur, which could impose
additional costs on the operation of our portfolio companies. For example, regulations to cut gasoline use and control greenhouse gas
emissions from new cars could adversely affect our medallion portfolio companies. Our portfolio companies may have to make
significant capital and other expenditures to comply with these laws and regulations. Changes in, or new, environmental restrictions
may force our portfolio companies to incur significant expenses or expenses that may exceed their estimates. There can be no
assurance that such companies would be able to recover all or any increased environmental costs from their customers or that their
business, financial condition or results of operations would not be materially and adversely affected by such expenditures or any
changes in environmental laws and regulations, in which case the value of these companies could be adversely affected.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We invest in our portfolio companies primarily through senior secured loans, junior secured loans, and subordinated debt issued
by small- to mid-sized companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally
with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of
interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which
we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company, holders of
debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full
before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to
use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to
share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution,
reorganization, or bankruptcy of the relevant portfolio company.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could
be subject to lender liability claims.
Even though we may have structured most of our investments as senior loans, if one of our portfolio companies were to go
bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that
portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of
other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or
instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim,
including as a result of actions taken in rendering significant managerial assistance.
We may not control many of Medallion Capital’s portfolio companies.
We may not control many of Medallion Capital’s portfolio companies, even though we may have board representation or board
observation rights. As a result, we are subject to the risk that a Medallion Capital portfolio company in which we invest may make
business decisions with which we disagree, and the management of such company may take risks or otherwise act in ways that do not
serve our interests as debt investors.
32
We may not realize gains from our equity investments.
Certain investments that we have made in the past and may make in the future include warrants or other equity securities. In
addition, we may from time to time make non-control, equity co-investments in companies in conjunction with private equity
sponsors. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive
may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity
interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we
experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the
business, recapitalization, or public offering, which would allow us to sell the underlying equity interests.
Other Risks Relating to Our Common Stock
The issuance of debt securities or preferred stock and our borrowing money from banks or other financial institutions
may affect holders of our common stock.
Our business periodically requires capital. We may issue debt securities or preferred stock, and/or borrow money from banks or
other financial institutions, which we refer to collectively as senior securities. Any amounts that we use to service our debt or make
payments on preferred stock will not be available for distributions to our common stockholders or to reinvest in our businesses. It is
likely that any debt we issue will be governed by an indenture or other instrument containing covenants restricting our operating
flexibility. Additionally, some of these securities or other indebtedness may be rated by rating agencies, and in obtaining a rating for
such securities and other indebtedness, we may be required to abide by operating and investment guidelines that further restrict
operating and financial flexibility. We and, indirectly, our stockholders will bear the cost of issuing and servicing such securities and
other indebtedness. Preferred stock or any convertible or exchangeable securities that we issue in the future may have rights,
preferences, and privileges more favorable than those of our common stock, including separate voting rights, and could delay or
prevent a transaction or a change in control to the detriment of the holders of our common stock.
If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our
common stock, the percentage ownership of our stockholders at that time would decrease and they may experience dilution.
Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms
or at all.
We borrow money, which magnifies the potential for gain or loss on amounts invested, and increases the risk of investing
in us.
Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested, and therefore increase the risk
associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders, and through long-term
subordinated SBA debentures. These creditors have fixed dollar claims on our assets that are superior to the claims of our
stockholders. If the value of our assets increases, then leveraging would cause stockholders’ equity to increase more sharply than it
would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause stockholders’ equity to
decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest
payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in
our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could reduce the
amount available for distribution payments.
As of December 31, 2019, we had $1,169,593,000 of outstanding indebtedness with a weighted average borrowing cost of
2.89%.
Most of our borrowing relationships have maturity dates during 2020 through 2021. We have been in active and ongoing
discussions with each of these lenders and have extended each of the facilities as they matured. Certain lenders have worked with us to
extend and change the terms of the borrowing agreements, but we cannot assure you that they will continue to do so. See Note 7 of our
consolidated financial statements for a discussion of the current and new lending arrangements to date.
33
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability to originate
loans that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of our expenses, variations
in and the timing of the recognition of charge-offs and provision for loan losses, changes in medallion collateral value, the degree to
which we encounter competition in our markets, and general economic conditions. As a result of these factors, results for any period
should not be relied upon as being indicative of performance in future periods.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease office space in New York City for our corporate headquarters under a lease expiring in April 2027. We also lease
office space for loan origination offices and subsidiary operations in Long Island City, New York; Newark, New Jersey; and Chicago,
Illinois, which, along with our New York City office, handles our medallion loan segment, and in Minneapolis, Minnesota, which
handles our commercial lending segment. Medallion Bank leases office space in Salt Lake City, Utah under a lease expiring in
November 2027, which handles the recreation and home improvement lending segments, and in Bothell, Washington, which handles
our home improvement lending segment. We do not own any real property, other than foreclosed properties obtained as a result of
lending relationships. We believe that our leased properties, taken as a whole, are in good operating condition and are suitable for our
current business operations.
ITEM 3. LEGAL PROCEEDINGS
We are currently involved in various legal proceedings incident to the ordinary course of our business, including collection
matters with respect to certain loans. We intend to vigorously defend any outstanding claims and pursue our legal rights. In the
opinion of our management and based upon the advice of legal counsel, there is no proceeding pending, or to the knowledge of
management threatened, which in the event of an adverse decision could result in a material adverse effect on our results of operations
or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
34
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
STOCK PERFORMANCE GRAPH
The following graph commences as of December 31, 2014 and compares the Company’s Common Stock with the cumulative
total return for the NASDAQ Composite Index and the Russell 2000 Index. Furthermore, the following graph assumes the investment
of $100 on December 31, 2014 in each of the Company’s common stock, the stocks comprising the NASDAQ Composite Index and
the Russell 2000 Index and assumes dividends are reinvested.
Cumulative Total Return
Based on Initial Investment of $100 on December 31, 2014
with dividends reinvested
200.00
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
12/14
12/15
12/16
12/17
12/18
12/19
Medallion Financial Corp.
Nasdaq (US) Index
Russell 2000 Index
Our common stock is quoted on NASDAQ under the symbol “MFIN.” Our common stock commenced trading on May 23,
1996. As of March 27, 2020, there were approximately 398 holders of record of our common stock. On March 27, 2020, the last
reported sale price of our common stock was $2.08 per share.
We are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains, and are
not subject to the annual distribution requirements under Subchapter M of the Code. Thus, there can be no assurance that we will pay
any cash distributions as we may retain our earnings in certain circumstances to facilitate the growth of our business, to finance our
investments, to provide liquidity, or for other corporate purposes. We have not paid dividends since 2016 and do not currently
anticipate paying dividends. We may, however, re-evaluate paying dividends in the future depending on market conditions.
We have adopted a dividend reinvestment plan pursuant to which stockholders may elect to have distributions reinvested in
additional shares of common stock. When we declare a distribution, all participants will have credited to their plan accounts the
number of full and fractional shares (computed to three decimal places) that could be obtained with the cash, net of any applicable
withholding taxes that would have been paid to them if they were not participants. The number of full and fractional shares is
computed at the weighted average price of all shares of common stock purchased for plan participants within the 30 days after the
distribution is declared plus brokerage commissions. The automatic reinvestment of distributions will not release plan participants of
any income tax that may be payable on the distribution. Stockholders may terminate their participation in the dividend reinvestment
plan by providing written notice to the Plan Agent at least 10 days before any given distribution payment date. Upon termination, we
will issue to a stockholder both a certificate for the number of full shares of common stock owned and a check for any fractional
shares, valued at the then current market price, less any applicable brokerage commissions and any other costs of sale. There are no
additional fees or expenses for participation in the dividend reinvestment plan. Stockholders may obtain additional information about
the dividend reinvestment plan by contacting the American Stock Transfer & Trust Company, LLC at 6201 15th Avenue, Brooklyn,
NY, 11219.
35
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not repurchase any of our shares during the three months ended December 31, 2019. Accordingly, under our Stock
Repurchase Program previously authorized by our Board of Directors, up to $22,874,509 of shares remain authorized for repurchase
under the program.
ITEM 6. SELECTED FINANCIAL DATA
Summary Consolidated Financial Data
You should read the consolidated financial information below with the consolidated financial statements and accompanying
notes thereto included in this report. As described therein, for the twelve months ended December 31, 2019 and the nine months ended
December 31, 2018, the Company reported under Bank Holding Company Accounting.
(Dollars in thousands, except per share
data)
Statement of operations
Net interest income
Provision for loan losses
Non-interest income (expense), net
Net income (loss) before income
taxes
Income tax provision
Less: income attributable to
noncontrolling interests
Net loss
Per share data
Net loss per diluted share
Distributions per share
Weighted average common shares
outstanding
Diluted
Balance sheet data
Net loans receivable
Total assets
Total borrowings (1)
Total liabilities
Total equity (2)
Selected financial ratios
Return on average assets (ROA)
Return on average equity (ROE)
Dividend payout ratio
Net interest margin
Other income ratio (3)
Total expense ratio (4)
Equity to assets (2)
Debt to equity (2)
Loans receivable to assets
Net charge-offs
Net charge-offs as a % of average
loans receivable
Allowance coverage ratio
Twelve Months Ended
December 31, 2019
Nine Months Ended
December 31, 2018
$
$
$
$
$
97,517
47,386
(47,794)
2,337
(341)
3,758
(1,762) $
(0.07) $
—
71,987
59,008
(20,135 )
(7,156 )
(709 )
2,307
(10,172 )
(0.42 )
—
24,342,979
24,234,633
$
1,114,762
1,541,667
1,169,593
1,207,199
334,468
981,487
1,381,846
1,062,028
1,091,642
290,204
(0.12)%
(0.59)
—
8.64
1.81
9.18
21.70
3.5x
72%
(0.90 )%
(4.62 )
—
8.19
1.88
9.77
21.00
3.7x
71 %
37,688
22,613
3.60%
3.97
2.73 %
3.58
(1) Excludes the $5,105 related to deferred financing costs as of December 31, 2019.
(2)
Includes $71,320 and $27,596 related to non-controlling interests in consolidated subsidiaries as of December 31, 2019 and
2018.
36
(3) Other income ratio represents other income divided by average interest earning assets, and excludes the gain on the
deconsolidation of Trust III of $25,325 for the nine months ended December 31, 2018. See Note 23 for additional information.
(4) Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average
interest earning assets.
You should read the consolidated financial information below with the consolidated financial statements and accompanying
notes thereto included in this report. As described therein, for the three months ended March 31, 2018, and the years ended
December 31, 2017, 2016, and 2015, the Company reported under Investment Company Accounting.
(Dollars in thousands, except per share data)
Statement of operations
Investment income
Interest expense
Net interest income
Noninterest income
Operating expenses
Net investment income (loss) before income taxes
Income tax benefit
Net investment income (loss) after income taxes
Net realized gains (losses) on investments
Net change in unrealized appreciation on Medallion Bank and other controlled
subsidiaries (1)
Net change in unrealized appreciation (depreciation) on investments (1)
Net change in unrealized depreciation on investments other than securities
Income tax (provision) benefit
Net increase (decrease) in net assets resulting from operations
Per share data
Net investment income (loss)
Income tax (provision) benefit
Net realized gains (losses) on investments
Net change in unrealized appreciation on investments (1)
Net increase (decrease) in net assets resulting from operations
Distributions declared per share
Weighted average common shares outstanding
Basic
Diluted
Balance sheet data
Net investments
Total assets
Total funds borrowed
Total liabilities
Total shareholders’ equity
Managed balance sheet data (2)
Net investments
Total assets
Total funds borrowed
Total liabilities
Selected financial ratios and other data
Return on average assets (ROA) (3)
Net investment income (loss) after taxes
Net increase (decrease) in net assets resulting from operations
Return on average equity (ROE) (4)
Net investment income (loss) after taxes
Net increase (decrease) in net assets resulting from operations
Weighted average yield
Weighted average cost of funds
Net interest margin (5)
Noninterest income ratio (6)
Total expense ratio (7)
Operating expense ratio (8)
As a percentage of net investment portfolio
Medallion loans
Commercial loans
Investment in Medallion Bank and other controlled subsidiaries
Equity investments
Investment securities
Investments to assets (9)
Equity to assets (10)
Debt to equity (11)
Three Months Ended
March 31,
2018
2017
Year Ended December 31,
2016
2015
$
$
$
$
$
$
4,033
3,551
482
60
4,108
(3,566 )
336
(3,230 )
(34,745 )
29,115
(1,915 )
(4,403 )
304
(14,874 )
(0.15 )
0.03
(1.44 )
0.94
(0.62 )
0.00
24,154,879
24,154,879
595,402
616,710
320,662
344,273
272,437
$
$
$
$
$
$
19,624
13,770
5,854
107
13,810
(7,849 )
728
(7,121 )
(43,744 )
9,483
8,222
(2,060 )
35,498
278
(0.33 )
1.51
(1.82 )
0.65
0.01
0.00
23,919,994
24,053,307
610,135
635,522
327,623
348,363
287,159
25,088 $
12,638
12,450
408
22,786
(9,928 )
10,047
119
457
130,121
(22,863 )
(28,372 )
(55,947 )
23,515 $
(0.41 ) $
(1.90 )
0.02
3.26
0.97 $
0.35 $
42,653
9,422
33,231
319
16,724
16,826
—
16,826
7,636
16,830
(2,295 )
(9,621 )
—
29,376
0.69
—
0.31
0.20
1.20
1.00
24,123,888
24,173,020
24,315,427
24,391,959
652,278 $
689,377
349,073
403,281
286,096
$
1,386,136
1,479,826
1,167,888
1,207,389
$
1,380,054
1,565,889
1,234,371
1,278,730
1,517,592 $
1,605,435
1,257,515
1,319,340
(2.08 )%
(9.55 )
(4.62 )
(21.24 )
2.70 %
2.38
0.32
0.01
1.16
0.68
27 %
15
56
2
—
97 %
44
118
(1.07 )%
0.04
(2.49 )
0.10
3.12 %
2.19
0.93
0.02
(1.37 )
2.20
34 %
15
49
2
—
96 %
45
114
0.02 %
3.48
0.04
8.49
4.17 %
2.10
2.07
0.07
13.5
3.78
41 %
13
45
1
—
95 %
42
122
606,959
689,050
404,540
410,962
278,088
1,501,555
1,631,118
1,313,436
1,353,030
2.59 %
4.53
6.08
10.61
7.74 %
1.71
6.03
0.06
4.75
3.04
51 %
14
26
1
8
88 %
40
145
$
$
$
$
$
$
$
37
(1) Unrealized appreciation (depreciation) on investments represents the increase (decrease) for the year in the fair value of our
investments, including the results of operations for Medallion Bank and other controlled subsidiaries, where applicable.
Includes the balances of wholly-owned, unconsolidated portfolio companies, primarily Medallion Bank.
(2)
(3) ROA represents the net investment income after taxes or net increase in net assets resulting from operations, divided by average
total assets, and includes the goodwill impairment of $5,099 in 2016. Excluding the impairment writeoff, the ratio was 0.77% in
2016.
(4) ROE represents the net investment income after taxes or net increase in net assets resulting from operations, divided by average
shareholders’ equity, and includes the goodwill impairment of $5,099 in 2016. Excluding the impairment writeoff, the ratio was
1.88% in 2016.
(5) Net interest margin represents net interest income for the year divided by average interest earning assets, and included interest
recoveries and bonuses of $0 for the three months ended March 31, 2018, $0 in 2017, $0 in 2016, and $817 in 2015, and also
included dividends from Medallion Bank and other controlled subsidiaries of $28 for the three months ended March 31, 2018,
$1,278 in 2017, $3,000 in 2016, and $18,889 in 2015. On a managed basis, combined with Medallion Bank, the net interest
margin was 6.96% for the three months ended March 31, 2018, and 6.99%, 6.77%, and 6.98% for 2017, 2016, and 2015.
(6) Noninterest income ratio represents noninterest income divided by average interest earning assets.
(7) Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average
interest earning assets, and includes the goodwill impairment of $5,099 in 2016. Excluding the impairment writeoff, the ratio
was 12.65% in 2016.
(8) Operating expense ratio represents operating expenses divided by average interest earning assets, and includes the goodwill
impairment of $5,099 in 2016. Excluding the impairment writeoff, the ratio was 2.94% in 2016.
(9) Represents net investments divided by total assets as of December 31.
(10) Represents total shareholders’ equity divided by total assets as of December 31.
(11) Represents total funds borrowed divided by total shareholders’ equity as of December 31.
38
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information contained in this section should be read in conjunction with the consolidated financial statements and the
accompanying notes thereto for the years ended December 31, 2019, 2018, and 2017. In addition, this section contains forward-
looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and
conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-
looking statements are described in the Risk Factors section on page 18. Additionally, more information about our business activities
can be found in “Business.”
GENERAL
We are a finance company whose strategic focus and growth in recent years has been through Medallion Bank (a wholly-owned
subsidiary), which originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers, and to finance
small-scale home improvements. Historically we have had a leading position in originating, acquiring, and servicing loans that
finance taxi medallions and various types of commercial businesses.
Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its
consumer loan portfolio at a compound annual growth rate of 16% (19% if there had been no loan sales during 2016, 2017, and 2018).
We have transitioned away from medallion lending and have placed our strategic focus on our growing consumer finance portfolios.
As a result of our change in strategy, as of December 31, 2019, our consumer loans represented 84% of our net loan portfolio, with
medallion loans representing 10% and commercial loans representing 6%. Total assets under management, which includes assets
serviced for third party investors, were $1,660,000,000 as of December 31, 2019, and $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.
Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the
total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-
bearing sources, such as bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, privately
placed notes, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost
of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest
income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability
of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our
interest-earning assets reprice on a different basis than our interest-bearing liabilities.
We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our
investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Our
investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants
to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated
balance sheets). Interest income is earned on the debt instruments.
Beginning in 2019, Medallion Bank began the process to build-out a strategic partnership program with financial technology, or
fintech, companies. Although no partnerships have been finalized, Medallion Bank is actively exploring this opportunity with a
number of fintech companies with a plan to begin operations in 2020.
On March 7, 2018, a majority of the Company’s shareholders authorized the Company’s board of directors to withdraw the
Company’s election to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as
amended, or the 1940 Act, and we withdrew such election effective April 2, 2018. At that point, we were no longer a BDC or subject
to the provisions of the 1940 Act applicable to BDCs. Historically, the composition of the Company’s assets caused it to meet the
definition of an “investment company,” and the Company made a corresponding election to be treated as a BDC. Now that the
Company has de-elected BDC status, it operates so as to fall outside the definition of an “investment company” or within an
applicable exception.
As a result of this change in status, commencing with the three months ended June 30, 2018:
• we consolidated the results of Medallion Bank and our other subsidiaries in our financial statements, which, as an
investment company, we were previously precluded from doing; and
• with the consolidation of Medallion Bank, given its significance to our overall financial results, we now report as a bank
holding company for accounting purposes under Article 9 and Guide 3 of Regulation S-X (but we are not a bank holding
company for regulatory purposes).
39
As we made this change to our financial reporting prospectively, in this report we refer to both accounting in accordance with
US generally accepted accounting principles, 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.
Our wholly-owned subsidiary, Medallion Bank, or the Bank, is a bank regulated by the FDIC and the Utah Department of
Financial Institutions which originates consumer loans, raises deposits, and conducts other banking activities. The Bank generally
provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of
funds, historically we have referred a portion of our taxi medallion and commercial loans to the Bank, which originated these loans,
and have been serviced by Medallion Servicing Corp., or MSC. However, at this time the Bank is not originating any new medallion
loans and is working with MSC to service its existing portfolio. The FDIC restricts the amount of medallion loans that the Bank may
finance to three times Tier 1 capital, although it is less than one times Tier 1 capital as of December 31, 2019. MSC earns referral and
servicing fees for these activities.
The assets of Taxi Medallion Loan Trust III, or Trust III, are not available to pay obligations of its affiliates or any other party.
Trust III’s loans are serviced by Medallion Funding LLC, or MFC. On November 8, 2018, a limited guaranty in favor of DZ Bank was
terminated in exchange for a $1.4 million note, payable in quarterly installments over five years. As a result of such restructuring,
effective as of such date, Trust III is no longer consolidated in our financial statements.
The current COVID-19 outbreak, its broad impact and preventive measures taken to contain or mitigate the outbreak have
had, and are likely to continue to have, significant negative effects on the US and global economy, employment levels, employee
productivity, and financial market conditions, which, in turn, may increasingly have negative effects the ability of our borrowers to
repay outstanding loans, the value of collateral securing loans, demand for loans and other financial services products and consumer
discretionary spending. As a result of these or other consequences, the outbreak has adversely affected our business, results of
operations and financial condition, likely materially. The effects of the outbreak on us could be exacerbated given that our business
model is largely consumer and small business directed, which are more severely affected by COVID-19, and the outbreak, and
preventative measures taken to contain or mitigate the outbreak, have had and may increasingly have a significant negative effects on
consumer discretionary spending. The extent to which the outbreak will impact our operations will depend on future developments,
which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the
actions taken to contain or mitigate the outbreak. We have taken steps to operate through this crisis, for example, by having
employees work remotely and negotiating with borrowers and lenders alike as to payment terms. See “Risk Factors -- The ongoing
coronavirus pandemic and any other future outbreak of disease or similar public health threat could have a material adverse impact on
our business, operating results and financial condition.”
CRITICAL ACCOUNTING POLICIES
We follow financial accounting and reporting policies that are in accordance with GAAP. Some of these significant accounting
policies require management to make difficult, subjective or complex judgments. The policies noted below, however, are deemed to
be our “critical accounting policies” under the definition given to this term by the SEC. According to the SEC, “critical accounting
policies” mean those policies that are most important to the presentation of a company’s financial condition and results of operations,
and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.
The judgments used by management in applying the critical accounting policies may be affected by deterioration in the
economic environment, which may result in changes to future financial results. Specifically, subsequent evaluations of the loan
portfolio, in light of the factors then prevailing, may result in significant changes to the allowance for loan losses in future periods, and
the inability to collect on outstanding loans could result in increased loan losses.
Allowance for Loan Losses
In analyzing the adequacy of the allowance for loan losses, the Company uses historical delinquency and actual loss rates with a
three-year look-back period for medallion loans and a one-year look-back period for recreation and home improvement loans, and
uses historical loss experience and other projections for commercial loans. The allowance 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 size 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. This evaluation is inherently subjective, as it
requires estimates that are susceptible to significant revision as more information becomes available.
40
Our methodology to calculate the general reserve portion of the allowance includes the use of quantitative and qualitative
factors. We initially determine an allowance based on quantitative loss factors for loans evaluated collectively for impairment. The
quantitative loss factors are based primarily on historical loss rates, after considering loan type, historical loss and delinquency
experience. The quantitative loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in
historical loss levels or other risks. Qualitative loss factors are used to modify the reserve determined by the quantitative factors and
are designed to account for losses that may not be included in the quantitative calculation according to management’s best judgment.
Performing loans are recorded at book value and the general reserve maintained to absorb expected losses consistent with GAAP.
All medallion loans that reach 90 days or more delinquent require a specific allowance for those loans, which is determined on
an individual basis. We charge-off loans in the period that such loans are deemed uncollectible or when they reach 120 days
delinquent regardless of whether the loan is a recreation, home improvement, or medallion loan.
The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be
responsive to changes in portfolio credit quality and inherent credit losses. The changes are reflected in both the pooled formula
reserve and in specific reserves as the collectability of larger classified loans is regularly recalculated with new information as it
becomes available. Management is primarily responsible for the overall adequacy of the allowance.
Medallion Loan Collateral Valuation
Due to the low volume of market transfer activity as medallion values declined in recent years, the determination of taxi
medallion collateral fair value has been derived quarterly for each jurisdiction taking into consideration recent market transfer activity,
to the extent it is available, as well as a discounted cash flow model when trading activity alone was deemed insufficient or
unreliable. In general, recent market transfers published by each jurisdiction have been analyzed to derive the median transfer activity
value. However, depending on the circumstances, when analyzing transfer activity, transactions which management determined from
available information not to be arms-length have been excluded from the calculation of the median transfer value. When discounted
cash flow models have been used, significant inputs typically include the discount rate, taxi fare/lease revenue, and associated
expenses such as vehicle costs, fuel, credit card processing fees, repair costs, and insurance premiums. A higher discount rate, lower
taxi fare/lease revenue and higher associated expenses would each produce a lower fair value. At period end, the transfer activity and,
if applicable, discounted cash flow values, are taken into consideration to arrive at a fair value of the medallion collateral in each
jurisdiction.
41
Average Balances and Rates (Bank Holding Company Accounting)
The following table shows the Company’s consolidated average balance sheets, interest income and expense, and the average
interest earning/bearing assets and liabilities, and which reflect the average yield on assets and average costs on liabilities as of and for
the twelve months ended December 31, 2019 and nine months ended December 31, 2018.
(Dollars in thousands)
Interest-earning assets
Interest-earning cash and cash equivalents
Investment securities
Loans
Recreation
Home improvement
Commercial
Medallion
Total loans
Total interest-earning assets
Non-interest-earning assets
Cash
Equity investments
Loan collateral in process of foreclosure (1)
Goodwill and intangible assets
Income tax receivable
Other assets
Total non-interest-earning assets
Total assets
Interest-bearing liabilities
Deposits
DZ loan
SBA debentures and borrowings
Notes payable to banks
Retail and privately placed notes
Preferred securities
Other borrowings
Total interest-bearing liabilities
Non-interest-bearing liabilities
Deferred tax liability
Other liabilities (2)
Total non-interest-bearing liabilities
Total liabilities
Non-controlling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income
Net interest margin
Twelve Months Ended December 31,
2019
Nine Months Ended December 31,
2018
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
$
36,444 $
45,283
574
1,285
1.58% $
2.84
45,836 $
44,789
508
850
1.47%
2.52
646,425 99,463
209,842 19,943
7,632
63,039
3,665
127,109
1,046,415 130,703
1,128,142 132,562
15.39
9.50
12.11
2.88
12.49
11.75
579,440 68,870
187,570 12,799
78,501 7,459
234,476 6,317
1,079,987 95,445
1,170,612 96,803
15.78
9.06
12.61
3.58
11.73
10.98
30,494
9,560
51,924
204,063
771
44,252
341,064
$1,469,206
12,131
10,665
56,397
210,441
—
37,542
327,176
$1,497,788
$ 916,416 22,521
—
—
2,985
76,544
2,069
45,506
5,789
59,252
1,522
33,000
159
8,028
1,138,746 35,045
2.46% $ 891,588 14,230
67,935 2,126
79,157 2,300
67,732 2,305
33,625 2,625
33,000 1,111
119
8,286
1,181,323 24,816
—
3.90
4.55
9.77
4.61
1.98
3.08
2.12%
4.15
3.86
4.52
10.36
4.47
1.91
2.79
7,602
28,331
35,933
1,174,679
31,450
263,077
$1,469,206
1,549
22,743
24,292
1,205,615
27,318
264,855
$1,497,788
$ 97,517
$ 71,987
8.64%
8.19%
(1)
(2)
Includes financed sales of this collateral to third parties reported separately from the loan portfolio, and that are conducted
by the Bank of $8,163 and $3,134 as of December 31, 2019 and 2018.
Includes deferred financing costs of $5,105 as of December 31, 2019.
42
During the twelve months ended December 31, 2019, our net loans yielded 12.49%, which was up 6% from 11.73% for the nine
months ended December 31, 2018, mainly driven by the overall increase in the higher yielding recreation loan balance and the
decrease in the lower yielding medallion loan balance. Interest bearing liabilities, mainly certificates of deposit, fund the growing
consumer loan business, and as market rates have increased, so has the average cost of borrowing. In addition, we issued new
privately placed notes during 2019 which also led to an increase in the cost of borrowings. In addition, due to the restructuring of the
DZ loan in the fourth quarter of 2018, the overall borrowings declined.
Rate/Volume Analysis (Bank Holding Company Accounting)
The following table presents the change in interest income and expense due to changes in the average balances (volume) and
average rates, calculated for the twelve months ended December 31, 2019 and the nine months ended December 31, 2018.
(Dollars in thousands)
Interest-earning assets
Interest-earning cash and cash equivalents
Investment securities
Loans
Recreation
Home improvement
Commercial
Medallion
Total loans
Total interest-earning assets
Interest-bearing liabilities
Deposits
DZ loan
SBA debentures and borrowings
Notes payable to banks
Retail and privately placed notes
Preferred securities
Other borrowings
Total interest-bearing liabilities
Net
Twelve Months Ended December 31,
2019
Increase
(Decrease)
In Rate
Increase
(Decrease)
In Volume
Net
Change
Nine Months Ended December 31, 2018
Increase
(Decrease)
In Volume
Increase
(Decrease)
In Rate
Net
Change
$
(294) $
3
75 $
129
(219) $
132
142 $
30
18 $
12
160
42
(2,756)
10,531
487
2,558
(850)
(1,933)
(972)
(2,245)
8,911
(4,091)
8,620 $ (3,887) $
$
7,775
3,045
(2,783)
(3,217)
4,820
4,733 $
662
(1,427)
2,089
188
160
28
161
314
(153 )
(2,422)
(1,460)
(962 )
1,002
(1,411)
(2,413)
1,174 $ (2,383) $ (1,209)
$
$
$
2,913 $
409 $
—
(2,367)
32
(130)
32
(979)
(172)
2,464
—
24
(2)
1
(602) $
2,827 $
9,222 $ (6,714) $
3,322 $
(2,367)
(98)
(947)
2,292
24
(1)
2,225 $
2,508 $
1,421
218 $ 1,203 $
(720)
(41)
(679 )
30
(2)
32
(82)
108
(190 )
—
(19)
(19)
—
79
79
6
4
2
(617 ) $ 1,332 $
715
1,791 $ (3,715) $ (1,924)
During the twelve months ended December 31, 2019, interest income increased primarily due to the increase in our consumer
loan portfolios even as the average rate decreased. Additionally, we saw a decline in our overall medallion portfolio as loans continued
to age 90 days or more past due and be charged-off to loans in process of foreclosure. Interest expense increased for the twelve months
primarily driven by the overall increase in borrowing rates.
Our interest expense is driven by the interest rates payable on our bank certificates of deposit, short-term credit facilities with
banks, fixed-rate, long-term debentures issued to the SBA, and other short-term notes payable. The Bank issues brokered bank
certificates of deposit, which are our lowest borrowing costs. The Bank is able to bid on these deposits at a wide variety of maturity
levels which allows for improved interest rate management strategies.
Our cost of funds is primarily driven by the rates paid on our various debt instruments and their relative mix, and changes in the
levels of average borrowings outstanding. See Note 7 to the consolidated financial statements for details on the terms of our
outstanding debt. Our debentures issued to the SBA typically have terms of ten years.
43
We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the
average amount of such liabilities outstanding during the period. The following tables show the average borrowings and related
borrowing costs for the years ended December 31, 2018 and 2017. Our average balances decreased during 2018, reflecting the
contraction in the loan portfolios, mainly due to the deconsolidation of Trust III and the consumer loan sale in the third quarter of
2018. The increase in borrowing costs primarily reflected the repricing of term borrowings based upon the current market and
increased deposit balances reflecting a lengthening of their maturity profile.
(Dollars in thousands)
December 31, 2018 (1)
Deposits
DZ loan
SBA debentures and borrowings
Notes payable to banks
Retail notes
Preferred securities
Other borrowings
Total borrowings
December 31, 2017 (2)
DZ loan
Notes payable to banks
SBA debentures and borrowings
Preferred securities
Retail notes
Total
Medallion Bank borrowings
Total managed borrowings
Interest
Expense
Average
Balance
Average
Borrowing
Costs
$
$
$
$
$
14,230 $
2,928
3,049
3,118
3,500
1,423
119
891,588
81,256
79,016
71,353
33,625
33,000
8,286
28,367 $ 1,198,124
102,894
2,892 $
84,219
3,164
80,284
3,099
33,000
1,111
33,625
3,504
334,022
13,770 $
13,869
913,072
27,639 $ 1,247,094
2.14%
3.60
3.86
4.37
10.41
4.31
1.93
2.37
2.81%
3.76
3.86
3.37
10.42
4.12
1.52
2.22
(1) Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and three months
ended March 31, 2018 under Investment Company Accounting.
(2) Balances under Investment Company Accounting.
We will continue to seek SBA funding through Medallion Capital to the extent it offers attractive rates. SBA financing subjects
its recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the
SBIA and SBA regulations. We believe that financing operations primarily with short-term floating rate secured bank debt has
generally decreased our interest expense, but has also increased our exposure to the risk of increases in market interest rates, which we
mitigate with certain interest rate strategies. At December 31, 2019 and 2018, short-term adjustable rate debt constituted 4% and 6%
of total debt.
44
Loans
The gross loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily
includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan. During the twelve
months ended December 31, 2019, there was continued growth in the consumer and commercial lending segments, which was
partially offset by the continued shrinkage of the medallion portfolio.
Improvement Commercial Medallion
Total
Twelve Months Ended December 31, 2019
(Dollars in thousands)
Gross loans – December 31, 2018
Loan originations
Principal payments
Charge-offs, net
Transfer to loans in process of foreclosure, net
Amortization of origination costs
Amortization of loan premium
FASB origination costs, net
Paid-in-kind interest
Gross loans – December 31, 2019
Home
Recreation
$ 587,038 $ 183,155 $
142,112
301,403
(76,157)
(146,873)
(786)
(17,419)
—
(14,512)
1,561
(6,428)
(416)
(247)
(2,145)
10,370
—
—
$ 713,332 $ 247,324 $
64,083 $ 183,606 $ 1,017,882
— 462,093
18,578
(13,553) (15,070 ) (251,653)
(37,688)
(31,348)
(4,952)
(3,289)
8,976
834
69,767 $ 130,432 $ 1,160,855
(819) (18,664 )
— (16,836 )
(119 )
34
—
(2,626 )
141
610
—
834
Provision and Allowance for Loan Loss (Bank Holding Company Accounting)
During the twelve months ended December 31, 2019, New York taxi medallion values decreased to a net realizable value of
$167,000, from $181,000 at December 31, 2018, with the net realizable value of the taxi medallions in other markets declining
slightly. In addition, loans continued to age 90 days or more or 120 days or more, and were reserved and charged-down to their
collateral value. The allowance for loan loss rate for certain consumer loans was slightly increased as well. The provision also
included $3,173,000 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. This figure excludes the general reserve of $17,351,000 at the Bank, which was netted against
loan balances at consolidation on April 2, 2018.
(Dollars in thousands)
Allowance for loan losses – beginning balance
Charge-offs
Twelve Months Ended
December 31, 2019
Nine Months Ended
December 31, 2018
$
36,395 $
— (1)
Recreation
Home improvement
Commercial
Medallion
Total charge-offs
Recoveries
Recreation
Home improvement
Commercial
Medallion
Total recoveries
Net charge-offs (2)
Provision for loan losses
Allowance for loan losses – ending balance (3)
(24,433 )
(2,504 )
(819 )
(22,205 )
(49,961 )
7,014
1,718
—
3,541
12,273
(37,688 )
47,386
46,093 $
(12,697)
(1,562)
—
(14,277)
(28,536)
4,437
905
4
577
5,923
(22,613)
59,008 (4)
36,395
$
(1) Beginning balance reflects the transition to Bank Holding Company Accounting by netting previously established unrealized
depreciation against the gross loan balances resulting in a starting point of zero for this table.
(2) As of December 31, 2019, cumulative charge-offs of loans and loans in process of foreclosure in the medallion portfolio were
$241,214, representing collection opportunities for the Company.
45
(3)
(4)
Includes $3,878 of a general reserve as of December 31, 2019, for the Company, for current and performing medallion loans
under 90 days past due, as an additional buffer against future losses, representing 9% of the total allowance, and 3.13% of the
loans in question. This figure excludes $17,351 of a general reserve on loans at the Bank, much of which was netted against loan
balances at consolidation on April 2, 2018. Subsequent to April 2, 2018, the Bank recorded general reserve benefit of $2,230.
Includes $8,161 of a reversal of provision for loan losses related to the deconsolidation of Trust III in the 2018 fourth quarter.
The following tables set forth the allowance for loan losses by type as of December 31, 2019 and 2018.
December 31, 2019
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
December 31, 2018
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
$
$
$
$
Amount
Percentage
of Allowance
Allowance as
a Percent of
Loan Category
18,075
2,608
—
25,410
46,093
39 %
6
—
55
100 %
2.53%
1.05
—
19.48
3.97%
Amount
Percentage
of Allowance
6,856
1,796
—
27,743
36,395
Allowance as
a Percent of
Loan Category
1.17%
0.98
—
15.11
3.58%
19 %
5
—
76
100 %
As of December 31, 2019, there was an increase in the allowance for loan loss as related to the recreation loan portfolio as
compared to December 31, 2018. This change was due to the significant increase in loans originated during the year, along with the
impact of the sale in the 2018 third quarter leading to a reversal of prior allowances, and an increase in some allowance loss rates.
The following table sets forth the pre-tax changes in our unrealized appreciation (depreciation) on investments, for the three
months ended March 31, 2018 and for the year ended December 31, 2017 under Investment Company Accounting.
(Dollars in thousands)
Balance December 31, 2016
Net change in unrealized
Appreciation on investments
Depreciation on investments
Reversal of unrealized appreciation
(depreciation) related to realized
Gains on investments
Losses on investments
Balance December 31, 2017
Net change in unrealized
Appreciation on investments
Depreciation on investments
Reversal of unrealized appreciation
(depreciation) related to realized
Gains on investments
Losses on investments
Balance March 31, 2018
Medallion
Loans
(28,523) $
$
Commercial
Loans
Investments
in
Subsidiaries
Equity
Investments
Investments
Other Than
Securities
Total
(1,378) $ 152,750 $
3,934 $
584 $ 127,367
—
(37,335)
—
(410)
6,170
—
2,060
(277 )
(821)
(1,253)
7,409
(39,275)
—
45,520
(20,338)
—
(38,170)
—
1,275
(513)
—
—
158,920
(3,082 )
486
3,121
—
—
(1,490)
(3,082)
47,281
139,700
—
18
38,795
—
(998 )
—
—
(1,915)
37,797
(40,067)
—
34,747
(23,761) $
$
—
—
—
—
(495) $ 197,715 $
—
—
2,123 $
—
—
—
34,747
(3,405) $ 172,177
46
Under both Bank Holding Company Accounting and Investment Company Accounting, we generally follow a practice of
discontinuing the accrual of interest income on our loans that are in arrears as to payments for a period of 90 days or more. We deliver
a default notice and begin foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the
most appropriate course of action under the circumstances. A loan is considered to be delinquent if the borrower fails to make a
payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment terms of the
loan with a borrower that cannot make payments in accordance with the original loan agreement. For loan modifications, the loan will
only be returned to accrual status if all past due interest and principal payments are brought fully current. For credit that is collateral
based, we evaluate the anticipated net residual value we would receive upon foreclosure of such loans, if necessary. There can be no
assurance, however, that the collateral securing these loans will be adequate in the event of foreclosure. For credit that is cash flow-
based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install
a new operator to run the business and reduce the debt.
For the consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not
located and the account reaches 120 days delinquent, the account is charged-off to realized losses. If the collateral is repossessed, a
realized loss is recorded to write the collateral down to its net realizable value, and the collateral is sent to auction. When the collateral
is sold, the net auction proceeds are applied to the account, and any remaining balance is written off as a realized loss, and any excess
proceeds are recorded as a recovery. Proceeds collected on charged-off accounts are recorded as recoveries. All collection,
repossession, and recovery efforts are handled on behalf of the Bank by the servicer.
The following table shows the trend in loans 90 days or more past due as of the dates indicated.
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total loans 90 days or more past due
Total Medallion Bank loans (2)
Total managed loans 90 days or more past due
Bank Holding Company
Accounting
Investment Company
Accounting
December 31, 2017
Amount
% (1)
December 31, 2019
Amount
$
% (1)
December 31, 2018
% (1)
Amount
5,800
184
107
2,572
8,663
N/A
N/A
0.5% $
4,133
135
0.0
279
0.0
16,678
0.2
0.7% $ 21,225
N/A
N/A
N/A
N/A
N/A
0.4 %
N/A
0.0
0.0 $
749
1.7 59,701
2.1 % $ 60,450
N/A $ 16,526
N/A $ 76,976
N/A
N/A
0.2%
18.7
18.9%
1.8%
6.2%
$
(1) Percentages are calculated against the total or managed loan portfolio, as appropriate.
(2)
Includes medallion and consumer loans held at the Bank.
We estimate that the weighted average loan-to-value ratio of our medallion loans was approximately 190%, 220%, and 131% as
December 31, 2019, 2018, and 2017.
Recreation and medallion loans that reach 120 days past due are charged down to collateral value and reclassified to loans in
process of foreclosure. The following table shows the activity of loans in process of foreclosure for the twelve months ended
December 31, 2019.
Twelve Months Ended December 31, 2019
(Dollars in thousands)
Loans in process of foreclosure – December 31, 2018
Transfer from loans, net
Sales
Cash payments received
Collateral valuation adjustments
Loans in process of foreclosure – December 31, 2019
47
Recreation
$
Medallion
Total
1,503 $
14,512
(7,591)
—
(6,948)
1,476 $
47,992 $
16,836
(1,515 )
(7,697 )
(4,381 )
51,235 $
49,495
31,348
(9,106)
(7,697)
(11,329)
52,711
$
The following table presents the credit-related information for the investment portfolios as of December 31, 2017 under
Investment Company Accounting.
(Dollars in thousands)
Total loans
Medallion loans
Commercial loans
Total loans
Investments in Medallion Bank and other controlled
subsidiaries
Equity investments (1)
Investment securities
Net investments
Net investments in Medallion Bank and other
controlled subsidiaries
Managed net investments
Unrealized appreciation (depreciation) on
investments
Medallion loans
Commercial loans
Total loans
Investments in Medallion Bank and other controlled
subsidiaries
Equity investments
Investment securities
Total unrealized appreciation on investments
Net unrealized depreciation on investments at
Medallion Bank and other controlled subsidiaries
Managed total unrealized appreciation
(depreciation) on investments
Unrealized appreciation (depreciation) as a % of
balances outstanding (2)
Medallion loans
Commercial loans
Total loans
Investments in Medallion Bank and other
controlled subsidiaries
Equity investments
Investment securities
Net investments
Net investments at Medallion Bank and other
controlled subsidiaries
Managed net investments
December 31, 2017
$
$
$
$
$
$
$
$
208,279
90,188
298,467
302,147
9,521
—
610,135
908,297
1,380,054
(20,338 )
(513 )
(20,851 )
158,920
3,121
—
141,190
(63,785 )
77,405
(8.90 )%
(0.57 )
(6.53 )
110.96
48.77
—
30.11
(6.64 )%
5.99 %
(1) Represents common stock, warrants, preferred stock, and limited partnership interests held as investments.
(2) Unlike other lending institutions, we were not permitted to establish reserves for loan losses. Instead, the valuation of our
portfolio was adjusted quarterly to reflect estimates of the current realizable value of the investment portfolio. These percentages
represent the discount or premium that investments were carried on the books at, relative to their par or gross value.
48
The following table presents the gain/loss experience on the investment portfolio for the three months ended March 31, 2018
and for the year ended December 31, 2017 under Investment Company Accounting.
(Dollars in thousands)
Realized gains (losses) on loans and equity
investments
Medallion loans
Commercial loans
Total loans
Investments in Medallion Bank and
other controlled subsidiaries
Equity investments
Investment securities
Total realized losses on loans
and equity investments
Net realized losses on investments at Medallion
Bank and other controlled subsidiaries
Total managed realized losses on loans
and equity investments
Realized gains (losses) as a % of average
balances outstanding
Medallion loans
Commercial loans
Total loans
Investments in Medallion Bank and other
controlled subsidiaries
Equity investments
Investment securities
Net investments
Net investments at Medallion Bank and other
controlled subsidiaries
Managed net investments
March 31, 2018
December 31, 2017
$
$
$
$
$
(34,747 )
2
(34,745 )
—
—
—
(49,609)
(1,412)
(51,021)
—
7,277
—
(34,745 )
$
(43,744)
(23,073 )
(43,256)
(57,818 )
$
(87,000)
(65.74 )%
0.01
(45.96 )
—
—
—
(30.89 )
(17.76)%
(1.71)
(14.10)
—
119.20
—
(8.50)
(9.66 )%
(18.22 )%
(4.19)%
(6.19)%
49
The following table sets forth the pre-tax changes in our unrealized and realized gains and losses in the investment portfolio for
the three months ended March 31, 2018 and the year ended December 31, 2017 under Investment Company Accounting.
(Dollars in thousands)
Net change in unrealized appreciation
(depreciation) on investments
Unrealized appreciation
Unrealized depreciation
Net unrealized appreciation on investments in
Medallion Bank and other controlled subsidiaries
Realized gains
Realized losses
Net unrealized losses on investments other than
securities and other assets
Total
Net realized gains (losses) on investments
Realized gains
Realized losses
Other gains
Direct recoveries (charge-offs)
Total
March 31, 2018 December 31, 2017
$
(998 ) $
(38,152 )
2,060
(38,022)
29,115
—
34,747
(1,915 )
22,797 $
— $
(34,747 )
—
2
(34,745 ) $
9,483
(3,082)
47,281
(2,075)
15,645
3,082
(47,281)
4,684
(4,229)
(43,744)
$
$
$
SEGMENT RESULTS
We manage our financial results under four operating segments and report like a bank holding company. The operating
segments are recreation lending, home improvement lending, commercial lending, and medallion lending. We also show results for
two non-operating segments: RPAC and corporate and other investments. Prior to April 2, 2018, we operated as one segment. All
results are for the twelve months ended December 31, 2019 and the nine months ended December 31, 2018.
Recreation Lending
The recreation lending segment is a high-growth prime and non-prime consumer finance business which is a significant source
of income for us, accounting for 75% of our interest income for the twelve months ended December 31, 2019 and 71% for the nine
months ended December 31, 2018. Recreation loans are secured primarily by RVs and boats, with RV loans making up 61% of the
portfolio and boat loans making up 19% of the portfolio at the end of 2019, compared to 59% and 18% at the end of 2018. Recreation
loans are made to borrowers residing in all fifty states, with the highest concentrations in Texas, California, and Florida, at 18%, 11%,
and 10% of loans outstanding at December 31, 2019 and 2018 and with no other states over 10%.
During the twelve months ended December 31, 2019, the recreation portfolio continued to grow, leading to an increase in
interest income and net income for the year, even as the allowance percentage and cost of borrowings increased. During the nine
months ended December 31, 2018, the recreation segment grew and also included a third quarter sale of $55,979,000 of recreation
loans for a gain of $3,093,000, included in non-interest income (expense).
50
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2019 and the
nine months ended December 31, 2018.
$
$
$
(Dollars in thousands)
Selected Earnings Data
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after loss provision
Total non-interest income (expense), net
Net income before taxes
Income tax provision
Net income after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status (1)
Charge-off%
Twelve Months Ended
December 31, 2019
Nine Months Ended December
31, 2018
99,463 $
13,304
86,159
28,638
57,521
(23,490)
34,031
(8,813)
25,218 $
713,332 $
18,075
695,257
707,377
563,805
3.84%
17.19
15.39
13.33
2.53
0.84
2.69
68,870
6,986
61,884
15,118
46,766
(14,242)
32,524
(8,579)
23,945
587,038
6,856
580,182
590,746
434,527
5.48%
22.60
15.78
14.18
1.17
0.73
1.89
(1) Loans 90 days or more past due.
Home Improvement Lending
The home improvement lending segment works with contractors and financial service providers to finance residential home
improvements and is concentrated in swimming pools, roofs, windows, and solar panels at 23%, 21%, 14%, and 12% at December 31,
2019, as compared to 31%, 15%, 11% and 16% of total loans outstanding at December 31, 2018, with no other collateral types over
10%. Home improvement loans are made to borrowers residing in all fifty states, with the highest concentrations in Texas, Ohio, and
Florida at 12%, 11%, and 10% at December 31, 2019, as compared to 15%, 9%, and 11% of loans outstanding at December 31, 2018,
and with no other states over 10%. In September 2018, we sold $44,909,000 of home improvement loans for a gain of $2,079,000,
which is included in non-interest income (expense).
51
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2019 and the
nine months ended December 31, 2018.
(Dollars in thousands)
Selected Earnings Data
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after loss provision
Total non-interest income (expense), net
Net income before taxes
Income tax provision
Net income after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status (1)
Charge-off%
Twelve Months
Ended
December 31,
2019
Nine Months
Ended
December 31,
2018
$
$
$
19,943 $
4,757
15,186
1,598
13,588
(7,520 )
6,068
(1,572 )
4,496 $
12,799
2,290
10,509
2,453
8,056
(3,093)
4,963
(1,319)
3,644
247,324 $
2,608
244,716
252,704
201,605
183,155
1,796
181,359
188,892
143,815
2.20 %
10.22
9.50
7.24
1.05
0.07
0.37
2.56%
11.30
9.06
7.44
0.98
0.07
0.46
(1) Loans 90 days or more past due.
Commercial Lending
We originate both senior and subordinated loans nationwide to businesses in a variety of industries, more than 61% of which are
located in the Midwest region, with the rest scattered across the country. These mezzanine loans are primarily secured by a second
position on all assets of the businesses and generally range in amount from $2,000,000 to $5,000,000 at origination, and typically
include an equity component as part of the financing. The commercial lending business has concentrations in manufacturing and
professional, scientific, and technical services making up 63% and 13% of loans outstanding at December 31, 2019, and 48% and 14%
at December 31, 2018.
52
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2019 and the
nine months ended December 31, 2018. The commercial segment encompasses the mezzanine lending business, and the other legacy
commercial loans (immaterial to total) have been re-allocated to corporate and other investments for the periods presented.
(Dollars in thousands)
Selected Earnings Data
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after loss provision
Total non-interest income (expense), net
Net income before taxes
Income tax provision
Net income after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage(1)
Delinquency status (1) (2)
Charge-off% (3)
Twelve Months
Ended
December 31,
2019
Nine Months
Ended
December 31,
2018
$
$
$
7,183 $
2,833
4,350
364
3,986
(1,149 )
2,837
(684 )
2,153 $
66,405 $
—
66,405
84,924
68,666
2.44 %
12.21
11.39
6.90
0.00
0.15
1.30
7,076
1,502
5,574
—
5,574
(1,824)
3,750
(862)
2,888
59,973
—
59,973
93,807
53,719
4.27%
9.43
14.25
11.23
0.00
0.44
0.00
(1) Ratio is based off of total commercial balances, and relates solely to the legacy commercial loans balances.
(2) Loans 90 days or more past due.
(3) Ratio is based on total commercial lending business, and relates to the total loan business.
Geographic Concentrations
Michigan
Minnesota
Illinois
North Carolina
California
New Jersey
Colorado
Delaware
Ohio
Oregon
Other (1)
Total
December 31, 2019
% of
Market
December 31, 2018
% of
Market
Total Gross
Loans
$
Total Gross
Loans
10,331
9,462
9,359
5,250
4,997
4,924
2,034
—
—
2,000
18,048
66,405
$
16% $
14
14
8
8
7
3
—
—
3
27
100% $
—
6,503
5,392
2,001
4,983
2,650
6,900
5,460
4,350
4,245
17,489
59,973
0%
11
9
3
8
5
12
9
7
7
29
100%
(1)
Includes seven other states, which were all under 7% as of December 31, 2019 and December 31, 2018.
53
Medallion Lending
The medallion lending segment operates mainly in the New York City, Newark, and Chicago markets. We have a long history
of owning, managing, and financing taxi fleets, taxi medallions, and corporate car services. During the twelve months ended
December 31, 2019, we saw the taxi medallion values decline slightly in the New York City and Chicago markets, although we did
see an improvement in collections. For the nine months ended December 31, 2018, we saw a leveling off in the medallion values in
the New York City market, while in other markets there were declines in values. We continued to experience a decline in interest
income due to loans aging 90 days or more and being placed on nonaccrual and by removing underperforming loans from the portfolio
by transferring them to loan collateral in process of foreclosure with charge-offs to collateral value. During the 2018 fourth quarter, we
deconsolidated Trust III, which resulted in a gain of $25,325,000, leading to an overall decline in medallion loans. All the loans are
secured by the medallions and enhanced by personal guarantees of the shareholders and owners.
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2019 and the
nine months ended December 31, 2018.
Twelve Months Ended December
31, 2019
Nine Months Ended December 31,
2018
(Dollars in thousands)
Selected Earnings Data
Total interest income
Total interest expense
Net interest loss
Provision for loan losses
Net interest loss after loss
provision
Total non-interest income
(expense), net
Net loss before taxes
Income tax benefit
Net loss after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status (1)
Charge-off%
(1) Loans 90 days or more past due.
Geographic Concentration
New York City
Newark
Chicago
All Other
Total
$
$
$
$
$
$
3,665
7,962
(4,297)
16,331
(20,628)
(10,493)
(31,121)
7,596
(23,525)
130,432
25,410
105,022
217,483
176,825
(9.73)%
(48.49)
2.88
(3.38)
19.48
2.04
14.68
6,317
10,125
(3,808)
41,437
(45,245)
9,742
(35,503)
7,938
(27,565)
183,606
27,743
155,863
273,501
294,465
(10.13)%
NM
3.58
(2.16)
15.11
9.43
7.76
December 31, 2018
% of
Market
Total Gross
Loans
December 31, 2019
% of
Market
Total Gross
Loans
$ 115,340
14,316
472
304
$ 130,432
88% $ 160,313
18,455
11
4,021
1
—
817
100% $ 183,606
87%
10
2
1
100%
54
RPAC
We are the majority owner and managing member of RPAC Racing, LLC, a performance and marketing company for
NASCAR. Revenues are mainly earned through sponsorships and race winning activity over the ten month race season (February
through November) during the year.
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2019 and the
nine months ended December 31, 2018.
(Dollars in thousands)
Selected Earnings Data
Sponsorship, race winnings, and other income
Race and other expenses
Interest expense
Total expenses
Net income (loss) before taxes
Income tax (provision) benefit
Net income (loss) after taxes
Balance Sheet Data
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Corporate and Other Investments
Twelve Months
Ended
December 31,
2019
Nine Months
Ended
December 31,
2018
$
$
$
18,742
15,938
159
16,097
2,645
(329 )
2,316
$
$
14,368
18,597
121
18,718
(4,350)
1,108
(3,242)
31,538
7,794
$
29,925
7,649
7.28 %
(96.37 )%
(11.69)%
NM
This non-operating segment relates to our equity and investment securities as well as our legacy commercial business, other
assets, liabilities, revenues, and expenses not allocated to the operating segments. This segment also reflects the elimination of all
intercompany activity among the consolidated entities.
55
The following table presents certain financial data and ratios as of and for the twelve months ended December 31, 2019 and the
nine months ended December 31, 2018.
(Dollars in thousands)
Selected Earnings Data
Interest income
Interest expense
Net interest loss
Total non-interest income (expense), net
Net loss before taxes
Income tax benefit
Net loss after taxes
Balance Sheet Data
Total loans, gross
Total loan allowance
Total loans, net
Total assets
Total borrowings
Selected Financial Ratios
Return on average assets
Return on average equity
Twelve Months
Ended
December 31,
2019
Nine Months
Ended
December 31,
2018
$
$
$
$
2,308
6,030
(3,722 )
(8,401 )
(12,123 )
3,461
(8,662 )
3,362
-
3,362
247,641
150,898
$
$
$
$
1,741
3,792
(2,051)
(6,489)
(8,540)
1,005
(7,535)
4,110
-
4,110
204,975
127,853
(3.71 )%
(14.26 )
(4.07)%
(12.37)
56
Trends in Investment Portfolio under Investment Company Accounting
In 2017, our investment income was driven by the principal amount of and yields on our investment portfolio. To identify trends
in the balances and yields, the following table illustrates our investments at fair value, grouped by medallion loans, commercial loans,
equity investments, and investment securities, and also presents the portfolio information for the Bank, at the date indicated.
(Dollars in thousands)
Medallion loans
New York
Newark
Chicago
Boston
Cambridge
Other
Total medallion loans
Deferred loan acquisition costs
Unrealized depreciation on loans
Net medallion loans
Commercial loans
Secured mezzanine
Other secured commercial
Total commercial loans
Deferred loan acquisition income
Unrealized depreciation on loans
Net commercial loans
Investment in Medallion Bank and other controlled
subsidiaries
Unrealized appreciation on subsidiary investments
Investment in Medallion Bank and other controlled
subsidiaries, net
Equity investments
Unrealized appreciation on equities
Net equity investments
Investment securities
Unrealized depreciation on investment securities
Net investment securities
Investments at cost (2)
Deferred loan acquisition costs
Unrealized appreciation on controlled subsidiaries, equity
investments, and investment securities
Unrealized depreciation on loans
Net investments
Medallion Bank investments
Consumer loans
Medallion loans
Commercial loans
Investment securities
Medallion Bank investments at cost (2)
Deferred loan acquisition costs
Unrealized depreciation on investment securities
Premiums paid on purchased securities
Unrealized depreciation on loans
Medallion Bank net investments
December 31, 2017
Interest
Rate (1)
Investment
Balances
167,226
21,935
19,436
18,564
773
482
228,416
201
(20,338)
208,279
88,334
2,477
90,811
(110)
(513)
90,188
143,227
158,920
302,147
6,400
3,121
9,521
—
—
—
468,854
91
162,041
(20,851)
610,135
693,289
222,252
1,598
43,582
960,721
11,097
(368)
265
(63,417)
908,298
4.23 % $
5.34
4.74
4.51
4.55
7.95
4.41
$
12.09 % $
9.39
12.02
$
0.83 % $
$
0.00 % $
$
—% $
$
4.73 % $
$
15.02 % $
4.30
2.28
2.40
11.94
$
(1) Represents the weighted average interest or dividend rate of the respective portfolio as of the date indicated.
(2) The weighted average interest rate for the entire managed loan portfolio (medallion, commercial, and consumer loans) was
10.89% at December 31, 2017.
57
PORTFOLIO SUMMARY (Investment Company Accounting)
Total Portfolio Yield
The weighted average yield (which is calculated by dividing the aggregate yield of each investment in the portfolio by the
aggregate portfolio balance and does not include expenses and sales load for any offering) of the total managed portfolio under
Investment Company Accounting at March 31, 2018 was 10.96%, an increase of 35 basis points from 10.61% at December 31, 2017.
Medallion Loan Portfolio
Our managed medallion loans of $318,864,000 comprised 23% of the net managed portfolio of $1,386,136,000 at March 31,
2018, compared to 28% of the net managed portfolio of $1,380,054,000 at December 31, 2017. The medallion loan portfolio
decreased by $69,137,000 or 18% on a managed basis from December 31, 2017 to March 31, 2018 primarily reflecting increased
realized and unrealized losses and net amortization of loan principal, especially in the New York, Boston, and Chicago markets.
The weighted average yield of the managed medallion loan portfolio at March 31, 2018 was 4.42%, an increase of 6 basis points
from 4.36% at December 31, 2017. The fluctuation in yield primarily reflected the repricing of the existing portfolio to current market
interest rates. At March 31, 2018, 15% of the managed medallion loan portfolio represented loans outside New York, compared to
19% at December 31, 2017.
Commercial Loan Portfolio
Our commercial loans represented 7% of the net managed investment portfolio as of March 31, 2018 and December 31, 2017.
Commercial loans increased by $4,986,000 or 5% on a managed basis from December 31, 2017 to March 31, 2018 primarily
reflecting the growth in the mezzanine loan portfolio.
The weighted average yield of the managed commercial loan portfolio at March 31, 2018 was 11.76%, a decrease of 9 basis
points from 11.85% at December 31, 2017. The decreases primarily reflected the recent lower rates on certain of the mezzanine loans.
Consumer Loan Portfolio
Medallion Bank originates fixed rate consumer loans secured by recreational vehicles, boats, trailers, and home improvements
located in all 50 states. Our managed consumer loans represented 52% and 49% of the managed net investment portfolio as of
March 31, 2018 and December 31, 2017.
The weighted average gross yield of the managed consumer loan portfolio was 14.86% at March 31, 2018, compared to 15.02%
at December 31, 2017. The change in yield primarily reflects the changes in the loans originated.
Investment in Medallion Bank and Other Controlled Subsidiaries
As an investment company prior to April 2, 2018, our investment in the Bank was previously subject to quarterly assessments of
fair value. We conducted a thorough valuation analysis, and determined whether any factors gave rise to a valuation different than
recorded book value, including various regulatory restrictions that were established at the Bank’s inception, by the FDIC and State of
Utah, and also by additional marketplace restrictions, such as the ability to transfer industrial bank charters. Because of these
restrictions and other factors, our board of directors had previously determined that the Bank had little value beyond its recorded book
value. As a result of this valuation process, we had previously used the Bank’s actual results of operations as the best estimate of
changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the 2015
second quarter, we first became aware of external interest in the Bank and its portfolio assets at values in excess of their book value.
Expression of interest in the Bank from both investment bankers and interested parties has continued. We incorporated these new
factors in the Bank’s fair value analysis and the board of directors determined that the Bank had a fair value in excess of book value.
In addition, in the 2016 third quarter there was a court ruling involving a marketplace lender that we believe heightens the interest of
marketplace lenders to acquire or merge with Utah industrial banks. We also engaged a valuation specialist to assist the board of
directors in its determination of the Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and
additional appreciation of $128,918,000 was recorded in 2016, $7,849,000 was recorded in 2017, and $39,826,000 was recorded in the
2018 first quarter.
58
Consolidated Results of Operations
For the Twelve Months Ended December 31, 2019 Compared to the Nine Months Ended December 31, 2018 under Bank
Holding Company Accounting
Net loss attributable to stockholders was $1,762,000 or $0.07 per diluted common share for the twelve months ended December
31, 2019, compared to a net loss of $10,172,000 or $0.42 per diluted common share for the nine months ended December 31, 2018.
Total interest income was $132,562,000 for the twelve months ended December 31, 2019, compared to $96,803,000 for the nine
months ended December 31, 2018. Interest income reflected the continued growth in the consumer lending segments partly offset by
the contraction in the lower yielding medallion lending segment. The yield on interest earning assets was 11.75% for the twelve
months ended December 31, 2019, an improvement from 10.98% for the nine months ended December 31, 2018. Average interest
earning assets were $1,128,479,000 for the twelve months ended December 31, 2019, a decline from $1,170,612,000 for the nine
months ended December 31, 2018.
Loans before allowance for loan losses were $1,160,855,000 as of December 31, 2019, comprised of recreation ($713,332,000),
home improvement ($247,324,000), medallion ($130,432,000), and commercial ($69,767,000) loans. The Company had an allowance
for loan losses as of December 31, 2019 of $46,093,000, which was attributable to medallion (55%), recreation (39%), and home
improvement (6%) loans. As of December 31, 2018, loans before allowance for loan loss were $1,017,882,000, which were comprised
of recreation ($587,038,000), home improvement ($183,155,000), medallion ($183,606,000), and commercial ($64,083,000) loans.
The Company had an allowance for loan losses as of December 31, 2018 of $36,395,000, which was attributable to the medallion
(76%), recreation (19%), and home improvement (5%) loan portfolios. Loans increased $142,973,000, or 14%, from the prior year
end primarily due to $462,093,000 of loan originations mostly in the consumer segments, offset partly by principal payments, transfer
to loans in process of foreclosure, and net charge-offs. The provision for loan losses was $47,386,000 for the twelve months ended
December 31, 2019, compared to $59,008,000 for the nine months ended December 31, 2018. The improvement was reflective of
lower net charge-offs on the medallion portfolio, along with taxi medallion values remaining relatively consistent during 2019. The
charge off ratios on the loan portfolio increased to 3.60% for the twelve months ended December 31, 2019 compared to 2.73% for the
nine months ended December 31, 2018, driven by the recreation segment. See Note 4 for additional information on loans and the
allowance for loan losses.
Interest expense was $35,045,000 for the twelve months ended December 31, 2019, compared to $24,816,000 for the nine
months ended December 31, 2018. The average cost of borrowed funds was 3.08%, compared to 2.79%, mainly driven by new
borrowings at higher rates and the roll off of lower cost borrowings. Average debt outstanding was $1,138,746,000 for the twelve
months ended December 31, 2019, compared to $1,181,323,000 for the nine months ended December 31, 2018. See page 42 for a
table which shows average balances and cost of funds for our funding sources.
Net interest income was $97,517,000 for the twelve months ended December 31, 2019, compared to $71,987,000 for the nine
months ended December 31, 2018, and the net interest margin was 8.64%, compared to 8.19%, reflecting the above.
Noninterest income, which is comprised of sponsorship and race winnings, prepayment fees, servicing fee income, late charges,
write-downs of loan collateral, impairment of equity investments, and other miscellaneous income was $20,387,000 for the twelve
months ended December 31, 2019, compared to $41,946,000 for the nine months ended December 31, 2018. The decrease was
primarily driven by the one-time gain on the deconsolidation of Trust III of $25,325,000 in the prior year.
Operating expenses were $68,181,000 for the twelve months ended December 31, 2019, compared to $62,081,000 for the nine
months December 31, 2018. Salaries and benefits expense was $24,971,000 for the twelve months ended December 31, 2019
compared to $19,357,000 for the nine months ended December 31, 2018, professional fees were $7,402,000 for the twelve months
ended December 31, 2019, compared to $8,609,000 for the nine months ended December 31, 2018, primarily reflecting legal costs for
a variety of corporate and investment-related matters, and collections costs were $6,638,000 for the twelve months ended December
31, 2019, compared to $5,207,000 for the nine months ended December 31, 2018. The remaining expenses for the twelve months
ended December 31, 2019 included race team costs of $8,996,000, loan servicing costs of $5,253,000, primarily reflecting costs of
servicing the recreation and home improvement consumer loans, and occupancy and other expenses of $14,921,000, whereas for the
nine months ended December 31, 2018, race team costs were $7,121,000, loan servicing costs were $3,470,000, and occupancy and
other operating expenses were $18,317,000, which included the impairment on goodwill of $5,615,000.
Total income tax expense was $341,000 for the twelve months ended December 31, 2019, compared to $709,000 for the nine
months ended December 31, 2018. The current year tax expense included $891,000 due to changes in effective state income tax rates,
partly offset by $380,000, $640,000 and $309,000 of benefit due to the revaluation of the net operating losses, changes in state income
tax accruals and income attributable to non-controlling interest. See Note 9 for more information.
59
Loan collateral in process of foreclosure was $52,711,000 at December 31, 2019, an increase from $49,495,000 at December 31,
2018, reflecting $31,348,000 of net loans transferred, partly offset by sales, cash payments, and valuation adjustments incurred during
the current year.
Goodwill and intangible assets were $203,339,000 at December 31, 2019, down from $204,785,000 at December 31, 2018,
reflecting the amortization of the intangible assets during 2019. See Note 2 for further information regarding goodwill and intangible
assets.
2018 First Quarter under Investment Company Accounting
Net decrease in net assets resulting from operations was $14,874,000 or $0.62 per diluted common share in the 2018 first
quarter, primarily reflecting an increase in net realized/unrealized losses on the investment portfolio, increased operating expenses,
and higher income taxes. Net investment loss after income taxes was $3,230,000 or $0.13 per share in the 2018 first quarter.
Investment income was $4,033,000 in the 2018 first quarter, and included $1,643,000 of interest reversals related to nonaccrual
loans in 2018. The yield on the investment portfolio was 2.69% in the 2018 first quarter.
Interest expense was $3,551,000 in the 2018 first quarter. The increase in interest expense was primarily due to increased
borrowing costs. The cost of borrowed funds was 4.44% in 2018 reflecting the continuing increase in market interest rates. Average
debt outstanding was $324,322,000 for the 2018 first quarter, primarily reflecting decreased borrowings required to fund the
contracting loan portfolio.
Net interest income was $482,000 and the net interest margin was 0.32% for the 2018 first quarter.
Noninterest income, which was comprised of prepayment fees, servicing fee income, late charges, and other miscellaneous
income, was $60,000 in the 2018 quarter primarily reflecting the reversal of a previously earned management fee due from a portfolio
company in the 2017 first quarter.
Operating expenses were $4,108,000 in the 2018 first quarter. Salaries and benefits expense was $2,349,000 in the 2018 first
quarter, primarily due to executive and employee bonus accruals. Professional fees were $723,000 in the 2018 first quarter, primarily
reflecting higher legal expenses for a variety of corporate and investment-related matters. Occupancy and other operating expenses of
$1,036,000 in the 2018 first quarter primarily reflected higher road or miscellaneous taxes, collection costs related to the medallion
loan portfolios and directors’ fees.
Total income tax benefit was $640,000 in the 2018 first quarter, and was comprised of three components, a $336,000 benefit
related to the net investment loss, an $8,426,000 benefit related to realized losses, and a provision of $8,122,000 related to net
unrealized gains on investments.
Net change in unrealized appreciation (depreciation) on investments before income tax was appreciation of $22,797,000 in the
2018 first quarter. Net change in unrealized appreciation other than the portion related to the Bank and the other controlled
subsidiaries, was depreciation of $6,318,000 in the 2018 first quarter, resulting in decreased depreciation of $2,205,000 and related
almost entirely to the medallion portfolio. Unrealized appreciation (depreciation) arises when we made valuation adjustments to the
investment portfolio. When investments were sold or written off, any resulting realized gain (loss) was grossed up to reflect previously
recorded unrealized components. As a result, movement between periods can appear distorted. The 2018 first quarter activity resulted
from net appreciation on the Bank and other controlled subsidiaries of $29,115,000 and by reversals of unrealized depreciation on
loans which were charged-off of $34,747,000, partially offset by unrealized depreciation on loans and other investments of
$40,067,000 mainly due to the continued decline of the taxi medallion values.
Our net realized losses on investments before taxes were $34,745,000 in the 2018 first quarter. The 2018 first quarter activity
reflected the realized losses in the loan portfolio.
Our net realized/unrealized loss on investments before income taxes was $11,948,000 in the 2018 first quarter, reflecting the
above.
60
For the Years Ended December 31, 2017 and 2016 under Investment Company Accounting
Net increase in net assets resulting from operations was $278,000 or $0.01 per diluted common share in 2017, down
$23,237,000 or 99% from $23,515,000 or $0.97 per share in 2016, primarily reflecting an increase in net realized/unrealized losses on
the investment portfolio and lower net interest income, partially offset by an increased income tax benefit and lower operating
expenses. Net investment loss after income taxes was $7,121,000 or $0.30 per share in 2017, down $7,240,000 from income of
$119,000 or less than $0.01 per share in 2016.
Investment income was $19,624,000 in 2017, down $5,464,000 or 22% from $25,088,000 in 2016, and included in 2017 and
2016 were $1,278,000 and $3,000,000 in dividends from the Bank and other controlled subsidiaries. The decrease was also due to
$5,514,000 of interest forgone in 2017, compared to $2,634,000 in 2016. The yield on the investment portfolio was 3.12% in 2017,
down 25% from was 4.17% in 2016. Excluding the dividends, the 2017 yield was down 20% to 2.92% from 3.67% in 2016, reflecting
the above. Average investments outstanding were $629,089,000 in 2017, up 4% from $602,349,000 in 2016 primarily reflecting
growth in the commercial portfolio and subsidiary investments.
Medallion loans were $208,279,000 at December 31, 2017, down $58,537,000 or 22% from $266,816,000 at December 31,
2016, representing 34% of the investment portfolio, compared to 41% at 2016, and were yielding 4.41% compared to 4.01% at 2016.
The decrease in outstandings was primarily concentrated in the New York and Chicago markets, although all markets declined, and
was primarily attributable to realized losses recognized and net amortization of loan principal. The managed medallion portfolio,
which includes loans at Medallion Bank and those serviced for third parties, was $414,350,000 at 2017, down $139,089,000 or 25%
from $553,439,000 at 2016, reflecting the above, and realized losses taken and principal amortization at Medallion Bank. The
commercial loan portfolio was $90,188,000 at 2017, compared to $83,634,000 at 2016, an increase of $6,554,000 or 8%, and
represented 15% of the investment portfolio compared to 13% at 2016. The increase was primarily attributable to increases in the
secured mezzanine portfolio, partially offset by decreases in other secured commercial loans. Commercial loans yielded 12.02% at
2017, down 8% from 13.05% at 2016, reflecting lower yields on certain recent loans. The net managed commercial loan portfolio,
which includes loans at the Bank and those serviced for or by third parties, was $92,530,000 at 2017, up $4,686,000 or 5% from
$87,844,000 at 2016, reflecting the above. Investments in Medallion Bank and other controlled subsidiaries were $302,147,000 at
2017, up $8,787,000 or 3% from $293,360,000 at 2016, primarily reflecting the appreciation and equity in the earnings of the Bank
other portfolio company investments, capital contributions made, dividends paid, portfolio sales, and the net valuation adjustment, and
which represented 49% of the investment portfolio at the end of 2017 and 45% in 2016, and which yielded 0.83% at 2017, compared
to 2.13% at 2016, primarily reflecting reduced dividends from Medallion Bank. Equity investments were $9,521,000 at 2017, up
$1,053,000 or 12% from $8,468,000 at 2016, primarily reflecting increase in investments held, and which represented 2% of the
investment portfolio at the end of 2017 and 1% at the end of 2016, and had a dividend yield of 0% in both years.
Interest expense was $13,770,000 in 2017, up $1,132,000 or 9% from $12,638,000 in 2016. The increase in interest expense was
primarily due to increased borrowing costs on floating rate borrowings. The cost of borrowed funds was 4.12% in 2017, compared to
3.32% at 2016, an increase of 24%, reflecting the increases in market interest rates. Average debt outstanding was $334,022,000 in
2017, compared to $380,305,000 at 2016, down 12%, primarily reflecting decreased borrowings required to fund the contracting
medallion loan portfolio.
Net interest income was $5,854,000 and the net interest margin was 0.93% in 2017, down $6,596,000 or 53% from $12,450,000
at 2016, which represented a net interest margin of 2.07%, all reflecting the items discussed above.
Noninterest income, which is comprised of prepayment fees, management fees, servicing fee income, late charges, and other
miscellaneous income was $107,000 in 2017, down $301,000 or 74% from $408,000 in 2016, primarily reflecting lower management
and other fees generated from the portfolios.
Operating expenses were $13,810,000 in 2017, down $8,976,000 or 39% from $22,786,000 in 2016 which included a
$5,099,000 goodwill write off. Salaries and benefits expense was $7,508,000 in 2017, down $4,262,000 or 36% from $11,770,000 in
2016, primarily due to a reduction in bonus costs recorded in the current period and lower salary expenses due to the sale of its asset-
based lending division in 2016. Professional fees were $2,619,000 in 2017, up $272,000 or 12% from $2,347,000 at 2016, primarily
reflecting higher legal and other professional fee expenses for a variety of corporate and investment-related matters. Occupancy
expense was $1,069,000 in 2017, up $103,000 or 11% from $966,000 in 2016, primarily reflecting annual increases in rent expense at
various locations. Other operating expenses of $2,614,000 in 2017 were up $10,000 from $2,604,000 in 2016 reflecting decreased
travel and entertainment expenses, directors’ fees, miscellaneous taxes and reduced expense reimbursements, partially offset by
increases in collection and other expenses.
Income tax benefit was $36,226,000 in 2017 compared to income tax expense of $45,900,000 in 2016, a change of $82,126,000.
Total taxes were comprised of three components, a $728,000 benefit related net investment loss compared to $10,047,000 in 2016,
61
benefits related to realized losses and unrealized appreciation on investments of $15,955,000 and $19,543,000, compared to provisions
of $384,000 and $55,563,000 in 2016. The tax benefit recorded in 2017 reflected the $17,279,000 adjustment to implement the change
in US tax law rates on the net tax liabilities.
Net change in unrealized appreciation on investments was $15,645,000 in 2017, compared to $78,886,000 in 2016, a decrease in
appreciation of $63,241,000. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other
controlled subsidiaries, was appreciation of $6,162,000 in 2017 compared to a depreciation of $51,235,000 in 2016, resulting in
increased appreciation of $57,397,000 in 2017. Unrealized appreciation (depreciation) arises when we make valuation adjustments to
the investment portfolio. When investments are sold or written off, any resulting realized gain (loss) is grossed up to reflect previously
recorded unrealized components. As a result, movement between periods can appear distorted. The 2017 activity resulted from a net
appreciation on the Bank and other controlled subsidiaries of $9,483,000, reversals of unrealized depreciation associated with
charged-off loans of $46,795,000, partially offset by unrealized depreciation on loans of $37,745,000, the reversal of unrealized
appreciation on investments that were exited with a realized gain of $3,082,000, unrealized depreciation on investments other than
securities and other assets of $2,075,000, and net unrealized appreciation on equity investments of $2,269,000. The 2016 activity
resulted from net appreciation on the Bank and other controlled subsidiaries of $130,121,000 and by reversals of unrealized
depreciation associated with charged-off loans of $3,486,000, partially offset by unrealized depreciation on loans of $27,710,000,
investments other than securities of $28,372,000, and net unrealized appreciation on investment securities of $1,367,000. The net
appreciation on the Bank and other controlled subsidiaries described above is net of the dividends declared by them to us of
$1,278,000 in 2017 and $3,000,000 in 2016.
Our net realized losses on investments were $43,744,000 in 2017 compared to gains of $457,000 in 2016, an increase in realized
losses of $44,201,000 in 2017. The 2017 activity reflected the reversals described in the unrealized paragraph above, other gain on the
liquidation of other investment securities of $4,684,000, and net loan charge-offs of $4,715,000, inclusive of losses on equity
investments. The 2016 activity reflected the reversals described in the paragraph above, and other net loan charge-offs of $224,000,
partially offset by gains of $2,111,000 from the sale of investment securities and $2,057,000 from the sale of the asset-based lending
portfolio.
Our net realized/unrealized gains on investments were $7,399,000 in 2017, compared to $23,396,000 in 2016, a decrease of
$15,997,000 or 68% of net gains in 2017, reflecting the above.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of
consumer, commercial, and medallion loans, and investment securities) reprice on a different basis over time in comparison to our
interest-bearing liabilities (consisting primarily of bank certificates of deposit, credit facilities and borrowings with banks and other
lenders, and SBA debentures and borrowings).
Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of
declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest
rates. Abrupt increases in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans
at the higher prevailing interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on average
than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net
earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning
assets and interest-bearing liabilities results in interest rate risk.
The effect of changes in interest rates is mitigated by regular turnover of the portfolios. Based on past experience, we anticipate
that approximately 40% of the medallion loan portfolio will mature or be prepaid each year. We believe that the average life of our
loan portfolios varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights
in a decreasing interest rate environment because the interest rate payable on the borrower’s loan is high relative to prevailing interest
rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment. However, borrowers may prepay for a
variety of other reasons, such as to monetize increases in the underlying collateral values.
62
In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten
year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years. We had
outstanding SBA debentures and borrowings of $71,746,000 with a weighted average interest rate of 3.42%, constituting 6% of our
total indebtedness, $36,000,000 of privately placed notes, with a weighted average interest rate of 8.25%, constituting 3% of total
indebtedness, and retail notes of $33,625,000, with a weighted average interest rate of 9.00%, constituting 3% of total indebtedness as
of December 31, 2019. Also, as of December 31, 2019, certain of the certificates of deposit were for terms of up to 57 months, further
mitigating the immediate impact of changes in market interest rates.
A relative measure of interest rate risk can be derived from our interest rate sensitivity gap. The interest rate sensitivity gap
represents the difference between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified
intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities, and negative when
repriceable liabilities exceed repriceable assets. A relative measure of interest rate sensitivity is provided by the cumulative difference
between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets.
The following table presents our interest rate sensitivity gap at December 31, 2019. The principal amounts of interest earning
assets are assigned to the time frames in which such principal amounts are contractually obligated to be repriced. We have not
reflected an assumed annual prepayment rate for such assets in this table.
December 31, 2019 Cumulative Rate Gap (1)
More
Than 2
and Less
Than 3
Years
More
Than
1 and Less
Than 2
Years
More
Than 3
and Less
Than 4
Years
Less
Than
1 Year
More
Than 4
and Less
Than 5
Years
More
Than
5 and Less
Than 6
Years
Thereafter
Total
— $
$ 50,237 $
20,464
5,129
36,817 41,286
—
17,700
— $
50,237
13,185
52,891
70,735 55,252 808,809 1,132,167
72,282
—
17,700
$ 125,218 $ 46,415 $ 61,012 $ 85,467 $ 70,794 $ 55,252 $ 808,837 $1,252,995
— $
14,026
46,986
—
— $
59
— $
28
— $
—
—
—
—
— $
20,746
$ 312,993 $ 223,865 $ 211,605 $ 118,740 $ 87,042 $
8,500
— 33,625
10,709 21,354
—
33,000
—
7,794
— $ 954,245
5,000
71,746
—
69,625
—
33,183
—
33,000
—
7,794
$ 385,242 $ 287,344 $ 211,605 $ 123,740 $ 129,162 $ 14,000 $ 18,500 $1,169,593
$ (260,024 ) $ (240,929) $(150,593) $ (38,273) $ (58,368) $ 41,252 $ 790,337 $
83,402
—
$ (260,024 ) $ (500,953) $(651,546) $(689,819) $(748,187) $ (706,935 ) $ 83,402 $
5,000 14,000 18,500
—
36,000
—
1,120
—
—
—
—
—
—
—
—
—
—
—
—
—
$ (232,323 ) $ (409,272) $(563,100) $(638,264) $(600,146) $ (554,335 ) $ 59,833 $
$ (172,208 ) $ (324,049) $(361,494) $(425,785) $(411,672) $ (379,286 ) $ 168,501 $
—
—
(Dollars in thousands)
Earning assets
Floating-rate
Adjustable rate
Fixed-rate
Cash
Total earning assets
Interest bearing liabilities
Deposits
SBA debentures and borrowings
Retail and privately placed notes
Notes payable to banks
Preferred securities
Other borrowings
Total liabilities
Interest rate gap
Cumulative interest rate gap (2)
December 31, 2018
December 31, 2017 (3)
(1) The ratio of the cumulative one year gap to total interest rate sensitive assets was (21%), as of December 31, 2019.
(2) Adjusted for the medallion loan 40% prepayment assumption results in a cumulative one year negative interest rate gap and
related ratio of $220,472 or 18% at December 31, 2019.
(3) Represents the cumulative rate gap on a combined basis with the Bank for the year noted.
Our interest rate sensitive assets were $1,252,995,000 and interest rate sensitive liabilities were $1,169,593,000 at December 31,
2019. The one-year cumulative interest rate gap was a negative $260,024,000 or 21% of interest rate sensitive assets. However, using
our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of
$220,472,000 or 18% at December 31, 2019. We seek to manage interest rate risk by originating adjustable-rate loans, by incurring
fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, and by other options consistent
with managing interest rate risk.
63
Liquidity and Capital Resources
Our sources of liquidity are with a variety of local and regional banking institutions, unfunded commitments to sell debentures
to the SBA, loan amortization and prepayments, private issuances of debt securities, participations or sales of loans to third parties, the
disposition of other assets of the Company, and dividends from Medallion Capital and the Bank, and are subject to compliance with
regulatory ratios. Additionally, we had $3,000,000 of unfunded commitments from the SBA as of December 31, 2019.
Additionally, the Bank has access to independent sources of funds for our business originated there, primarily through brokered
certificates of deposit. The Bank has $45,000,000 available under fed funds lines with several commercial banks. In addition, the Bank
can retain earnings in its business to fund future growth.
In December 2019, the Bank closed an initial public offering of $46,000,000 aggregate liquidation amount, yielding net
proceeds of $42,485,000, of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F. Dividends are payable
quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025,
at a floating rate equal to a benchmark rate (which is expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a
spread of 6.46% per annum.
In March 2019, we completed a private placement to certain institutional investors of $30,000,000 aggregate principal amount
of 8.25% unsecured senior notes due 2024, with interest payable semiannually. A follow-on offering of these notes in the 2019 third
quarter raised an additional $6,000,000.
The components of our debt were as follows at December 31, 2019, exclusive of deferred financing costs of $5,105,000. See
Note 7 to the consolidated financial statements for details of the contractual terms of our borrowings.
(Dollars in thousands)
Deposits
SBA debentures and borrowings
Retail and privately placed notes
Notes payable to banks
Preferred securities
Other borrowings
Total outstanding debt
Balance
Percentage
Rate (1)
$
954,245
71,746
69,625
33,183
33,000
7,794
$ 1,169,593
81 %
6
6
3
3
1
100 %
2.35%
3.42
8.61
4.11
4.01
2.00
2.89%
(1) Weighted average contractual rate as of December 31, 2019.
Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all
contractual obligations at December 31, 2019.
(Dollars in thousands)
Deposits
SBA debentures and borrowings
Retail and privately placed notes
Notes payable to banks
Preferred securities
Other borrowings
Operating lease obligations
Total
Less than
1 year
1 – 2 years 2 – 3 years 3 – 4 years 4 – 5 years
More than
5 years
Total (1)
Payments due by period
5,000
$ 312,993 $223,865 $211,605 $118,740 $ 87,042 $
20,746
— $ 954,245
71,746
69,625
33,183
33,000
7,794
18,145
$ 353,786 $291,403 $214,296 $126,376 $ 130,415 $ 71,462 $1,187,738
5,000 32,500
—
— 36,000
—
—
— 33,000
—
—
5,962
2,373
8,500
— 33,625
9,683 22,940
—
—
2,473
—
—
280
—
—
2,411
280
—
—
2,356
—
7,794
2,570
(1)
Total debt is exclusive of deferred financing costs of $5,105.
Most of our borrowing relationships have maturity dates during 2020 through 2021. We have been in active and ongoing
discussions with each of these lenders and, to date, have extended each of the facilities as they matured. We have arranged for changes
to the terms of the notes and payment and borrowing base calculations which we anticipate will facilitate our operations for the
foreseeable future.
64
On July 16, 2019, we paid $10,819,000 at maturity in satisfaction of all our outstanding obligations under one of our credit
facilities. In connection with this payment, we obtained a waiver from one of our other lenders, with a term note of $2,422,000, of
certain resulting repayment and other obligations, which waiver expires on April 1, 2020.
In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of them at
times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some
or all of our portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because
we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at
which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in
market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost
of funds would increase, which would reduce our net interest income.
We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-
term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We
may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. We have analyzed the
potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no
actions were taken to alter the existing interest rate sensitivity a hypothetical immediate 1% increase in interest rates would result in an
increase to net income as of December 31, 2019 by $780,000 on an annualized basis, and the impact of such an immediate increase of
1% over a one year period would have been ($1,116,000) at December 31, 2019. Although management believes that this measure is
indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of
the assets on the balance sheet, and other business developments that could affect net income from operations in a particular quarter or
for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the
potential outcome simulated by these estimates.
We continue to work with investment banking firms and other financial intermediaries to investigate the viability of a number of
other financing options which include, among others, the sale or spinoff of certain assets or divisions, the development of a
securitization conduit program, and other independent financing for certain subsidiaries or asset classes. These financing options
would also provide additional sources of funds for both external expansion and continuation of internal growth.
The following table illustrates sources of available funds for us and each of our subsidiaries, and amounts outstanding under
credit facilities and their respective end of period weighted average interest rates at December 31, 2019. See Note 7 to the
consolidated financial statements for additional information about each credit facility.
65
Bank Holding Company Accounting
Medallion
Financial
Corp.
MB
4,477 (2 ) $ 50,136 $
MFC
$
MCI
FSVC
RPAC and
Other
December 31, 2019(1) December 31, 2018
57,713
67,821
$
1,059 $
(Dollars in thousands)
Cash
Brokered CDs & other
funds borrowed
Average interest rate
Maturity
SBA debentures and
borrowings
Amounts undisbursed
Amounts outstanding
Average interest rate
Maturity
Retail and privately placed
notes
Average interest rate
Maturity
Bank loans
Average interest rate
Maturity
Preferred securities
Average interest rate
Maturity
Other borrowings
Average interest rate
Maturity
Total cash
954,245
—
2.35 %
— 1/20-9/24
—
—
—
—
—
—
—
—
—
—
—
553 $
11,250 $
346 $
—
—
—
—
—
—
54,000
—
3,000
—
—
51,000
—
3.49%
— 3/21-3/29
20,746
—
20,746
3.25%
2/20
—
—
—
—
—
—
—
—
—
—
—
—
69,625
8.61 %
4/21-3/24
21,135
4.43 %
9/20-3/21
33,000
4.01 %
9/37
—
—
—
—
12,048
—
3.55%
— 2/21-12/23
—
—
—
—
—
—
—
—
—
—
—
—
553 $
4,477 $ 50,136 $
$
—
—
—
—
—
—
—
—
—
11,250 $
—
—
—
—
—
—
—
—
— 3/20-12/20
—
—
—
—
—
—
7,794
2.00%
346 $
1,059 $
7,794 $
Total debt outstanding
$ 123,760 $ 954,245 $
12,048 $
51,000 $
20,746 $
954,245
2.35%
1/20-9/24
848,040
2.14%
1/19-07/23
74,746
3,000
71,746
3.42%
2/20-3/29
69,625
8.61%
4/21-3/24
33,183
4.11%
9/20-12/23
33,000
4.01%
9/37
7,794
2.00%
3/20-12/20
67,821
1,169,593
$
$
83,099
3,000
80,099
3.40%
2/20-3/29
33,625
9.00%
4/21
59,615
4.55%
3/19-12/23
33,000
4.86%
9/37
7,649
2.00%
12/19-3/20
57,713
1,062,028
(1) Total debt is exclusive of deferred financing costs of $5,105.
(2)
Includes $2,970 of an interest reserve associated with the 2019 private placement, which can be used for no other purpose for
three years.
Loan amortization, prepayments, and sales also provide a source of funding for us. Prepayments on loans are influenced
significantly by general interest rates, medallion loan market values, economic conditions, and competition.
We also generate liquidity through deposits generated at the Bank, borrowing arrangements with other banks, and through the
issuance of SBA debentures, as well as from cash flow from operations. In addition, we may choose to participate a greater portion of
our loan portfolio to third parties. We are actively seeking additional sources of liquidity, however, given current market conditions,
we cannot assure you that we will be able to secure additional liquidity on terms favorable to us or at all. If that occurs, we may
decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become more favorable, or
we may be required to dispose of assets when we would not otherwise do so, at prices which may be below the net book value of such
assets in order for us to repay indebtedness on a timely basis.
Recently Issued Accounting Standards
In March 2020, the FASB issues ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting.” The objective of this is to provide optional guidance for a limited period of time to ease the
potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of
the London Interbank Offered Rate (LIBOR). The amendments in this update are effective for all entities as of March 12, 2020
through December 31, 2022. We do not believe this will have a material impact on our financial condition.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes, or Topic 740,: Simplifying the Accounting for Income
Taxes.” The objective of this update is to simplify the accounting for income taxes by removing certain exceptions to the general
principles and improve consistent application of and simplify other areas of Topic 740. The amendments in this update are effective
for annual periods beginning after December 15, 2020, and interim periods within those fiscal years. We do not believe this update
will have a material impact on our financial condition.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement, or 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
66
fair value of assets and liabilities. The amendments in this update are effective for annual periods beginning after December 15, 2019
and interim periods within those fiscal years. We do not believe this update will have a material impact on our financial condition.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other, or Topic 350,: Simplifying the Test for
Goodwill Impairment.” The objective of this update is to simplify the subsequent measurement of goodwill, by eliminating step 2
from the goodwill impairment test. The amendments in this update are effective for annual periods beginning after December 15,
2019, and interim periods within those fiscal years. We do not believe this update will have a material impact on our financial
condition.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses, or Topic 326,: Measurement of Credit
Losses on Financial Instruments.” The main objective of this new standard is to provide financial statement users with more decision-
useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting
entity at each reporting date. Under the new standard, the concepts used by entities to account for credit losses on financial
instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is removed. Loss estimates
are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and
supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and
measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling
have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is
effective for fiscal years beginning after December 15, 2019 for public entities, with early adoption permitted. In October 2019, the
FASB voted to defer implementation of the standard for smaller reporting companies, such as us, to fiscal years beginning after
December 15, 2022. We are assessing the impact the update will have on our financial statements, and expect the update to have an
impact on our accounting for estimated credit losses on our loans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business activities contain elements of risk. We consider the principal types of risk to be fluctuations in interest rates and
portfolio valuations. We consider the management of risk essential to conducting our businesses. Accordingly, our risk management
systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits, and to continually
monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.
In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of them at
times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some
or all of our portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because
we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at
which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in
market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost
of funds would increase, which would reduce our net interest income. We use a combination of long-term and short-term borrowings
and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term
floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to
limit our exposure to interest rate fluctuations. We have analyzed the potential impact of changes in interest rates on net interest
income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate
sensitivity a hypothetical immediate 1% increase in interest rates would result in an increase to net income as of December 31, 2019
by $780,000 on an annualized basis, and the impact of such an immediate increase of 1% over a one year period would have been
($1,116,000) at December 31, 2019. Although management believes that this measure is indicative of our sensitivity to interest rate
changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other
business developments that could affect net income from operations in a particular quarter or for the year taken as a whole.
Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these
estimates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements set forth under Item 15 (A) (1) in this Annual Report on Form 10-K, which
financial statements are incorporated herein by reference in response to this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
67
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rules 13a—15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, and have concluded that they
are effective as of December 31, 2019 to provide reasonable assurance that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods
specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed
by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors,
management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies
and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of our assets;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated Framework (2013). Based on its assessment and those criteria, management believes that we
maintained effective internal control over financial reporting as of December 31, 2019.
We believe that the consolidated financial statements included in this report fairly represent our consolidated financial position
and consolidated results of operations for all periods presented.
Our Independent Registered Public Accounting Firm, Mazars USA LLP, has audited and issued a report on management’s
assessment of our internal control over financial reporting. The report of Mazars USA LLP appears below.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief
Financial Officer, have evaluated our internal control over financial reporting to determine whether any changes occurred during the
2019 fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting, and have concluded that there have been no changes that occurred during the 2019 fourth quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
68
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Medallion Financial Corp.
Opinion on Internal Control over Financial Reporting
We have audited Medallion Financial Corp. and subsidiaries’ (the “Company’s”) internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control –
Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of Medallion Financial Corp. and subsidiaries (the “Company”) as of December 31, 2019
and 2018 and the related consolidated statements of operations, other comprehensive income (loss), changes in stockholders’ equity
and changes in net assets, and cash flows for each of the three years in the three-year period ended December 31, 2019, and selected
financial ratios and other data (see note 17) for each of the three years in the three-year period ended December 31, 2017 of the
Company, and our report dated March 30, 2020 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and procedures may deteriorate.
/s/ Mazars USA LLP
New York, New York
March 30, 2020
69
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2020 for our fiscal year 2020
Annual Meeting of Shareholders under the captions “Our Directors and Executive Officers,” “Corporate Governance,” and
“Section 16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2020 for our fiscal year 2020
Annual Meeting of Shareholders under the captions “Corporate Governance,” “Executive Compensation” and “Compensation
Committee Interlocks and Insider Participation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2020 for our fiscal year 2020
Annual Meeting of Shareholders under the captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2020 for our fiscal year 2020
Annual Meeting of Shareholders under the captions “Certain Relationships and Related Party Transactions”, “Our Directors and
Executive Officers,” and “Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2020 for our fiscal year 2020
Annual Meeting of Shareholders under the caption “Principal Accountant Fees and Services.”
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements of Medallion Financial Corp. and the Report of Independent Public Accountants thereon
are included as set forth on the Index to Financial Statements on F-1.
2. FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements on F-1.
70
3. EXHIBITS
Number
3.1(a)
Restated Medallion Financial Corp. Certificate of Incorporation. Filed as Exhibit 3.1 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (File No. 000-27812) and incorporated by reference herein.
Description
3.1(b) Amendment to Restated Certificate of Incorporation. Filed as Exhibit 3.1.1 to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998 (File No. 000-27812) and incorporated by reference herein.
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Amended and Restated By-Laws of Medallion Financial Corp. (filed as Exhibit 3.1 to the Current Report on Form 8-K
filed on April 27, 2018 (File No. 001-37747) and incorporated by reference herein).
Fixed/Floating Rate Junior Subordinated Note, dated June 7, 2007, by Medallion Financial Corp., in favor of Medallion
Financing Trust I. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188)
and incorporated by reference herein.
Indenture, dated April 15, 2016, between Medallion Financial Corp. and Wilmington Trust, National Association. Filed as
Exhibit d.6 to the Registration Statement on Form N-2 filed on April 15, 2016 (File No. 333-206692) and incorporated by
reference herein.
First Supplemental Indenture, dated April 15, 2016, between Medallion Financial Corp. and Wilmington Trust, National
Association. Filed as Exhibit d.7 to the Registration Statement on Form N-2 filed on April 15, 2016 (File No. 333-206692)
and incorporated by reference herein.
Note, effective March 1, 2017, by Freshstart Venture Capital Corp., in favor of Small Business Administration. Filed as
Exhibit 4.1 to the Current Report on Form 8-K filed on January 31, 2017 (File No. 814-00188) and incorporated by
reference herein.
Amendment No. 1 to Note, dated and effective as of January 31, 2018, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on
February 5, 2018 (File No. 814-00188) and incorporated by reference herein.
Amendment No. 2 to Note, dated and effective as of January 31, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on
February 1, 2019 (File No. 001-33747) and incorporated by reference herein.
Amendment No. 3 to Note, dated and effective as of February 15, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on
February 21, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 4 to Note, dated and effective as of March 14, 2019, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on March 15, 2019 (File
No. 001-37747) and incorporated by reference herein.
Amendment No. 5 to Note, dated and effective as of March 27, 2019, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on March 29, 2019 (File
No. 001-37747) and incorporated by reference herein.
4.10
Amendment No. 6 to Note, dated and effective as of January 30, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on
February 3, 2020 (File No. 001-37747) and incorporated by reference herein.
4.11
Amendment No. 7 to Note, dated and effective as of March 27, 2020, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed herewith.
4.12
10.1
Form of Note Purchase Agreement, including the form of Note attached thereto. Filed as Exhibit 4.1 to the Current Report
on Form 8-K filed on March 26, 2019 (File No. 011-37747) and incorporated by reference herein.
First Amended and Restated Employment Agreement, between Medallion Financial Corp. and Alvin Murstein dated May
29, 1998. Filed as Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File
No. 814-00188) and incorporated by reference herein.*
71
Number
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Description
Amendment No. 1 to First Amended and Restated Employment Agreement, dated and effective as of April 27, 2017, by
and between Medallion Financial Corp. and Alvin Murstein. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed
on May 3, 2017 (File No. 814-00188) and incorporated by reference herein.*
Amendment No. 2 to First Amended and Restated Employment Agreement, dated and effective as of December 22, 2017,
by and between Medallion Financial Corp. and Alvin Murstein. Filed as Exhibit 10.3 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 2017 (File No. 814-00188) and incorporated by reference herein.*
First Amended and Restated Employment Agreement, between Medallion Financial Corp. and Andrew Murstein dated
May 29, 1998. Filed as Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998
(File No. 814-00188) and incorporated by reference herein.*
Amendment No. 1 to First Amended and Restated Employment Agreement, dated and effective as of April 27, 2017, by
and between Medallion Financial Corp. and Andrew Murstein. Filed as Exhibit 10.2 to the Current Report on Form 8-K
filed on May 3, 2017 (File No. 814-00188) and incorporated by reference herein.*
Amendment No. 2 to First Amended and Restated Employment Agreement, dated and effective as of December 22, 2017,
by and between Medallion Financial Corp. and Andrew Murstein. Filed as Exhibit 10.6 to the Annual Report on Form 10-
K for the fiscal year ended December 31, 2017 (File No. 814-00188) and incorporated by reference herein.*
Employment Agreement, dated June 27, 2016, between Donald Poulton, Medallion Financial Corp. and Medallion Bank.
Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on June 30, 2016 (File No. 814-00188) and incorporated by
reference herein.*
Letter Agreement, dated March 7, 2017, by and between Medallion Financial Corp. and Larry D. Hall. Filed as Exhibit
10.8 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (File No. 814-00188) and
incorporated by reference herein.*
2006 Employee Stock Option Plan. Filed as Exhibit II to our definitive proxy statement for our 2006 Annual Meeting of
Shareholders filed on April 28, 2006 (File No. 814-00188) and incorporated by reference herein.*
First Amended and Restated 2006 Non-Employee Director Stock Option Plan. Filed as Exhibit B to Amendment No. 3 to
Form 40-APP filed on June 18, 2012 (File No. 812-13666) and incorporated by reference herein.*
2015 Employee Restricted Stock Plan. Filed as Exhibit B to Amendment No. 1 to Form 40-APP filed on December 11,
2015 (File No. 812-14433) and incorporated by reference herein.*
2015 Non-Employee Director Stock Option Plan. Filed as Exhibit B to Amendment No. 2 to Form 40-APP filed on
January 14, 2016 (File No. 812-14458) and incorporated by reference herein.*
10.13
2018 Equity Incentive Plan. Filed as Annex A to our definitive proxy statement for our 2018 Annual Meeting of
Shareholders filed on April 30, 2018 (File No. 001-37747) and incorporated by reference herein.*
10.14
10.15
10.16
10.17
Indenture of Lease, dated October 31, 1997, by and between Sage Realty Corporation, as Agent and Landlord, and
Medallion Financial Corp., as Tenant. Filed as Exhibit 10.64 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (File No. 812-09744) and incorporated by reference herein.
First Amendment of Lease, dated September 6, 2005, by and between Medallion Financial Corp. and Sage Realty
Corporation. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 12, 2005 (File No. 814-00188)
and incorporated by reference herein.
Second Amendment of Lease, dated August 5, 2015, by and between Sage Realty Corporation and Medallion Financial
Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 7, 2015 (File No. 814-00188) and
incorporated by reference herein.
Agreement of Lease, dated July 3, 2002, by and between B-LINE Holdings, L.C. and Medallion Bank. Filed as Exhibit
10.17 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No. 001-37747) and
incorporated by reference herein.
10.18 Amendment of Lease Agreement, dated October 29, 2004, by and between B-LINE Holdings, L.C. and Medallion Bank.
Filed as Exhibit 10.18 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No. 001-
37747) and incorporated by reference herein.
72
Number
Description
10.19 Assignment of Lease, dated July 6, 2006, by and between Medallion Bank and Zerop Medical, LLC, and consented and
agreed to by B-LINE Holdings, L.C. Filed as Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2018 (File No. 001-37747) and incorporated by reference herein.
10.20
10.21
Second Amendment of Lease Agreement, dated January 9, 2007, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No.
001-37747) and incorporated by reference herein.
Third Amendment of Lease Agreement, dated October 31, 2007, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.21 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No.
001-37747) and incorporated by reference herein.
10.22 Third Amendment of Lease Agreement, dated November 15, 2011, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.22 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No.
001-37747) and incorporated by reference herein.
10.23
10.24
10.25
Fourth Amendment of Lease Agreement, dated November 21, 2011, by and between B-LINE Holdings, L.C. and
Medallion Bank. Filed as Exhibit 10.23 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018
(File No. 001-37747) and incorporated by reference herein.
Fifth Amendment of Lease Agreement, dated November 26, 2012, by and between B-LINE Holdings, L.C. and Medallion
Bank. Filed as Exhibit 10.24 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File No.
001-37747) and incorporated by reference herein.
Sixth Amendment of Lease Agreement, dated January 26, 2017, by and between Investment Property Group, LLC, as
successor-in-interest to B-LINE Holdings, L.C., and Medallion Bank. Filed as Exhibit 10.25 to the Annual Report on Form
10-K for the fiscal year ended December 31, 2018 (File No. 001-37747) and incorporated by reference herein.
10.26
Seventh Amendment of Lease Agreement, dated May 10, 2017, by and between Investment Property Group, LLC and
Medallion Bank. Filed as Exhibit 10.26 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018
(File No. 001-37747) and incorporated by reference herein.
10.27
10.28
Eighth Amendment of Lease Agreement, dated March 28, 2018, by and between Investment Property Group, LLC and
Medallion Bank. Filed as Exhibit 10.27 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018
(File No. 001-37747) and incorporated by reference herein.
Letter from Mountain High Real Estate Advisors, Inc. to Medallion Bank, dated July 23, 2018, regarding 8th Amendment
Lease Commencement. Filed as Exhibit 10.28 to the Annual Report on Form 10-K for the fiscal year ended December 31,
2018 (File No. 001-37747) and incorporated by reference herein.
10.29 Ninth Amendment to Agreement of Lease, dated August 19, 2019, by and between Investment Property Group, LLC and
Medallion Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 21, 2019 (File No. 001-37747)
and incorporated by reference herein.
10.30
10.31
10.32
10.33
Commitment Letter, dated March 30, 2016, by the Small Business Administration to Medallion Capital, Inc., accepted and
agreed to by Medallion Capital, Inc. on April 7, 2016. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
April 7, 2016 (filed No. 814-00188) and incorporated by reference herein.
Junior Subordinated Indenture, dated as of June 7, 2007, between Medallion Financing Trust I and Wilmington Trust
Company as trustee. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188)
and incorporated by reference herein.
Purchase Agreement, dated as of June 7, 2007, among Medallion Financial Corp., Medallion Financing Trust I, and Merrill
Lynch International. Filed as Exhibit 10.3 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188)
and incorporated by reference herein.
Custodian Agreement, effective July 23, 2003, among Wells Fargo Bank Minnesota, National Association, as custodian,
and Medallion Financial Corp., Medallion Funding Corp. and Freshstart Venture Capital Corp. Filed as Exhibit j.1 to the
Registration Statement on Form N-2 filed on December 20, 2011 (File No. 333-178644) and incorporated by reference
herein.
73
Number
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
Description
Loan Agreement, effective as of January 25, 2017, by and among U.S. Small Business Administration, Freshstart Venture
Capital Corp. and Medallion Financial Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 31,
2017 (File No. 814-00188) and incorporated by reference herein.
Amendment No. 1 to Loan Agreement, dated as of October 20, 2017, by and between U.S. Small Business Administration
and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 26, 2017
(File No. 814-00188) and incorporated by reference herein.
Amendment No. 2 to Loan Agreement, dated and effective as of January 31, 2018, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
February 5, 2018 (File No. 814-00188) and incorporated by reference herein.
Amendment No. 3 to Loan Agreement, dated and effective as of January 31, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
February 1, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 4 to Loan Agreement, dated and effective as of February 15, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
February 21, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 5 to Loan Agreement, dated and effective as of March 14, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
March 15, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 6 to Loan Agreement, dated and effective as of March 27, 2019, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
March 29, 2019 (File No. 001-37747) and incorporated by reference herein.
Amendment No. 7 to Loan Agreement, dated and effective as of January 30, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on
February 3, 2020 (File No. 001-37747) and incorporated by reference herein.
10.42
Amendment No. 8 to Loan Agreement, dated and effective as of March 27, 2020, by and between U.S. Small Business
Administration and Freshstart Venture Capital Corp. Filed herewith.
21.1
23.1
31.1
31.2
32.1
32.2
List of Subsidiaries of Medallion Financial Corp. Filed herewith.
Consent of Mazars USA LLP, independent registered public accounting firm, related to reports on financial statements of
Medallion Financial Corp. Filed herewith.
Certification of Alvin Murstein pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
Certification of Larry D. Hall pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
Certification of Alvin Murstein pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. Filed herewith.
Certification of Larry D. Hall pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. Filed herewith.
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
74
*
Compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this Annual Report on Form 10-K.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange of Act of 1934, registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEDALLION FINANCIAL CORP.
Date: March 30, 2020
By: /s/ Alvin Murstein
Alvin Murstein
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
/s/ Alvin Murstein
Alvin Murstein
Title
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date
March 30, 2020
/s/ Larry D. Hall
Larry D. Hall
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 30, 2020
/s/ Andrew M. Murstein
Andrew M. Murstein
/s/ Henry L. Aaron
Henry L. Aaron
/s/ John Everets
John Everets
/s/ Frederick A. Menowitz
Frederick A. Menowitz
/s/ David L. Rudnick.
David L. Rudnick
/s/ Allan J. Tanenbaum
Allan J. Tanenbaum
President and Director
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
Director
Director
Director
Director
Director
76
MEDALLION FINANCIAL CORP.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .............................................................................................................
Consolidated Balance Sheets as of December 31, 2019 and 2018 ...................................................................................................
Consolidated Statements of Operations for the Years ended December 31, 2019, 2018, and 2017 .................................................
Consolidated Statements of Other Comprehensive Income (Loss) for the Years Ended December 31, 2019, 2018, and 2017 ......
Consolidated Statements of Changes in Stockholders’ Equity and Changes in Net Assets for the Years ended December 31,
2019, 2018, and 2017 ..................................................................................................................................................................
Consolidated Statements of Cash Flows for the Years ended December 31, 2019, 2018, and 2017 ...............................................
Notes to Consolidated Financial Statements ....................................................................................................................................
Page
F-2
F-3
F-4
F-6
F-7
F-10
F-12
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Medallion Financial Corp.
Opinion on the Consolidated Financial Statements and Selected Financial Ratios and Other Data
We have audited the accompanying consolidated balance sheets of Medallion Financial Corp. and subsidiaries (the “Company”) as of
December 31, 2019 and 2018, and the related consolidated statements of operations, other comprehensive income (loss), changes in
stockholders’ equity and changes in net assets, and cash flows for each of the three years in the three-year period ended December 31,
2019 and the related notes to the financial statements and the selected financial ratios and other data (see note 17) for each of the three
years in the three-year period ended December 31, 2017 (collectively referred to as the “consolidated financial statements and selected
financial ratios and other data”) . In our opinion, the consolidated financial statements and selected financial ratios and other data
present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its
operations, changes in stockholders’ equity and net assets, and cash flows for each of the three years in the three-year period ended
December 31, 2019, and the selected financial ratios and other data for each of the three years in the three-year period ended
December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on the criteria established in
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated March 30, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
Basis for Opinion
These consolidated financial statements and selected financial ratios and other data are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the Company’s consolidated financial statements and selected financial
ratios and other data based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements and selected financial ratios and other data are free
of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements and selected financial ratios and other data, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements and selected financial ratios and other data. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements and selected financial ratios and other data. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Mazars USA LLP
We have served as the Company’s auditor since 2005.
New York, New York
March 30, 2020
F-2
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 2019
December 31, 2018
(Dollars in thousands, except share and per share data)
Assets
Cash (1)
Federal funds sold
Equity investments
Investment securities
Loans
Allowance for loan losses
Net loans receivable
Accrued interest receivable
Property, equipment, and right-of-use lease asset, net
Loan collateral in process of foreclosure (2)
Goodwill
Intangible assets, net
Income tax receivable
Other assets
Total assets
Liabilities
Accounts payable and accrued expenses (3)
Accrued interest payable
Deposits (4)
Short-term borrowings
Deferred tax liabilities (5)
Operating lease liabilities
Long-term debt (6)
Total liabilities
Commitments and contingencies (7)
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- 27,597,802
shares at December 31, 2019 and 27,385,600 shares at December 31, 2018 issued)
Additional paid in capital
Treasury stock (2,951,243 shares at December 31, 2019 and December 31, 2018)
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders’ equity
Non-controlling interest in consolidated subsidiaries
Total equity
Total liabilities and equity
Number of shares outstanding
Book value per share
$
$
$
$
$
17,700 $
50,121
10,079
48,998
1,160,855
(46,093 )
1,114,762
8,662
14,375
52,711
150,803
52,536
1,516
19,404
1,541,667 $
16,234 $
4,398
951,651
38,223
9,341
12,738
174,614
1,207,199
23,842
33,871
9,197
45,324
1,017,882
(36,395)
981,487
7,413
1,222
49,495
150,803
53,982
—
25,210
1,381,846
18,789
3,852
848,040
55,178
6,973
—
158,810
1,091,642
—
—
276
275,511
(24,919 )
999
11,281
263,148
71,320
334,468
1,541,667 $
24,646,559
10.68 $
274
274,292
(24,919)
(82)
13,043
262,608
27,596
290,204
1,381,846
24,434,357
10.75
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Includes restricted cash of $2,970 as of December 31, 2019.
Includes financed sales of this collateral to third parties that are reported separately from the loan portfolio, and that are conducted by Medallion Bank of $8,163
and $3,134 as of December 31, 2019 and 2018.
Includes the short-term portion of lease liabilities of $2,085 as of December 31, 2019. Refer to Note 8 for more details.
Includes $2,594 of deferred financing costs as of December 31, 2019. Refer to Note 7 for more details.
Includes $1,812 of income tax receivable as of December 31, 2018. Refer to Note 9 for more details.
Includes $2,511 of deferred financing costs as of December 31, 2019. Refer to Note 7 for more details.
Refer to Note 13 for details.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-3
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
Interest and fees on loans
Interest and dividends on investment securities
Medallion lease income
Interest income on investments
Dividend income from controlled subsidiaries
Interest income from affiliated investments
Interest income from controlled subsidiaries
Dividends and interest income on short-term investments
Total interest income (2)/total investment income (2)
Interest on deposits
Interest on short-term borrowings
Interest on long-term debt
Interest expense
Total interest expense (3)
Net interest income/net investment income
Provision for loan losses
Net interest income after provision for loan losses
Other income (loss)
Gain on deconsolidation of Trust III
Sponsorship and race winnings, net
Gain on the extinguishment of debt
Gain on sale of loans
Writedown of loan collateral in process of foreclosure
Impairment of equity investments
Other income
Total other income, net
Other expenses
Salaries and employee benefits
Race team related expenses
Professional fees
Collection costs
Loan servicing fees
Rent expense
Regulatory fees
Amortization of intangible assets
Travel, meals, and entertainment
Intangible asset impairment
Other expenses (4)
Total other expenses (5)
Income (loss) before income taxes/net investment loss before taxes (5)
Income tax (provision) benefit
Net income (loss) after taxes/net investment income (loss) after taxes
Net realized losses on investments (6)
Income tax benefit
Total net realized losses on investments
Net change in unrealized appreciation on Medallion Bank and other
controlled subsidiaries
Net change in unrealized depreciation on investments other than securities
Net change in unrealized appreciation (depreciation) on investments
Income tax (provision) benefit
Net unrealized appreciation on investments
Net realized/unrealized gains (losses) on investments
Net income (loss) after taxes/net increase (decrease) on net assets resulting
from operations
Less: income attributable to the non-controlling interest
Total net income (loss) attributable to Medallion Financial Corp./net
increase (decrease) on net assets resulting from operations
Basic net income (loss) per share
Diluted net income (loss) per share
Distributions declared per share
Weighted average common shares outstanding
Basic
Diluted
Bank Holding
Company Accounting
December 31, 2019
Combined (1)
For the Years Ended
December 31, 2018
Investment Company
Accounting
December 31, 2017
$
130,167 $
2,225
170
—
—
—
—
—
132,562
22,521
3,242
9,282
—
35,045
97,517
47,386
50,131
—
18,742
4,145
—
(4,381 )
—
1,881
20,387
24,971
8,996
7,402
6,638
5,253
2,419
1,722
1,446
1,138
—
8,196
68,181
2,337
(341 )
1,996
—
—
—
—
—
—
—
—
—
1,996
3,758
(1,762 ) $
(0.07 ) $
(0.07 ) $
— $
$
$
$
$
95,080 $
1,644
133
3,287
28
654
10
0
100,836
14,230
4,441
6,145
3,551
28,367
72,469
59,008
13,461
25,325
14,368
—
4,946
(2,188 )
(939 )
494
42,006
21,706
7,121
9,332
5,207
3,470
2,040
1,703
1,083
1,448
5,615
7,464
66,189
(10,722 )
(373 )
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(34,745 )
8,426
(26,319 )
29,115
(1,915 )
(4,403 )
(8,122 )
14,675
(11,644 )
(22,739 )
2,307
(25,046 ) $
(1.03 ) $
(1.03 ) $
— $
—
—
198
14,564
1,278
2,541
165
878
19,624
—
—
—
13,770
13,770
5,854
—
5,854
—
—
—
—
—
—
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107
7,508
—
2,619
316
—
1,069
—
—
750
—
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13,810
(7,849)
728
(7,121)
(43,744)
15,955
(27,789)
9,483
(2,060)
8,222
19,543
35,188
7,399
278
—
278
0.01
0.01
—
24,342,979
24,342,979
24,214,978
24,214,978
23,919,994
24,053,307
(1) Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and the three months
ended March 31, 2018 under Investment Company Accounting.
F-4
(2)
Included in interest and investment income is $834, $1,869 and $2,268 of paid in kind interest for the years ended December 31,
2019, 2018, and 2017.
(3) Average borrowings outstanding were $1,138,746, $1,198,124, and $334,022, and the related average borrowing costs were
3.08%, 2.37%, and 4.12% for the years ended December 31, 2019, 2018, and 2017.
(4) See Note 16 for the components of other expenses for the three months ended March 31, 2018 and the year ended December 31,
(5)
2017.
Includes $256 and $870 of net revenues received from Medallion Bank for the years ended December 31, 2018 and 2017,
primarily for expense reimbursements. See Notes 6 and 14 for additional information.
(6) There were no net losses on investment securities of affiliated issuers for the years ended December 31, 2018 and 2017.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-5
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Net income (loss) after taxes/net increase (decrease) on net assets
resulting from operations
Other comprehensive income (loss), net of tax
Total comprehensive income (loss)
Less: comprehensive income attributable to the non-controlling interest
Total comprehensive income (loss) attributable to Medallion Financial
Corp.
Bank Holding
Company
Accounting
Combined (1)
Investment
Company
Accounting
For the Years Ended
December 31, 2019 December 31, 2018 December 31, 2017
$
1,996 $
1,081
3,077
3,758
(22,739) $
(82)
(22,821)
2,307
$
(681) $
(25,128) $
278
—
278
—
278
(1) Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and the three months
ended March 31, 2018 under Investment Company Accounting.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-6
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F
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(Dollars in thousands, except per share data)
Net investment loss after income taxes
Net realized losses on investments, net of tax
Net unrealized appreciation on investments, net of tax
Net increase in net assets resulting from operations
Investment income, net
Return of capital
Realized gains from investment transactions, net
Distributions to shareholders (1)
Stock-based compensation expense
Exercise of stock options
Treasury stock acquired
Capital share transactions
Total increase in net assets
Net assets at the beginning of the period
Net assets at the end of the period (2)
Capital share activity
Common stock issued, beginning of period
Exercise of stock options
Issuance of restricted stock, net
Common stock issued, end of period
Treasury stock, beginning of period
Treasury stock acquired
Treasury stock, end of period
Common stock outstanding
$
$
Investment Company
Accounting
Year Ended
December 31, 2017
(7,121)
(27,789)
35,188
278
—
—
—
—
785
—
—
785
1,063
286,096
287,159
26,976,064
—
318,263
27,294,327
(2,951,243)
—
(2,951,243)
24,343,084
(1) Distributions declared were $0.00 per share for the year ended December 31, 2017.
(2)
Includes $0 of undistributed net investment income and $0 of undistributed net realized gains on investments, and $0 of capital
loss carryforwards at December 31, 2017.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-9
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)/net increase in net assets resulting from operations
Adjustments to reconcile net loss/net increase in net assets resulting from operations to net cash
provided by operating activities:
Provision for loan losses
Paid-in-kind interest
Depreciation and amortization
Amortization of origination fees, net
(Decrease) increase in deferred and other tax liabilities, net
Net change in loan collateral in process of foreclosure
Net realized gains on sale of investments
Net change in unrealized (appreciation) depreciation on investments
Stock-based compensation expense
Gain on deconsolidation of Trust III
Gain on extinguishment of debt
Intangible asset impairment
(Increase) decrease in accrued interest receivable
Decrease in other assets
Decrease in accounts payable and accrued expenses
Increase in accrued interest payable
Loans originated
Proceeds from principal receipts, sales, and maturities of loans
Capital returned by Medallion Bank and other controlled subsidiaries, net
Net change in unrealized depreciation on investment other than securities
Increase in unrealized appreciation on Medallion Bank and other controlled
subsidiaries
Net realized losses on investments
Increase in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
Proceeds from principal receipts, sales, and maturities of loans
Purchases of investments
Proceeds from principal receipts, sales, and maturities of investments
Proceeds from the sale of loan collateral in process of foreclosure
Net cash used for investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from time deposits and funds borrowed
Repayments of time deposits and funds borrowed
Purchase of federal funds
Repayments of federal funds
Non-controlling interest equity raised by Medallion Bank
Distributions to non-controlling interests
Payments of declared distributions
Net cash provided by (used for) financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents, beginning of period (2)
Cash and cash equivalents, end of period (3)
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest
Cash paid during the period for income taxes
NON-CASH INVESTING
Loans transferred to loan collateral in process of foreclosure
Bank Holding
Company
Accounting
2019
Combined (1)
Year Ended December 31,
2018
Investment
Company
Accounting
2017
$
1,996 $
(22,739) $
278
47,386
(834)
7,499
4,952
853
11,838
(1,820)
1,734
1,221
—
(4,145)
—
(1,249)
2,838
(8,024)
690
—
—
—
—
—
—
—
64,935
(471,069)
251,653
(10,507)
7,119
16,294
(206,510)
525,842
(414,277)
4,000
(4,000)
42,485
(2,367)
—
151,683
10,108
57,713
67,821 $
59,008
(1,869)
5,564
3,132
13,637
9,926
(5,921)
6,457
576
(25,325)
—
5,615
797
1,309
(675)
139
(8,193)
13,279
93
1,915
(29,115)
34,745
4,196
66,551
(333,740)
302,409
(10,376)
6,417
11,593
(23,697)
364,139
(389,951)
8,000
(8,000)
—
(1,776)
(66 )
(27,654)
15,200
42,513
57,713 $
32,008 $
310
25,102 $
85
—
(2,268)
1,019
68
(33,364)
—
—
(8,222)
785
—
—
—
222
122
(907)
949
(29,131)
46,755
696
2,060
(9,483)
43,744
—
13,323
—
—
—
—
—
—
—
(21,450)
—
—
—
—
(145)
(21,595)
(8,272)
20,962
12,690
11,897
62
31,348 $
32,125 $
-
$
$
$
(1) Balance includes the nine months ended December 31, 2018 under Bank Holding Company Accounting and the three months
ended March 31, 2018 under Investment Company Accounting.
F-10
(2)
(3)
Included in the beginning balance for the year ended December 31, 2018 was $29,923 of cash, cash equivalents, and federal
funds sold as a result of the consolidation of previously unconsolidated subsidiaries and excludes $100 of cash held by the
Company on deposit with the Bank.
Includes federal funds sold at December 31, 2019 and 2018.
The accompanying notes should be read in conjunction with these consolidated financial statements.
F-11
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES
Medallion Financial Corp., or 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, or the Bank, a Federal Deposit Insurance
Corporation, or FDIC, insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activities.
The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and
undergoes examinations by those agencies. The Bank was initially formed for the primary purpose of originating commercial loans in
three categories: 1) loans to finance the purchase of taxi medallions, 2) asset-based commercial loans, and 3) SBA 7(a) loans.
Subsequent to its formation, the Bank began originating consumer loans to finance the purchases of recreational vehicles, or RVs,
boats, and other related items, and to finance small scale home improvements. The Company also conducts business through
Medallion Funding LLC, or MFC, a Small Business Investment Company, or SBIC, which originates and services taxi medallion and
commercial loans.
The Company also conducts business through its subsidiaries Medallion Capital, Inc., or MCI, an SBIC which conducts a
mezzanine financing business, and Freshstart Venture Capital Corp., or FSVC, an SBIC that originated and services medallion and
commercial loans. MFC, MCI, and FSVC, as SBICs, are regulated by the Small Business Administration, or 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, or
RPAC, a professional car racing team that competes in the Monster Energy NASCAR Cup Series, which is also consolidated with the
Company.
The Company formed a wholly-owned subsidiary, Medallion Servicing Corporation, or MSC, to provide loan services to the
Bank. The Company has assigned all of its loan servicing rights for the Bank, which consists of servicing medallion loans originated
by the Bank, to MSC, which bills and collects the related service fee income from the Bank, and is allocated and charged by the
Company for MSC’s share of these servicing costs.
Taxi Medallion Loan Trust III, or Trust III, was established for the purpose of owning medallion loans originated by MFC or
others. Trust III is a variable interest entity, or VIE, and MFC was the primary beneficiary until the 2018 fourth quarter. As a result,
the Company consolidated Trust III in its financial results until consummation of a restructuring in the 2018 fourth quarter. For a
discussion of the restructuring, see Note 23. 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, or Fin Trust, for the purpose of issuing
unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any
liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to
Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,083,000 at December 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, or together, Medallion Chicago, purchased $8,689,000 of City of Chicago
taxi medallions out of foreclosure, some of which are leased to fleet operators. The 159 medallions are carried at a net realizable value
of $3,091,000 in other assets on the Company’s consolidated balance sheet at December 31, 2019 compared to a net realizable value
of $4,305,000 at December 31, 2018.
F-12
(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, or
BDC, under the Investment Company Act of 1940, or the 1940 Act. Prior to such time, the Company was a closed-end, non-
diversified management investment company that had elected to be treated as a BDC under the 1940 Act. Accordingly, commencing
with the three months ended June 30, 2018, the Company (which now consolidates the results of the Bank and its other subsidiaries)
reports in accordance with Bank Holding Company Accounting; periods prior to such change in status are reported in accordance with
Investment Company Accounting. Significant accounting policies that differ between such periods are described in more detail below.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the US
(GAAP) requires management to make estimates that affect the amounts reported in the consolidated financial statements and the
accompanying notes. Accounting estimates and assumptions are those that management considers to be the most critical to an
understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. All of
these estimates reflect management’s best judgment about current economic and market conditions and their effects based on
information available as of the date of these consolidated financial statements. If such conditions change, it is reasonably possible that
the judgments and estimates could change, which may result in future impairments of loans and loans in process of foreclosure,
goodwill and intangible assets, and investments, among other effects.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly-owned and controlled
subsidiaries commencing with the three months ended June 30, 2018. All significant intercompany transactions, balances, and profits
(losses) have been eliminated in consolidation. As a result of the Company’s election to withdraw from being regulated as a BDC
under the 1940 Act, effective April 2, 2018, the Bank and various other Company subsidiaries were not consolidated with the
Company prior to the three months ended June 30, 2018. See Note 6 for the presentation of financial information for the Bank and
other controlled subsidiaries for such prior periods.
The consolidated financial statements have been prepared in accordance with GAAP. The Company consolidates all entities it
controls through a majority voting interest, a controlling interest through other contractual rights, or as being identified as the primary
beneficiary of VIEs. The primary beneficiary is the party who has both (1) the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance and (2) an obligation to absorb losses of the entity or a right to receive benefits
from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third-
party’s holding is recorded as non-controlling interest.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash
equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that exceed
the federally insured limits. Cash includes $2,970,000 of an interest reserve associated with the private placements of debt in March
and August 2019, which cannot be used for any other purpose until March 2022.
Fair Value of Assets and Liabilities
The Company follows the Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 820, Fair
Value Measurements and Disclosures, or 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 19 and 20 to the
consolidated financial statements.
F-13
Equity Investments
Equity investments of $10,079,000 and $9,197,000 at December 31, 2019 and 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, or 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 $248,000 and $154,000 at December 31, 2019 and 2018, and $79,000 was amortized to interest income for the year ended
December 31, 2019, and $80,000 was amortized to interest income for the nine months ended December 31, 2018. The Bank, a
previously unconsolidated subsidiary under Investment Company Accounting prior to April 2, 2018, amortized $21,000 and $81,000
to interest income for the three months ended March 31, 2018 and for year ended December 31, 2017. 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 financial statements, and reported in
accumulated other comprehensive income (loss) as a separate component of stockholders’ equity, net of the effect of income taxes,
until they are sold. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a
component of operating results and any amounts previously included in stockholder’s equity, which were recorded net of the income
tax effect, will be reversed.
Other Investment Valuation (Investment Company Accounting)
Prior to April 2, 2018, under the 1940 Act, the Company’s investment in the Bank, as a wholly owned portfolio investment, was
subject to quarterly assessments of fair value. The Company conducted a thorough valuation analysis, and also received an opinion
regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of the
Bank on at least an annual basis. The Company’s analysis included factors such as various regulatory restrictions that were established
at the Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium
imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross
revenues are primarily derived from non-financial activities) which expired in July 2013 and the lack of any new charter issuances
since the moratorium’s expiration. Because of these restrictions and other factors, the Company’s Board of Directors had previously
determined that the Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had
previously used the Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a
component of unrealized appreciation (depreciation) on investments. In the 2015 second quarter, the Company first became aware of
external interest in the Bank and its portfolio assets at values in excess of their book value. Expression of interest in the Bank from
both investment bankers and interested parties has continued. The Company incorporated these new factors in the Medallion Bank’s
fair value analysis and the Board of Directors determined that the Bank had a fair value in excess of book value. In addition, in the
2016 third quarter there was a court ruling involving a marketplace lender that the Company believes heightened the interest of
marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the
Board of Directors in their determination of the Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015,
and additional appreciation of $128,918,000 was recorded in 2016, $7,849,000 was recorded in 2017, and $39,826,000 was recorded
in the 2018 first quarter. 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.
F-14
Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related
loans. At December 31, 2019 and 2018, net loan origination costs were $17,839,000 and $14,416,000. The majority of these loan
origination costs were capitalized into the loan balances on April 2, 2018 in connection with the change in reporting status. Net
amortization to income for the years ended December 31, 2019, 2018 and 2017 was $4,952,000, $3,128,000 ($3,993,000 when
combined with the Bank), and $68,000 ($3,581,000 when combined with the Bank).
Interest income is recorded on the accrual basis. 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 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 90 days or more past due were
$8,663,000 at December 31, 2019, or 0.76% of the total loan portfolio, compared to $21,225,000, or 2.14% at December 31, 2018.
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a
concessions to the borrower for other than an insignificant period of time that the Company would not otherwise consider, the related
loan is classified as a troubled debt restructuring, or TDR. The Company strives to identify borrowers in financial difficulty early and
work with them to modify their loans to more affordable terms before they reach nonaccrual status. These modified terms may include
rate reductions, principal forgiveness, term extensions, payment forbearance, and other actions intended to minimize the economic
loss to the Company and to avoid foreclosure or repossession of the collateral. For modifications where the Company forgives
principal, the entire amount of such principal forgiveness is immediately charged off. Loans classified as TDRs are considered
impaired loans. Beginning in 2019, all consumer loans which are party to a Chapter 13 bankruptcy are immediately classified as
TDRs. The Company’s policy with regard to bankrupt loans is take an immediate 40% write down of the loan balance.
Loan collateral in process of foreclosure primarily includes medallion loans that have reached 120 days past due and have been
charged down to their net realizable value, in addition to consumer repossessed collateral in the process of being sold. The medallion
loan component reflects that the collection activities on the loans have transitioned from working with the borrower to the liquidation
of the collateral securing the loans.
The Company had $28,833,000 and $40,500,000 of net loans pledged as collateral under borrowing arrangements at
December 31, 2019 and 2018.
The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers
and Servicing, or 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
$113,581,000 and $140,180,000 at December 31, 2019 and 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 the
Bank, and determined that no material servicing asset or liability existed as of December 31, 2019 and 2018. The Company assigned
its servicing rights of the Bank’s portfolio to MSC. The costs of servicing were allocated to MSC by the Company, and the servicing
fee income was billed to and collected from the Bank by MSC.
F-15
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 $3,173,000 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. Subsequent to April 2, 2018, the Bank recorded a general reserve benefit of $2,230,000. Credit
losses are deducted from the allowance and subsequent recoveries are added back to the allowance.
Unrealized Appreciation (Depreciation) and Realized Gains (Losses) on Investments (Investment Company Accounting)
Prior to April 2, 2018, under Investment Company Accounting, the Company’s loans, net of participations and any unearned
discount, were considered investment securities under the 1940 Act and recorded at fair value. As part of the fair value methodology,
loans were valued at cost adjusted for any unrealized appreciation (depreciation). Since no ready market existed for these loans, the
fair value was determined in good faith by the Board of Directors. In determining the fair value, the Board of Directors considered
factors such as the financial condition of the borrower, the adequacy of the collateral, individual credit risks, cash flows of the
borrower, market conditions for loans (e.g. values used by other lenders and any active bid/ask market), historical loss experience, and
the relationships between current and projected market rates and portfolio rates of interest and maturities. Investments other than
securities, which represent collateral received from defaulted borrowers, were valued similarly.
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 were generated through sales of investments, foreclosure on specific collateral, and writeoffs of loans
or assets acquired in satisfaction of loans, net of recoveries. Refer to Note 5 for additional details.
Goodwill and Intangible Assets
The Company’s goodwill and intangible assets arose as a result of the excess of fair value over book value for several of the
Company’s previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under
the Company’s new reporting, and was subject to a purchase price accounting allocation process conducted by an independent third
party expert to arrive at the current categories and amounts. Goodwill is not amortized, but is subject to quarterly review by
management to determine whether additional impairment testing is needed, and such testing is performed at least on an annual basis.
Intangible assets are amortized over their useful life of approximately 20 years. As of December 31, 2019 and 2018, the Company had
goodwill of $150,803,000, which all related to the Bank, and intangible assets of $52,536,000 and $53,982,000, and the Company
recognized $1,446,000 and $1,083,000 of amortization expense on the intangible assets for the twelve months ended December 31,
2019 and 2018. Additionally, loan portfolio premiums of $12,387,000 were determined as of April 2, 2018, of which $5,758,000 and
$9,048,000 were outstanding at December 31, 2019 and 2018, and of which $3,289,000 and $3,339,000 were amortized to interest
income for the twelve months ended December 31, 2019 and 2018. The Company engaged an expert to assess the goodwill and
intangibles for impairment at December 31, 2019 and 2018, who concluded there was no impairment on the Bank and there was
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 of the dates presented.
December 31, 2019 December 31, 2018
21,176
$
6,641
26,165
53,982
20,075 $
6,296
26,165
52,536 $
$
(Dollars in thousands)
Brand-related intellectual property
Home improvement contractor relationships
Race organization
Total intangible assets
F-16
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 $418,000, $422,000,
and $94,000 ($232,000 had the Bank been consolidated) for the years ended December 31, 2019, 2018, and 2017.
Deferred Costs
Deferred financing costs 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
$2,348,000, $1,864,000, and $925,000 ($2,255,000 had the Bank been consolidated) for the years ended December 31, 2019, 2018,
and 2017, recorded as interest expense. In addition, the Company capitalizes certain costs for transactions in the process of completion
(other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon
completion or termination of the transaction, any accumulated amounts will be amortized against income over an appropriate period,
or written off. The amounts on the Company’s balance sheet for all of these purposes were $5,105,000 and $4,461,000 at
December 31, 2019 and 2018.
Income Taxes
Income taxes are accounted for using the asset and liability approach in accordance with FASB ASC Topic 740, Income Taxes,
or ASC 740. Deferred tax assets and liabilities reflect the impact of temporary differences between the carrying amount of assets and
liabilities and their tax basis and are stated at tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax
assets are also recorded for net operating losses, capital losses and any tax credit carryforwards. A valuation allowance is provided
against a deferred tax asset when it is more likely than not that some or all of the deferred tax assets will not be realized. All available
evidence, both positive and negative, is considered to determine whether a valuation allowance for deferred tax assets is needed. Items
considered in determining our valuation allowance include expectations of future earnings of the appropriate tax character, recent
historical financial results, tax planning strategies, the length of statutory carryforward periods and the expected timing of the reversal
of temporary differences. Under ASC 740, forming a conclusion that a valuation allowance is not needed is difficult when there is
negative evidence, such as cumulative losses in recent years. The Company recognizes tax benefits of uncertain tax positions only
when the position is more likely than not to be sustained assuming examination by tax authorities. The Company records income tax
related interest and penalties, if applicable, within current income tax expense.
Sponsorship and Race Winnings
The Company accounts for sponsorship and race winnings revenue under FASB ASC Topic 606, Revenue from Contracts with
Customers. Sponsorship revenue is recognized when the Company’s performance obligations are completed in accordance with the
contract terms of the sponsorship contract. Race winnings revenue is recognized after each race during the season based upon terms
provided by NASCAR and the placement of the driver.
F-17
Earnings (Loss) Per Share (EPS)
Basic earnings (loss) per share are computed by dividing net income (loss)/net increase (decrease) in net assets resulting from
operations available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if option contracts to issue common stock were exercised, or if
restricted stock vests, and has been computed after giving consideration to the weighted average dilutive effect of the Company’s
stock options and restricted stock. The Company uses the treasury stock method to calculate diluted EPS, which is a method of
recognizing the use of proceeds that could be obtained upon exercise of options and warrants, including unvested compensation
expense related to the shares, in computing diluted EPS. It assumes that any proceeds would be used to purchase common stock at the
average market price during the period. The table below shows the calculation of basic and diluted EPS.
(Dollars in thousands, except share and per share)
Net income (loss)/net increase in net assets resulting from
operations available to common stockholders
Weighted average common shares outstanding applicable
to basic EPS
Effect of dilutive stock options
Effect of restricted stock grants
Adjusted weighted average common shares outstanding
applicable to diluted EPS
Basic income (loss) per share
Diluted income (loss) per share
Years Ended December 31,
2018
2017
2019
$
(1,762) $
(25,046 ) $
278
24,342,979 24,214,978 23,919,994
439
132,874
—
—
—
—
24,342,979 24,214,978 24,053,307
0.01
$
0.01
(1.03 ) $
(1.03 )
(0.07) $
(0.07)
Potentially dilutive common shares excluded from the above calculations aggregated 462,180, 100,000, and 366,245 shares as
of December 31, 2019, 2018, and 2017.
Stock Compensation
The Company follows FASB ASC Topic 718, or 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 2019, 2018, and 2017, the Company issued 216,148, 101,010, and 327,251 restricted shares of stock-based
compensation awards, issued 449,450, 39,000, and 29,666 shares of other stock-based compensation awards, and issued 26,040, 0, and
0 of restricted share units of stock based compensation awards, and recognized $1,221,000, $576,000, and $785,000, or $0.05, $0.02,
and $0.03, per diluted common share for each respective year, of non-cash stock-based compensation expense related to the grants. As
of December 31, 2019, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was
$1,797,000, which is expected to be recognized over the next 17 quarters (see Note 10).
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial
Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the bank regulators about
components, risk weightings, and other factors.
FDIC-insured banks, including the Bank, are subject to certain federal laws, which impose various legal limitations on the
extent to which banks may finance or otherwise supply funds to certain of their affiliates. In particular, the Bank is subject to certain
restrictions on any extensions of credit to, or other covered transactions, such as certain purchases of assets, with the Company or its
affiliates.
F-18
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for
federal deposit insurance, the FDIC ordered that the Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%,
which could preclude its ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As of
December 31, 2019, the Bank’s Tier 1 leverage ratio was 19.35%. The Bank’s actual capital amounts and ratios and the regulatory
minimum ratios are presented in the following table.
(Dollars in thousands)
Common Equity Tier 1 capital
Tier 1 capital
Total capital
Average assets
Risk-weighted assets
Leverage ratio (1)
Common Equity Tier 1 capital ratio (2)
Tier 1 capital ratio (3)
Total capital ratio (3)
Regulatory
Minimum
Well-Capitalized
—
—
—
—
—
4.0%
7.0
8.5
10.5
December 31, 2019
158,187
226,975
241,842
1,172,866
1,144,337
December 31, 2018
141,608
$
167,911
180,917
1,059,461
993,374
15.8%
14.3
16.9
18.2
19.4 %
13.8
19.8
21.1
— $
—
—
—
—
5.0%
6.5
8.0
10.0
(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 the table above, the minimum risk-based ratios as of December 31, 2018 reflect the 75% phase-in of the capital conservation
buffer of 2.5%, and the minimum risk-based ratios as of December 31, 2019 reflect the capital conservation buffer of 2.5%. The “well-
capitalized” requirements were the binding requirements for risk-based capital ratios as of December 31, 2018 because of the
transitional provisions then applicable to the capital conservation buffer and were the binding requirements for Tier 1 leverage capital
as of both December 31, 2019 and December 31, 2018.
Recently Issued Accounting Standards
In March 2020, the FASB issues ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting.” The objective of this is to provide optional guidance for a limited period of time to ease the
potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of
the London Interbank Offered Rate (LIBOR). The amendments in this update are effective for all entities as of March 12, 2020
through December 31, 2022. The Company does not believe this will have a material impact on its financial condition.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes, or Topic 740,: Simplifying the Accounting for Income
Taxes.” The objective of this update is to simplify the accounting for income taxes by removing certain exceptions to the general
principles and improve consistent application of and simplify other areas of Topic 740. The amendments in this update are effective
for annual periods beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not believe
this update will have a material impact on its financial condition.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement, or 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, or 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, or 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
F-19
entity at each reporting date. Under the new standard, the concepts used by entities to account for credit losses on financial
instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is removed. Loss estimates
are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and
supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and
measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling
have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is
effective for fiscal years beginning after December 15, 2019 for public entities, with early adoption permitted. In October 2019, the
FASB voted to defer implementation of the standard for smaller reporting companies, such as the Company, to fiscal years beginning
after December 15, 2022. The Company is assessing the impact the update will have on its financial statements, and expects the
update to have an impact on the Company’s accounting for estimated credit losses on its loans.
Reclassifications
Certain reclassifications have been made to prior year balances to conform with the current year presentation. These
reclassifications have no effect on the previously reported results of operations.
(3) INVESTMENT SECURITIES (Bank Holding Company Accounting)
Fixed maturity securities available for sale at December 31, 2019 and 2018 consisted of the following:
December 31, 2019
(Dollars in thousands)
Mortgage-backed securities, principally obligations of US
federal agencies
State and municipalities
Total
December 31, 2018
(Dollars in thousands)
Mortgage-backed securities, principally obligations of US
federal agencies
State and municipalities
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
36,335 $
12,279
48,614 $
411 $
186
597 $
(112 ) $
(101 )
(213 ) $
36,634
12,364
48,998
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
32,184 $
14,239
46,423 $
15 $
35
50 $
(742 ) $
(407 )
(1,149 ) $
31,457
13,867
45,324
$
$
$
$
The amortized cost and estimated market value of investment securities as of December 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)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Amortized
Cost
Fair
Value
$
$
2,035 $
10,254
10,052
26,273
48,614 $
2,029
10,281
10,101
26,587
48,998
F-20
The following tables show information pertaining to securities with gross unrealized losses at December 31, 2019 and 2018,
aggregated by investment category and length of time that individual securities have been in a continuous loss position follows.
December 31, 2019
(Dollars in thousands)
Mortgage-backed securities, principally obligations of US
federal agencies
State and municipalities
Total
December 31, 2018
(Dollars in thousands)
Mortgage-backed securities, principally obligations of US
federal agencies
State and municipalities
Total
Less than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Twelve Months and Over
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
(74) $
(17)
(91) $
8,291 $
2,099
10,390 $
(38 ) $
(84 )
(122 ) $
4,939
2,739
7,678
Less than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Twelve Months and Over
Gross
Unrealized
Losses
Fair
Value
(54) $
(78)
(132) $
4,616 $
5,429
10,045 $
(688 ) $
(329 )
(1,017 ) $
24,871
6,259
31,130
Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, and
the Company has the intent and ability to hold the securities for the foreseeable future. The fair value is expected to recover as the
bonds approach the maturity date.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES (Bank Holding Company Accounting)
The following table shows the major classification of loans, inclusive of capitalized loan origination costs, at December 31,
2019 and 2018.
As of December 31, 2019
As of December 31, 2018
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total gross loans
Allowance for loan losses
Total net loans
As a
Percent of
Gross Loans
As a
Percent of
Gross Loans
58%
18
6
18
100%
Amount
62% $ 587,038
183,155
21
64,083
6
183,606
11
100% 1,017,882
(36,395 )
$ 981,487
Amount
$ 713,332
247,324
69,767
130,432
1,160,855
(46,093)
$1,114,762
The following table show the components of changes in gross loans for the twelve months ended December 31, 2019.
Improvement Commercial Medallion
Total
Twelve Months Ended December 31, 2019
(Dollars in thousands)
Gross loans – December 31, 2018
Loan originations
Principal payments
Charge-offs, net
Transfer to loans in process of foreclosure, net
Amortization of origination costs
Amortization of loan premium
FASB origination costs
Paid-in-kind interest
Gross loans – December 31, 2019
Home
Recreation
$ 587,038 $ 183,155 $
142,112
301,403
(76,157)
(146,873)
(786)
(17,419)
—
(14,512)
1,561
(6,428)
(416)
(247)
(2,145)
10,370
—
—
$ 713,332 $ 247,324 $
64,083 $ 183,606 $ 1,017,882
— 462,093
18,578
(13,553) (15,070 ) (251,653)
(37,688)
(31,348)
(4,952)
(3,289)
8,976
834
69,767 $ 130,432 $ 1,160,855
(819) (18,664 )
— (16,836 )
(119 )
34
—
(2,626 )
141
610
—
834
F-21
The following table sets forth the activity in the allowance for loan losses for the twelve months ended December 31, 2019
and the nine months ended December 31, 2018.
(Dollars in thousands)
Allowance for loan losses – beginning balance
Charge-offs
Recreation
Home improvement
Commercial
Medallion
Total charge-offs
Recoveries
Recreation
Home improvement
Commercial
Medallion
Total recoveries
Net charge-offs (2)
Provision for loan losses
Allowance for loan losses – ending balance (3)
$
$
Twelve Months Ended
December 31, 2019
Nine Months Ended
December 31, 2018
— (1)
36,395 $
(24,433 )
(2,504 )
(819 )
(22,205 )
(49,961 )
7,014
1,718
—
3,541
12,273
(37,688 )
47,386
46,093 $
(12,697)
(1,562)
—
(14,277)
(28,536)
4,437
905
4
577
5,923
(22,613)
59,008 (4)
36,395
(1) Beginning balance reflects the transition to Bank Holding Company Accounting by netting previously established unrealized
depreciation against the gross loan balances, resulting in a starting point of zero for this table.
(2) As of December 31, 2019, cumulative charge-offs of loans and loans in process of foreclosure in the medallion loan portfolio
were $241,214, representing collection opportunities for the Company.
Includes $3,173 of a general reserve as of December 31, 2019, for the Company, for current and performing medallion loans
under 90 days past due, as an additional buffer against future losses, representing 7% of the total allowance, and 2.56% of the
loans in question. This figure excludes $17,351 of a general reserve on loans at the Bank, which was netted against loan
balances at consolidation on April 2, 2018. Subsequent to April 2, 2018, the Bank recorded general reserves benefit of $2,230.
Includes $8,161 of reversal of provision for loan losses related to the deconsolidation of Trust III in the 2018 fourth quarter.
(3)
(4)
The following tables set forth the allowance for loan losses by type as of December 31, 2019 and 2018.
December 31, 2019
(Dollars in thousands)
Recreation
Home Improvement
Commercial
Medallion
Total
December 31, 2018
(Dollars in thousands)
Recreation
Home Improvement
Commercial
Medallion
Total
Amount
$
18,075
2,608
—
25,410
46,093
$
Amount
$
6,856
1,796
—
27,743
36,395
Percentage
of Allowance
Allowance as
a Percent of
Loan Category
39 %
6
—
55
100 %
2.53%
1.05
—
19.48
3.97%
Allowance as
a Percent of
Loan Category
1.17%
0.98
—
15.11
3.58%
19 %
5
—
76
100 %
Percentage
of Allowance
$
F-22
The following table presents total nonaccrual loans and foregone interest, substantially all of which is in the medallion portfolio.
The decline reflects the charge-offs of certain loans and their movement to loan collateral in process of foreclosure. The fluctuation in
nonaccrual interest foregone is due to past due loans and market conditions.
(Dollars in thousands)
Total nonaccrual loans
Interest foregone for the year
Amount of foregone interest applied to principal
for the year
Interest foregone life-to-date
Amount of foregone interest applied to principal
life-to-date
Percentage of nonaccrual loans to gross loan portfolio
Bank Holding
Company
Accounting
December 31,
2019
26,484
2,152
$
December 31,
2018
34,877 $
1,153
$
Investment
Company
Accounting
December 31,
2017 (1)
98,494
823
254
2,744
535
1,952
52
12,485
471
2%
1,214
3 %
3,495
31%
(1) Does not include the Bank’s nonaccrual loans of $32,668, interest income foregone for the year of $795 and foregone interest
paid and applied to principal for the year of $917, interest income foregone life-to-date of $1,487 and foregone interest paid and
applied to principal life-to-date of $1,221.
The following tables present the performance status of loans as of December 31, 2019 and 2018.
December 31, 2019
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
December 31, 2018
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
Percentage of
Nonperforming
to Total
Total
Performing Nonperforming
$
705,070 $
247,139
57,905
88,248
$ 1,098,362 $
8,262 $ 713,332
247,324
185
69,767
11,862
42,184
130,432
62,493 (1)$ 1,160,855
Percentage of
Nonperforming
to Total
Total
Performing Nonperforming
$
581,250 $
183,018
60,249
145,391
969,908 $
$
5,788 $ 587,038
183,155
137
64,083
3,834
38,215
183,606
47,974 (1)$ 1,017,882
1.16%
0.07
17.00
32.34
5.38%
0.99%
0.07
5.98
20.81
4.71%
(1) Includes $36,009 and $13,097 of TDRs as of December 31, 2019 and 2018, which are accruing and paying currently, but
which are considered nonperforming loans under GAAP.
For those performing loans aged under 90 days past due, there is a possibility that their delinquency status will continue to
deteriorate and they will subsequently be placed on nonaccrual status and be reserved for, and as such, deemed nonperforming.
F-23
The following tables provide additional information on attributes of the nonperforming loan portfolio as of December 31, 2019
and 2018, all of which had an allowance recorded against the principal balance.
(Dollars in thousands)
With an allowance recorded
Recreation
Home improvement
Commercial
Medallion
Total nonperforming loans with an allowance
(Dollars in thousands)
With an allowance recorded
Recreation
Home improvement
Commercial
Medallion
Total nonperforming loans with an allowance
December 31, 2019
Unpaid
Principal
Balance
Recorded
Investment
Twelve Months Ended
December 31, 2019
Related
Allowance
Average
Investment
Recorded
Interest Income
(Expense)
Recognized
$
$
8,262 $
185
11,862
42,184
62,493 $
8,262 $
185
11,867
42,650
62,964 $
329 $
3
—
14,824
15,156 $
8,317 $
185
7,886
44,721
61,109 $
471
—
392
346
1,209
December 31, 2018
Unpaid
Principal
Balance
Recorded
Investment
Nine Months Ended
December 31, 2018
Related
Allowance
Average
Investment
Recorded
Interest Income
(Expense)
Recognized
$
$
5,788 $
137
3,834
38,215
47,974 $
5,788 $
137
3,929
39,334
49,188 $
204 $
3
—
28,940
29,147 $
6,165 $
137
6,036
59,915
72,253 $
357
—
(12)
725
1,070
The following tables show the aging of all loans as of December 31, 2019 and 2018.
December 31, 2019
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
Days Past Due
60-89
30-59
8,426 $
$ 27,357 $
427
931
—
—
12,491
2,118
$ 40,779 $ 10,971 $
Total (1)
Total
Current
90 +
5,800 $ 41,583 $ 648,227 $ 689,810 $
249,288 250,830
1,542
69,767
69,660
107
109,106 126,287
2,572 17,181
8,663 $ 60,413 $1,076,281 $ 1,136,694 $
184
107
(1) Excludes loan premiums of $5,758 resulting from purchase price accounting and $18,403 of capitalized loan origination costs.
December 31, 2018
(Dollars in thousands)
Recreation
Home improvement
Commercial
Medallion
Total
Days Past Due
30-59
$ 19,584 $
723
—
8,720
$ 29,027 $
60-89
Total
Current Total (1)
6,198 $
296
454
90 +
4,133 $ 29,915 $537,294 $ 567,209 $
1,154 184,507 185,661
733 63,350 64,083
2,694 16,678 28,092 148,743 176,835
9,642 $ 21,225 $ 59,894 $933,894 $ 993,788 $
135
279
(1)
costs.
Excludes loan premiums of $9,047 resulting from purchase price accounting and $15,047 of capitalized loan origination
F-24
Recorded
Investment
90 Days and
Accruing
Recorded
Investment
90 Days and
Accruing
—
—
—
—
—
—
—
—
—
—
The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 190% and
220% as of December 31, 2019 and 2018.
The following table shows the troubled debt restructurings which the Company entered into during the year ended December 31,
2019.
(Dollars in thousands)
Recreation loans
Medallion loans
Number of Loans
Pre-
Modification
Investment
Post-
Modification
Investment
294 $
71
4,433 $
31,376
2,831
31,385
During the twelve months ended December 31, 2019, four medallion loans modified as troubled debt restructurings were in
default and had an investment value of $1,023,000 as of December 31, 2019, net of $428,000 of an allowance for loan loss, and 213
recreation loans modified as troubled debt restructuring were in default and had an investment value of $1,905,000 as of December 31,
2019, net of a $76,000 allowance for loan losses.
The following table shows the troubled debt restructurings which the Company entered into during the year ended December 31,
2018.
(Dollars in thousands)
Medallion loans
Number of Loans
Pre-
Modification
Investment
Post-
Modification
Investment
11 $
5,581 $
5,581
During the year ended December 31, 2018, one loan modified as a troubled debt restructuring was in default and had an
investment value of $218,000 as of December 31, 2018, net of $71,000 of an allowance for loan loss.
The following tables show the activity of the loans in process of foreclosure, which relates only to the recreation and medallion
loans, for the twelve months ended December 31, 2019 and the nine months ended December 31, 2018.
Twelve Months Ended December 31, 2019
(Dollars in thousands)
Loans in process of foreclosure – December 31, 2018
Transfer from loans, net
Sales
Cash payments received
Collateral valuation adjustments
Loans in process of foreclosure – December 31, 2019
Nine Months Ended December 31, 2018
(Dollars in thousands)
Loans in process of foreclosure – beginning balance (1)
Transfer from loans, net
Sales
Cash payments received
Collateral valuation adjustments
Deconsolidation of Trust III
Loans in process of foreclosure – December 31, 2018
Recreation
$
Medallion
Total
1,503 $
14,512
(7,591)
—
(6,948)
1,476 $
47,992 $
16,836
(1,515 )
(7,697 )
(4,381 )
51,235 $
49,495
31,348
(9,106)
(7,697)
(11,329)
52,711
Recreation
$
Medallion
Total
1,369 $
9,289
(451)
(4,354)
(4,350)
—
1,503 $
51,479 $
25,369
(2,533 )
(4,337 )
(4,122 )
(17,864 )
47,992 $
52,848
34,658
(2,984)
(8,691)
(8,472)
(17,864)
49,495
$
$
(1) Beginning balance for the nine months ended December 31, 2018 reflects the transition to Bank Holding Company Accounting
by reclassifying the medallions loans of the Company of $31,099,000 from investments to loans in process of foreclosure as of
April 2, 2018.
F-25
(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 and for the year ended December 31, 2017 under Investment Company Accounting.
(Dollars in thousands)
Balance December 31, 2016
Net change in unrealized
Appreciation on investments
Depreciation on investments
Reversal of unrealized appreciation
(depreciation) related to realized
Gains on investments
Losses on investments
Balance December 31, 2017
Net change in unrealized
Appreciation on investments
Depreciation on investments
Reversal of unrealized appreciation
(depreciation) related to realized
Gains on investments
Losses on investments
Balance March 31, 2018
Medallion
Loans
(28,523) $
$
Commercial
Loans
Investments
in
Subsidiaries
Equity
Investments
Investments
Other Than
Securities
Total
(1,378) $ 152,750 $
3,934 $
584 $ 127,367
—
(37,335)
—
(410)
6,170
—
2,060
(277 )
(821)
(1,253)
7,409
(39,275)
—
45,520
(20,338)
—
(38,170)
—
1,275
(513)
—
—
158,920
(3,082 )
486
3,121
—
—
(1,490)
(3,082)
47,281
139,700
—
18
38,795
—
(998 )
—
—
(1,915)
37,797
(40,067)
—
34,747
(23,761) $
$
—
—
—
—
(495) $ 197,715 $
—
—
2,123 $
—
—
—
34,747
(3,405) $ 172,177
The following table sets forth the pre-tax changes in our unrealized and realized gains and losses in the investment portfolio for
the three months ended March 31, 2018 and for the year ended December 31, 2017 under Investment Company Accounting.
(Dollars in thousands)
Net change in unrealized appreciation
(depreciation) on investments
Unrealized appreciation
Unrealized depreciation
Net unrealized appreciation on investments in
Medallion Bank and other controlled subsidiaries
Realized gains
Realized losses
Net unrealized losses on investments other than
securities and other assets
Total
Net realized gains (losses) on investments
Realized gains
Realized losses
Other gains
Direct charge-offs
Total
Three Months Ended
March 31, 2018
Year Ended
December 31, 2017
$
$
$
$
(998 ) $
(38,152 )
29,115
—
34,747
(1,915 )
22,797 $
— $
(34,747 )
—
2
(34,745 ) $
2,060
(38,022)
9,483
(3,082)
47,281
(2,075)
15,645
3,082
(47,281)
4,684
(4,229)
(43,744)
(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 the Bank’s results.
F-26
The following table presents information derived from the Bank’s statement of comprehensive income and other valuation
adjustments on other controlled subsidiaries for the year ended December 31, 2017.
(Dollars in thousands)
Statement of comprehensive income
Investment income
Interest expense
Net interest income
Noninterest income
Operating expenses (1)
Net investment income before income taxes
Income tax provision
Net investment income after income taxes
Net realized/unrealized losses of Medallion Bank (1)
Net increase in net assets resulting from operations of
Medallion Bank
Unrealized appreciation on Medallion Bank (2)
Net realized/unrealized losses on controlled
subsidiaries other than Medallion Bank
Net increase in net assets resulting from operations of
Medallion Bank and other controlled subsidiaries
$
2017
111,281
13,869
97,412
121
26,032
71,501
15,093
56,408
(51,696 )
4,712
5,482
(711 )
$
9,483
(1) Excluded from operating expenses and included in net realized/unrealized losses of the Bank were $1,476 of unrealized losses
on other assets for 2017.
(2) Unrealized appreciation on the Bank reflects the adjustment to the investment carrying amount to reflect the dividends declared
to the Company and the US Treasury, and the fair value adjustments to the carrying amount of the Bank.
(7) FUNDS BORROWED
The outstanding balances of funds borrowed were as follows.
Payments Due for the Year Ending December 31,
(Dollars in thousands)
Deposits
SBA debentures and
borrowings
Retail and privately placed
notes (3)
Notes payable to banks
Preferred securities (3)
Other borrowings
Total
2020
2022
$ 312,993 $ 223,865 $211,605 $118,740 $ 87,042 $
2023
2024
2021
Thereafter
December
31, 2019(1)
December
31, 2018
Interest
Rate
(2)
— $ 954,245 $ 848,040 2.35%
20,746
8,500
—
5,000
5,000 32,500
71,746
80,099 3.42
— 33,625
9,683 22,940
—
—
—
7,794
—
280
—
—
—
— 36,000
—
—
— 33,000
—
—
280
—
—
69,625
33,183
33,000
7,794
33,625 8.61
59,615 4.11
33,000 4.01
7,649 2.00
$ 351,216 $ 288,930 $211,885 $124,020 $128,042 $ 65,500 $ 1,169,593 $ 1,062,028
(1) Excludes deferred financing costs of $5,105.
(2) Weighted average contractual rate as of December 31, 2019.
(3) Relates to loans held at Medallion Financial Corp. (parent company only).
F-27
(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 as of December 31, 2019.
(Dollars in thousands)
Three months or less
Over three months through six months
Over six months through one year
Over one year
Total deposits
December 31, 2019
83,100
$
111,413
118,480
641,252
954,245
$
(B) 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, or the SBA Loan. In connection with the SBA Loan, FSVC executed a
Note, or the SBA Note, with an effective date of March 1, 2017, in favor of SBA, in the principal amount of $34,024,756. 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, which was
subsequently extended to June 1, 2020. 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 December 31, 2019,
$172,485,000 of commitments had been fully utilized, there were $3,000,000 of commitments available, and $71,746,000 was
outstanding, including $20,746,000 under the SBA Note.
(C) 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.
F-28
The table below summarizes the key attributes of the Company’s various borrowing arrangements with these lenders as of
Balance
Outstanding at
December 31,
2019
Note
Amounts
Payment
Average
Interest
Rate at
December 31,
2019
Interest Rate
Index(1)
December 31, 2019.
(Dollars in thousands)
Borrower
# of
Lenders/
Notes
Note
Dates
Maturity
Dates
Medallion
Financial Corp.
5/5 4/11 - 8/14 9/20 - 3/21
Type
Term loans
and demand
notes secured
by pledged
loans (2)
Term loans
secured by
owned Chicago
taxi
medallions (4)
$ 21,135 (2)$
21,135 Interest only(3)
4.43% Various(3)
Medallion
Chicago
Medallion
Funding
2/23
11/11 -
12/11
2/21
18,449
10,928
1/1
11/18
12/23
1,400
$ 40,984 $
1,120
33,183
$134 of
principal &
interest paid
monthly
$70
principal &
interest paid
quarterly
3.50%
N/A
4.00%
N/A
(1) At December 31, 2019, 30 day LIBOR was 1.76%, 360 day LIBOR was 2.00%, and the prime rate was 4.75%.
(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 up to or from $12 to $81.
(4) Guaranteed by the Company.
On July 6, 2019, the Company paid $10,819,000 at maturity in satisfaction of all its outstanding obligations under one of its
credit facilities. In connection with this payment, the Company obtained a waiver from one of its other lenders, with a term note of
$2,422,000, of certain resulting repayment and other obligations, which waiver expires on April 1, 2020.
In March 2019, the Company used some of the proceeds of the privately placed notes to pay off one of the notes payable to
banks at a 50% discount, resulting in a gain on debt extinguishment of $4,145,000 in the 2019 first quarter.
In November 2018, MFC entered into a note to the benefit of DZ Bank for $1,400,000 at a 4.00% interest rate due December
2023, as part of the restructuring of the DZ loan. See Note 23 for more information.
(D) RETAIL AND PRIVATELY PLACED NOTES
In March 2019, the Company completed a private placement to certain institutional investors of $30,000,000 aggregate principal
amount of 8.25% unsecured senior notes due 2024, with interest payable semiannually. The Company used the net proceeds from the
offering for general corporate purposes, including repaying certain borrowings under its notes payable to banks at a discount, which
led to a gain of $4,145,000 in the 2019 first quarter. In August 2019, the private placement was reopened and an additional $6,000,000
principal amount of notes was issued to certain institutional investors.
In April 2016, the Company issued a total of $33,625,000 aggregate principal amount of 9.00% unsecured notes due 2021, with
interest payable quarterly in arrears. The Company used the net proceeds from the offering of approximately $31,786,000 to make
loans and other investments in portfolio companies and for general corporate purposes, including repaying borrowings under its DZ
loan in the ordinary course of business.
(E) PREFERRED SECURITIES
In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to
Fin Trust which, in turn, sold $35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common
stock to the Company. The notes bear a variable rate of interest of 90 day LIBOR (1.91% at December 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
F-29
and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party
investor. At December 31, 2019, $33,000,000 was outstanding on the preferred securities.
(F) OTHER BORROWINGS
In November and December 2017, RPAC amended the terms of various promissory notes with affiliate Richard Petty (refer to
Note 14 for more details). At December 31, 2019, the total outstanding on these notes was $7,294,000 at a 2.00% annual interest rate
compounded monthly and due March 31, 2020. Additionally, RPAC has a short term promissory note to an unrelated party, for
$500,000 due on December 31, 2020.
(G) COVENANT COMPLIANCE
Certain of our debt agreements contain restrictions that require the Company and its subsidiaries to maintain certain financial
ratios, including debt to equity and minimum net worth, which in the event of noncompliance could preclude their ability to pay
dividends to the Company.
(8) LEASES
The Company has leased premises that expire at various dates through November 30, 2027 subject to various 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 twelve months ended December 31,
2019.
(Dollars in thousands)
$
Operating lease costs
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Right-of-use asset obtained in exchange for lease liability
2,184
2,419
2,413
The following table presents the breakout of the operating leases as of December 31, 2019.
(Dollars in thousands)
Operating lease right-of-use assets
Other current liabilities
Operating lease liabilities
Total operating lease liabilities
Weighted average remaining lease term
Weighted average discount rate
At December 31, 2019, maturities of the lease liabilities were as follows.
(Dollars in thousands)
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less imputed interest
Total operating lease liabilities
F-30
$
December 31,
2019
13,482
2,085
12,738
14,823
7.3 years
5.54 %
$
$
2,570
2,473
2,411
2,356
2,373
5,962
18,145
3,322
14,823
Occupancy expense was $2,436,000, $2,287,000, and $1,069,000 for the years ended December 31, 2019, 2018, and 2017.
(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 December 31,
2019 and 2018.
(Dollars in thousands)
Goodwill and other intangibles
Provision for loan losses
Net operating loss carryforwards (1)
Accrued expenses, compensation, and other assets
Unrealized gains on other investments
Total deferred tax liability
Valuation allowance
Deferred tax liability, net
Taxes receivable
Net deferred and other tax liabilities
2019
(45,595) $
19,198
22,607
1,701
(6,790)
(8,879)
(462)
(9,341)
1,516
(7,825) $
2018
(45,272 )
25,790
11,132
1,844
(2,024 )
(8,530 )
(255 )
(8,785 )
1,812
(6,973 )
$
$
(1) As of December 31, 2019, the Company and its subsidiaries had an estimated $89,687 of net operating loss carryforwards,
$1,712 which expires at various dates between December 31, 2026 and December 31, 2035, and which had a net asset value of
$22,145 as of December 31, 2019.
The components of our tax (provision) benefit for the years ended December 31, 2019, 2018, and 2017 were as follows.
(Dollars in thousands)
Current
Federal
State
Deferred
Federal
Federal income tax rate change
State
Net (provision) benefit for income taxes
2019
2018
2017
$
$
— $
519
(2,797 ) $
(1,078 )
15,613
756
(489)
—
(371)
(341) $
5,270
—
(1,464 )
(69 ) $
(4,169)
17,279
6,747
36,226
F-31
The following table presents a reconciliation of statutory federal income tax (provision) benefit to consolidated actual income
tax (provision) benefit reported for the years ended December 31, 2019, 2018, and 2017.
(Dollars in thousands)
Statutory Federal income tax (provision) benefit at 21%
(35% in 2017)
State and local income taxes, net of federal income
tax benefit
Revaluation of net operating losses
Change in effective state income tax rate
Change in state income tax accruals
Federal income tax rate change
Income attributable to non-controlling interest
Utilization of carry forwards
Appreciation of Medallion Bank
Other
Total income tax (provision) benefit
2019
2018
2017
$
(642) $
4,935 $
12,582
(120)
380
(891)
640
—
309
—
—
(17)
(341) $
440
—
(2,564 )
—
—
—
(910 )
(1,974 )
4
(69 ) $
645
—
3,232
—
17,279
—
2,284
1,050
(846)
36,226
$
The Tax Cuts and Jobs Act, 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 December 31, 2019.
The Company has filed tax returns in many states. Federal, New York State, New York City, and Utah state tax filings of the
Company for the tax years 2016 through the present are the more significant filings that are open for examination.
(10) STOCK OPTIONS AND RESTRICTED STOCK
The Company’s Board of Directors approved the 2018 Equity Incentive Plan, or the 2018 Plan, which was approved by the
Company’s stockholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to
the Company’s employees and non-employee directors, including options, restricted stock, restricted stock units, stock appreciation
rights, etc. A total of 1,500,253 shares of the Company’s common stock are issuable under the 2018 Plan, and 771,405 remained
issuable as of December 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 occurs first.
The Company’s Board of Directors approved the 2015 Employee Restricted Stock Plan, or the 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.
F-32
The Company had a stock option plan, or the 2006 Stock Option Plan, available to grant both incentive and nonqualified stock
options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and
shareholders on June 16, 2006, provided for the issuance of a maximum of 800,000 shares of common stock of the Company. No
additional shares are available for issuance under the 2006 Stock Option Plan. The 2006 Stock Option Plan was administered by the
Compensation Committee of the Board of Directors. The option price per share could not be less than the current market value of the
Company’s common stock on the date the option was granted. The term and vesting periods of the options were determined by the
Compensation Committee, provided that the maximum term of an option could not exceed a period of ten years.
The Company’s Board of Directors approved the 2015 Non-Employee Director Stock Option Plan, or the 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, or 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 December 31, 2019, 550,040 options on the
Company’s common stock were outstanding under the Company’s plans, of which 62,778 options were exercisable. Additionally,
there were 284,879 unvested shares of the Company’s common stock outstanding and 26,040 unvested restricted share units 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 $3.10, $1.06, and $0.28 per share for the years ended
December 31, 2019, 2018, and 2017. The following assumption categories are used to determine the value of any option grants.
Risk free interest rate
Expected dividend yield
Expected life of option in years (1)
Expected volatility (2)
Year ended December 31,
2018
2017
2019
2.29%
0.66
6.25
49.03%
2.82 %
4.86
6.00
30.00 %
1.84%
7.39
6.00
30.00%
(1) Expected life is calculated using the simplified method.
(2) We determine our expected volatility based on our historical volatility.
F-33
The following table presents the activity for the stock option programs for the years ended December 31, 2019, 2018, and 2017.
Outstanding at December 31, 2016
Granted
Cancelled
Exercised (1)
Outstanding at December 31, 2017
Granted
Cancelled
Exercised (1)
Outstanding at December 31, 2018
Granted
Cancelled
Exercised (1)
Outstanding at December 31, 2019 (2)
Options exercisable at
December 31, 2017
December 31, 2018
December 31, 2019 (2)
Number of
Options
Exercise
Price Per
Share
345,518
29,666
(54,558)
—
320,626
39,000
(214,960)
—
144,666
449,450
(44,076)
—
550,040
$7.10-13.84 $
2.14-2.61
10.76-11.21
—
2.14-13.84
5.27-5.58
9.22-9.24
—
2.14-13.84
5.21-7.25
6.55-13.84
—
$2.14-13.53 $
Weighted
Average
Exercise Price
9.67
2.35
10.94
—
8.78
5.46
9.22
—
7.23
6.61
9.00
—
6.58
273,960
81,889
62,778
7.10-13.84
2.14-13.84
$2.14-13.53 $
9.50
9.25
7.60
(1) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at the exercise
date and the related exercise price of the underlying options, was $0 for 2019, 2018, and 2017.
(2) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at
December 31, 2019 and the related exercise price of the underlying options, was $512,000 for outstanding options and $111,000
for exercisable options as of December 31, 2019. The remaining contractual life was 8.87 years for outstanding options and 5.95
years for exercisable options at December 31, 2019.
The following table presents the activity for the restricted stock programs for the years ended December 31, 2019, 2018, and
2017.
Outstanding at December 31, 2016
Granted
Cancelled
Vested (1)
Outstanding at December 31, 2017
Granted
Cancelled
Vested (1)
Outstanding at December 31, 2018
Granted
Cancelled
Vested (1)
Outstanding at December 31, 2019 (2)
Grant
Price Per
Share
Number of
Shares
167,703 $ 3.95-13.46 $
2.06-3.93
327,251
2.14-10.08
(8,988)
9.08-13.46
(77,384)
2.06-10.38
408,582
3.93-5.27
101,010
3.93-9.08
(9,737)
2.06-10.38
(308,940)
2.14-5.27
190,915
4.80-7.25
216,148
3.93-6.55
(3,946)
2.06-4.80
(118,238)
$3.95-7.25 $
284,879
Weighted
Average
Grant Price
8.88
2.48
3.07
11.09
3.45
4.41
4.66
3.35
4.06
6.59
4.97
3.89
6.01
(1) The aggregate fair value of the restricted stock vested was $736,000, $1,270,000, and $169,000 for 2019, 2018, and 2017.
(2) The aggregate fair value of the restricted stock was $2,071,000 as of December 31, 2019. The remaining vesting period was
3.07 years at December 31, 2019.
F-34
In addition, during the twelve months ended December 31, 2019, the Company granted and has outstanding, 26,040 restricted
stock units that vest in one year with a grant price of $4.80. These units have the option of deferring vesting until a future date if the
non-employee director makes a formal election under the guidelines of IRC Section 409A.
The following table presents the activity for the unvested options outstanding under the plans for the year ended December 31,
2019.
Outstanding at December 31, 2018
Granted
Cancelled
Vested
Outstanding at December 31, 2019
Number of
Options
Exercise Price
Per Share
449,450
62,777 $2.14-7.10 $
5.21-7.25
6.55
(21,889)
2.14-7.10
487,262 $2.14-7.25 $
(3,076)
Weighted
Average
Exercise Price
4.59
6.61
6.55
4.40
6.45
The intrinsic value of the options vested was $43,000, $32,000, and $0 in 2019, 2018, and 2017.
(11) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents the Company’s quarterly results of operations for the years ended December 31, 2019, 2018, and
2017.
(Dollars in thousands, except per share data)
2019 Quarter Ended
Net interest income
Income (loss) before income taxes
Net income (loss) after taxes
Net income (loss) attributable to Medallion Financial
Corp.
Basic net income (loss) per share
Diluted net income (loss) per share
2018 Quarter Ended (1)
Net interest income/net investment income
Income (loss) before income taxes/net investment loss
before taxes
Net income (loss) after taxes/net decrease on net assets
resulting from operations
Net income (loss) attributable to Medallion Financial
Corp./net decrease in net assets resulting from operations
Basic net income (loss) per share
Diluted net income (loss) per share
2017 Quarter Ended (1)
Investment income
Net investment loss after income taxes
Net increase (decrease) in net assets resulting from
operations
Net increase (decrease) in net assets resulting from
operations per common share
Basic
Diluted
March 31
June 30
September 30 December 31
$
22,321 $
1,139
1,395
23,194 $
(8,478)
(6,643)
25,415 $
7,600
7,435
26,587
2,076
(191)
1,228
0.05
0.05
(7,500)
(0.31)
(0.31)
4,975
0.20
0.20
(465)
(0.02)
(0.02)
$
482 $
24,719 $
24,265 $
23,003
(3,566)
(17,905)
(3,963 )
14,712
(14,874)
(13,884)
(3,846 )
9,865
(14,874)
(0.62)
(0.62)
(14,647)
(0.60)
(0.60)
(4,697 )
(0.19 )
(0.19 )
9,172
0.38
0.38
$
4,250 $
(435)
3,787 $
(1,293)
5,567 $
(2,490 )
6,020
(2,903)
1,111
(4,797)
619
3,345
0.05
0.05
(0.20)
(0.20)
0.03
0.03
0.14
0.14
(1) The three months ended March 31, 2018 and earlier quarters have been accounted for under Investment Company Accounting,
and subsequent quarters have been accounted for under Bank Holding Company Accounting.
F-35
(12) SEGMENT REPORTING (Bank Holding Company Accounting)
Under Bank Holding Company Accounting, the Company has six business segments, which include four lending and two non-
operating segments, which are reflective of how Company management makes decisions about its business and operations.
Prior to April 2, 2018, the Company had one business segment, its lending and investing operations. This segment originated
and serviced medallion, secured commercial and consumer loans, and invested in both marketable and nonmarketable securities.
The four lending segments reflect the main types of lending performed at the Company, which are recreation, home
improvement, commercial, and medallion. The recreation and home improvement lending segments are conducted by the Bank in all
fifty states, with the highest concentrations in Texas, Florida, and California, at 16%, 10%, and 10% of loans outstanding and with no
other states over 10% as of December 31, 2019. The recreation lending segment is a consumer finance business that works with third-
party dealers and financial service providers for the purpose of financing RVs, boats, and other consumer recreational equipment, of
which RVs, boats, and trailers make up 61%, 19%, and 12% of the segment portfolio as of December 31, 2019. The home
improvement lending segment works with contractors and financial service providers to finance residential home improvements
concentrated in swimming pools, roofs, windows, and solar panels, at 23%, 21%, 14%, and 12% of total home improvement loans
outstanding, and with no other product lines over 10% as of December 31, 2019. The commercial lending segment focuses on
enterprise wide industries, including manufacturing, retail trade, information, recreation and various other industries, in which 61% of
these loans are made in the Midwest. The medallion lending segment arose in connection with the financing of the medallions, taxis,
and related assets, of which 88% were in New York City as of December 31, 2019.
In addition, our non-operating segments include RPAC, which is a race car team, and our corporate and other segment, which
includes items not allocated to our operating segments such as investment securities, equity investments, intercompany eliminations,
and other corporate elements.
As part of the segment reporting, capital ratios for all operating segments have been normalized at 20%, which approximates the
percentage of consolidated total equity divided by total assets, with the net adjustment applied to corporate and other investments for
the twelve months ended December 31, 2019. In addition, beginning in 2019, the commercial segment exclusively represents the
mezzanine lending business, and the legacy commercial loan business (immaterial to total) has been re-allocated to corporate and
other investments for all periods presented.
F-36
The following tables present segment data as of and for the year ended December 31, 2019, and as of and for the nine months
ended December 31, 2018.
Year Ended December 31, 2019
(Dollars in thousands)
Total interest income
Total interest expense
Net interest income (loss)
Provision for loan losses
Net interest income (loss) after
loss
provision
Sponsorship and race winnings
Race team related expenses
Other income (expense), net
Net income (loss) before taxes
Income tax (provision) benefit
Net income (loss) after taxes
Balance Sheet Data
Total loans net
Total assets
Total funds borrowed
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status(2)
Charge-off ratio
Commercial
Lending
Medallion
Lending
RPAC
Corporate and Other
Investments
Consumer Lending
Home
Improvement
Recreation
$ 99,463 $
13,304
86,159
28,638
19,943 $
4,757
15,186
1,598
7,183 $
2,833
4,350
3,665 $
7,962
(4,297)
364 16,331
— $
159
(159)
—
Consolidated
2,308 $ 132,562
35,045
6,030
97,517
(3,722)
47,386
455
57,521
—
—
(23,490 )
34,031
(8,813 )
$ 25,218 $
13,588
—
—
(7,520)
6,068
(1,572)
4,496 $
—
—
(159)
3,986 (20,628)
—
18,742
—
(8,996)
(6,942)
(1,149) (10,493)
2,645
2,837 (31,121)
(684)
(329)
7,596
2,153 $ (23,525) $ 2,316 $
(4,177)
—
—
(7,946)
(12,123)
3,461
(8,662) $
50,131
18,742
(8,996)
(57,540)
2,337
(341)
1,996
$ 695,257 $ 244,716 $
707,377 252,704
563,805 201,605
66,405 $105,022 $
84,924 217,483
68,666 176,825
— $
31,538
7,794
3,362 $1,114,762
1,541,667
1,169,593
247,641
150,898
3.84 %
17.19
15.39
13.33
2.53
0.84
2.69
2.20%
10.22
9.50
7.24
1.05
0.07
0.37
2.44%
12.21
11.39
6.90
0.00 (1)
0.15 (1)
1.30 (3)
(9.73%)
(48.49)
2.88
(3.38)
19.48
2.04
14.68
7.28%
(96.37)
N/A
N/A
N/A
N/A
N/A
(3.71%)
(14.26)
N/A
N/A
N/A
N/A
N/A
(0.12)%
(0.59)
11.75
8.64
3.97
0.76
3.60
(1) Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.
(2) Loans 90 days or more past due.
(3) Ratio is based on total commercial lending balances, and relates to the total loan business.
F-37
Nine Months Ended December 31, 2018
Consumer Lending
(Dollars in thousands)
Total interest income
Total interest expense
Net interest income (loss)
Provision for loan losses
Net interest income (loss) after loss
provision
Sponsorship and race winnings
Race team related expenses
Other income (expense), net
Net income (loss) before taxes
Income tax (provision) benefit
Net income (loss) after taxes
Balance Sheet Data
Total loans net
Total assets
Total funds borrowed
Selected Financial Ratios
Return on average assets
Return on average equity
Interest yield
Net interest margin
Reserve coverage
Delinquency status(2)
Charge-off ratio
Recreation
$ 68,870 $
6,986
61,884
15,118
Home
Improvement
Commercial
Lending
Medallion
Lending
RPAC
12,799 $
2,290
10,509
2,453
6,317 $
7,076 $
1,502 10,125
(3,808)
5,574
— 41,437
—
121
(121 )
—
Corporate
and Other
Investments Consolidated
96,803
$
24,816
71,987
59,008
1,741 $
3,792
(2,051)
—
46,766
—
—
(14,242 )
32,524
(8,579 )
$ 23,945 $
8,056
—
—
(3,093)
4,963
(1,319)
3,644 $
(121 )
5,574 (45,245)
—
—
14,368
—
—
(7,121 )
(11,476 )
(1,824)
9,742
(4,350 )
3,750 (35,503)
(862)
1,108
7,938
2,888 $ (27,565) $ (3,242 )
$
(2,051)
—
—
(6,489)
(8,540)
1,005
(7,535) $
12,979
14,368
(7,121)
(27,382)
(7,156)
(709)
(7,865)
$ 580,182 $ 181,359 $
590,746 188,892
434,527 143,815
59,973 $155,863 $
93,807 273,501
53,719 294,465
—
29,925
7,649
$
204,975
127,853
4,110 $ 981,487
1,381,846
1,062,028
5.48 %
22.60
15.78
14.18
1.17
0.73
1.89
2.56%
11.30
9.06
7.44
0.98
0.07
0.46
4.27%
9.43
14.25
11.23
0.00
0.44 (1)
0.00
(10.13)%
NM
3.58
(2.16)
15.11
9.43
7.21
(11.69 )%
NM
N/A
N/A
N/A
N/A
N/A
(4.07)%
(12.37)
N/A
N/A
N/A
N/A
N/A
(0.90)%
(4.62)
10.98
8.19
3.58
2.14
2.73
(1) Ratio is based on total commercial lending balances, and relates solely to the legacy commercial loan business.
(2) Loans 90 days or more past due.
F-38
(13) COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key officers for either a two- or five-year term. Annually, the contracts
with a five-year term will renew for new five-year terms unless prior to the end of the first year, either the Company or the executive
provides notice to the other party of its intention not to extend the employment period beyond the current five-year term. Typically,
the contracts with a two-year term will renew for new two-year terms unless prior to the term either the Company or the executive
provides notice to the other party of its intention not to extend the employment period beyond the current one-year term; however,
there is currently one agreement that renews after two years for additional one-year terms and one agreement with a two-year term that
does not have a renewal period. In the event of a change in control, as defined, during the employment period, the agreements provide
for severance compensation to the executive in an amount equal to the balance of the salary, bonus, and value of fringe benefits which
the executive would be entitled to receive for the remainder of the employment period.
Employment agreements expire at various dates through 2024, which future minimum payments under these agreements of
approximately $5,670,000 as follows.
(Dollars in thousands)
2020
2021
2022
2023
2024
Thereafter
Total
$
$
2,389
1,654
673
673
281
—
5,670
(B) OTHER COMMITMENTS
The Company had no commitments outstanding to extend credit or make investments at December 31, 2019. Generally, any
commitments would be on the same terms as loans to or investments in existing borrowers or investees, and generally have fixed
expiration dates. Since some commitments would be expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
(C) LITIGATION
The Company and its subsidiaries become defendants to various legal proceedings arising from the normal course of business.
In the opinion of management, based on the advice of legal counsel, there is no proceeding pending, or to the knowledge of
management threatened, which in the event of an adverse decision could result in a material adverse impact on the financial condition
or results of operations of the Company.
(D) REGULATORY
In the ordinary course of business, the Company and its subsidiaries are subject to inquiries from certain regulators. During
2014, FSVC was examined by the SBA. The foregoing regulatory examination was resolved in January 2017 as a result of FSVC
transfer to liquidation status and the restructure of the FSVC loan described in Note 7.
(14) RELATED PARTY TRANSACTIONS
Certain directors, officers, and stockholders of the Company are also directors and officers of its main consolidated subsidiaries,
MFC, MCI, FSVC, and the Bank, as well as other subsidiaries. Officer salaries are set by the Board of Directors of the Company.
Jeffrey Rudnick, the son of one of the Company’s directors, is an officer of LAX Group, LLC, or LAX, one of the Company’s
equity investments. Mr. Rudnick receives a salary from LAX of $171,000 per year, and certain equity from LAX consisting of 10%
ownership in LAX Class B stock, vesting at 3.34% per year; 5% of any new equity raised from outside investors at a valuation of
$1,500,000 or higher; and 10% of LAX’s profits as a year-end bonus. In addition, Mr. Rudnick provides consulting services to the
Company directly for a monthly retainer of $4,200.
F-39
The Company’s subsidiary RPAC, has an agreement with minority shareholder Richard Petty, in which it makes an annual
payment of $700,000 per year for services provided to the entity. In addition, RPAC has a note payable to a trust controlled by
Mr. Petty of $7,294,000 that earns interest at an annual rate of 2% as of December 31, 2019, none of which has been paid to date.
In the 2019 second quarter, RPAC entered into a sponsorship agreement with Victory Junction, a 501(c)(3) public charity of
which Richard Petty is a board member, for $7,000,000 of sponsorship payments to RPAC during the 2019 race car season, of which
$5,600,000 was subsequently earned and received in 2019, and the balance which has been written off as it was not expected to be
received.
The Company and MSC serviced $311,988,000 of loans for the Bank at December 31, 2017. Under Investment Company
Accounting, included in net investment income were amounts as described in the table below that were received from the Bank for
services rendered in originating and servicing loans, and also for reimbursement of certain expenses incurred on their behalf.
The Company had assigned its servicing rights to the Bank portfolio to MSC, a wholly-owned entity that had been
unconsolidated under Investment Company Accounting. The costs of servicing are allocated to MSC by the Company, and the
servicing fee income is billed and collected from the Bank by MSC. As a result, $1,290,000 and $5,272,000 of servicing fee income
was earned by MSC for the three months ended March 31, 2018 and for the year ended December 31, 2017.
The following table summarizes the net revenues received from the Bank not eliminated under Investment Company
Accounting.
(Dollars in thousands)
Reimbursement of operating expenses
Loan origination and servicing fees
Total other income
Three Months Ended
March 31, 2018
Year Ended
December 31, 2017
$
$
250 $
6
256 $
865
5
870
The Company had a loan to Medallion Fine Art, Inc. in the amount of $999,000 as of December 31, 2017, which was repaid in
full during the 2018 first quarter. The loan bore interest at a rate of 12%, all of which was paid in kind. During 2017, the Company
advanced $0, and was repaid $2,365,000 with respect to this loan. Additionally, the Company recognized $10,000 of interest income
not eliminated for the year ended December 31, 2018, and $165,000 of interest income in 2017.
The Company and MCI have loans to RPAC which has been eliminated in consolidation since April 2, 2018. The Company and
MCI recognized $0 of interest income for the three months ended March 31, 2018 and during the year ended December 31, 2017,
recognized $56,000 of interest income with respect to these loans.
(15) STOCKHOLDERS’/SHAREHOLDERS’ EQUITY
In November 2003, the Company announced a stock repurchase program which authorized the repurchase of up to $10,000,000
of common stock. In November 2004, the repurchase program was increased by an additional $10,000,000, which was further
increased to a total of $20,000,000 in July 2014, and which was further increased to a total of $26,000,000 in July 2015. As of
December 31, 2019, a total of 2,931,125 shares had been repurchased for $24,587,000, in which $22,874,509 of shares remain
authorized for repurchase under the program. There were no purchases in 2019, 2018, and 2017.
(16) OTHER OPERATING EXPENSES (Investment Company Accounting)
The major components of other expenses were as follows.
(Dollars in thousands)
Directors’ fees
Miscellaneous taxes
Computer expense
Other expenses
Total other operating expenses
Three Months Ended,
March 31, 2018
Year Ended,
December 31, 2017
$
$
89 $
120
74
304
587 $
319
258
244
727
1,548
F-40
(17) SELECTED FINANCIAL RATIOS AND OTHER DATA (Investment Company Accounting)
The following table provides selected financial ratios and other data for the periods indicated.
(Dollars in thousands, except per share data)
Net share data
Net asset value at the beginning of the year
Net investment income (loss)
Income tax provision (benefit)
Net realized gains (losses) on investments
Net change in unrealized appreciation on investments
Net increase (decrease) in net assets resulting from
operations
Issuance of common stock
Repurchase of common stock
Distribution of net investment income
Return of capital
Distribution of net realized gains on investments
Total distributions
Other
Total increase (decrease) in net asset value
Net asset value at the end of the period/year (1)
Per share market value at beginning of year
Per share market value at end of period/year
Total return (2)
Ratios/supplemental data
Total shareholders’ equity (net assets)
Average net assets
Total expense ratio (3) (4) (5)
Operating expenses to average net assets (4) (5)
Net investment income (loss) after income taxes to average
net assets (4) (5)
Three
Months
Ended
March 31,
2018
2017
Year ended December 31,
2016
2015
$
$
$
$
$
11.80
(0.15)
0.03
(1.44)
0.94
(0.62)
(0.03)
—
—
—
—
—
—
(0.65)
11.15
3.53
4.65
(129%)
$
$
$
$
$
11.91
(0.33)
1.51
(1.82)
0.65
0.01
(0.12)
—
—
—
—
—
—
(0.11)
11.80
3.02
3.53
17%
$
11.42
(0.41)
(1.90)
0.02
3.26
0.97
—
0.12
(0.60)
—
—
(0.60)
—
0.49
11.91
7.04
3.02
(54%)
$
$
11.16
0.69
0.00
0.31
0.20
1.20
—
0.06
(0.81)
(0.18)
—
(0.99)
(0.01)
0.26
11.42
10.01
7.04
(22%)
272,437
284,021
$
287,159
285,704
$
286,096
276,978
$
10.02%
5.87
(3.03%)
4.83
29.36%
8.23
278,088
276,745
9.45%
6.04
(4.61)
(2.49)
0.04
6.08
(1)
Includes $0.00 of undistributed net investment income per share as of March 31, 2018 and December 31, 2017, 2016, and 2015,
and $0.00 of undistributed net realized gains per share for all periods presented.
(2) Total return is calculated by dividing the change in market value of a share of common stock during the year, assuming the
reinvestment of distributions on the payment date, by the per share market value at the beginning of the year.
(3) Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average net
assets.
(4) MSC has assumed certain of the Company’s servicing obligations, and as a result, servicing fee income of $1,290, $5,272,
$5,421, and $5,658, and operating expenses of $1,150, $4,211, $5,249, and $6,044, which formerly were the Company’s, were
now MSC’s for the three months ended March 31, 2018 and the years ended December 31, 2017, 2016, and 2015. Excluding the
impact of the MSC amounts, the total expense ratio, operating expense ratio, and net investment income (loss) ratio would have
been 11.75%, 6.88%, and 7.51% in the March 31, 2018 quarter, (1.37%), 6.31%, and (2.49%) in 2017, 29.42%, 8.28%, and
1.95% in 2016, and 11.63%, 8.23%, and 5.94% in 2015.
(5) These ratios include the goodwill impairment writeoff of $5,099 in 2016. Excluding the writeoff, the total expense, operating
expense, and net investment income ratios were 27.52%, 6.39%, and 1.88% in 2016.
F-41
(18) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Investment Plan, or the 401(k) Plan, which covers all full-time and part-time employees of the
Company who have attained the age of 21 and have a minimum of one year of service, including the employees of Medallion Bank.
Under the 401(k) Plan, an employee may elect to defer not less than 1% of total annual compensation, up to the applicable limits set
forth in the Internal Revenue Code. Employee contributions are invested in various mutual funds according to the directions of the
employee. The Company matches employee contributions to the 401(k) Plan in an amount per employee equal to one-third of the first
6% of the employee’s annual contributions, subject to legal limits. The Company’s 401(k) plan expense, including amounts for the
employees of Medallion Bank and other consolidated subsidiaries in the prior year periods, was approximately $193,000, $182,000,
and $185,000 for the years ended December 31, 2019, 2018, and 2017.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB ASC Topic 825, “Financial Instruments,” requires disclosure of fair value information about certain financial
instruments, whether assets, liabilities, or off-balance-sheet commitments, if practicable. The following methods and assumptions
were used to estimate the fair value of each class of financial instrument. Fair value estimates that were derived from broker quotes
cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of
the instrument.
(a) Cash – Book value equals fair value.
(b) Equity securities – The Company’s equity securities are recorded at cost less impairment, which approximated fair value.
(c)
Investment securities – The Company’s investments are recorded at the estimated fair value of such investments.
(d) Loans receivable – The Company’s loans are recorded at book value which approximated fair value.
(e) Floating rate borrowings – Due to the short-term nature of these instruments, the carrying amount approximates fair
value.
(f) Commitments to extend credit – The fair value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining terms of the agreements and present
creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the
difference between the current levels of interest rates and the committed rates. At December 31, 2019 and December 31,
2018, the estimated fair value of these off-balance-sheet instruments was not material.
(g) Fixed rate borrowings – The fair value of the debentures payable to the SBA is estimated based on current market
interest rates for similar debt.
(Dollars in thousands)
Financial assets
Cash and federal funds sold (1)
Equity investments
Investment securities
Loans receivable
Accrued interest receivable (2)
Financial liabilities
Funds borrowed (3)
Accrued interest payable (2)
December 31, 2019
December 31, 2018
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
67,821 $
10,079
48,998
67,821 $
10,079
48,998
1,114,762 1,114,762
8,662
8,662
57,713 $
9,197
45,324
981,487
7,413
57,713
9,197
45,324
981,487
7,413
1,169,593 1,171,274 1,062,028 1,062,297
3,852
3,852
4,398
4,398
(1) Categorized as level 1 within the fair value hierarchy. See Note 20.
(2) Categorized as level 3 within the fair value hierarchy. See Note 20.
(3) As of December 31, 2019 and 2018, publicly traded unsecured notes traded at a premium to par of $1,681 and $269.
(20) FAIR VALUE OF ASSETS AND LIABILITIES
The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair
value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure
requirements for fair value measurements.
F-42
In accordance with FASB ASC 820, the Company has categorized its assets and liabilities measured at fair value, based on the
priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs
(level 3). Our assessment and classification of an investment within a level can change over time based upon maturity or liquidity of
the investment and would be reflected at the beginning of the quarter in which the change occurred.
As required by FASB ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level
within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value
measurement in its entirety. For example, a level 3 fair value measurement may include inputs that are observable (levels 1 and 2) and
unobservable (level 3). Therefore gains and losses for such assets and liabilities categorized within the level 3 table below may include
changes in fair value that are attributable to both observable inputs (levels 1 and 2) and unobservable inputs (level 3).
Assets and liabilities measured at fair value, recorded on the consolidated balance sheets, are categorized based on the inputs to
the valuation techniques as follows:
Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active
market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded
derivatives, most US Government and agency securities, and certain other sovereign government obligations).
Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are
observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the
following:
A) Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
B) Quoted price for identical or similar assets or liabilities in non-active markets (for example, corporate and municipal
bonds, which trade infrequently);
C)
D)
Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include
most over-the-counter derivatives, including interest rate and currency swaps); and
Pricing models whose inputs are derived principally from or corroborated by observable market data through
correlation or other means for substantially the full term of the asset or liability (examples include certain residential
and commercial mortgage-related assets, including loans, securities, and derivatives).
Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about
the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity
investments, and certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).
A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs
may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are
reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur. Commencing
with the quarter ended June 30, 2018, equity investments are recorded at cost and are evaluated for impairment periodically.
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a
recurring basis as of December 31, 2019 and 2018.
December 31, 2019
(Dollars in thousands)
Assets
Equity investments
Available for sale investment securities (1)
Total
Level 1
Level 2
Level 3
Total
$
$
— $
—
— $
— $
48,998
48,998 $
10,079 $
—
10,079 $
10,079
48,998
59,077
(1) Total unrealized gains of $1,081, net of tax, was included in accumulated other comprehensive income (loss) for the twelve
months ended December 31, 2019 related to these assets.
F-43
December 31, 2018
(Dollars in thousands)
Assets
Equity investments
Available for sale investment securities (1)
Total
Level 1
Level 2
Level 3
Total
$
$
— $
—
— $
— $
45,324
45,324 $
9,197 $
—
9,197 $
9,197
45,324
54,521
(1) Total unrealized losses of $82, net of tax, was included in accumulated other comprehensive income (loss) for the nine months
ended December 31, 2018 related to these assets.
The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilities for the twelve
months ended December 31, 2019, and the nine months ended December 31, 2018 under Bank Holding Company Accounting, and for
the quarter ended March 31, 2018 under Investment Company Accounting.
(Dollars in thousands)
December 31, 2018
Gains included in earnings
Purchases, investments, and issuances
Sales, maturities, settlements, and distributions
December 31, 2019
Amounts related to held assets (1)
Equity
Investments
9,197
87
3,396
(2,601 )
10,079
(1,734 )
$
$
$
(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of December 31, 2019.
(Dollars in thousands)
March 31, 2018
Losses included in earnings
Purchases, investments, and issuances
Sales, maturities, settlements, and distributions
Transfers in (1)
December 31, 2018
Amounts related to held assets (2)
Equity
Investments
9,458
(1,274 )
1,232
(1,596 )
1,377
9,197
(1,851 )
$
$
$
(1) Represents the removal of RPAC investments eliminated in consolidation as well as the transfer of LAX from controlled
subsidiaries during the 2018 second quarter.
(2) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of December 31,
2018.
(Dollars in thousands)
December 31, 2017
Gains (losses) included in earnings
Purchases, investments, and issuances
Sales, maturities, settlements, and distributions
March 31, 2018
Amounts related to held assets (1)
Medallion
Loans
Commercial
Loans
Investments in
Medallion
Bank & Other
Controlled
Subsidiaries
Equity
Investments
Investments
Other Than
Securities
Other
Assets
$ 208,279 $
(38,190)
7
(8,941)
$ 161,155 $
(38,190) $
$
90,188 $
(8)
7,252
(3,812)
93,620 $
(10) $
302,147 $
29,143
462
(583)
331,169 $
29,143 $
9,521 $
(993 )
935
(5 )
9,458 $
(993 ) $
7,450 $
(1,915)
—
—
5,535 $
(1,915) $
339
—
—
—
339
—
(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of March 31, 2018.
F-44
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-
recurring basis as of December 31, 2019 and 2018 under Bank Holding Company Accounting.
December 31, 2019
(Dollars in thousands)
Assets
Impaired loans
Loan collateral in process of foreclosure
Total
December 31, 2018
(Dollars in thousands)
Assets
Impaired loans
Loan collateral in process of foreclosure
Total
Significant Unobservable Inputs
Level 1
Level 2
Level 3
Total
— $
—
— $
— $
—
— $
34,915 $
52,711
87,626 $
34,915
52,711
87,626
Level 1
Level 2
Level 3
Total
— $
—
— $
— $
—
— $
47,974 $
49,495
97,469 $
47,974
49,495
97,469
$
$
$
$
ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of
assets and liabilities classified as level 3 within the fair value hierarchy. The tables below are not intended to be all-inclusive, but
rather to provide information on significant unobservable inputs and valuation techniques used by the Company.
The valuation techniques and significant unobservable inputs used in recurring level 3 fair value measurements of assets and
liabilities as of December 31, 2019 and 2018 were as follows under Bank Holding Company Accounting.
(Dollars in thousands)
Equity investments
Fair Value
at 12/31/19
Valuation Techniques
$
7,435 Investee financial analysis
1,189 Investee book value adjusted
for market appreciation
Unobservable Inputs
Financial condition and
operating performance of the
borrower
Collateral support
Financial condition and
operating performance of the
investee
Public company comparables Business enterprise value
Business enterprise
value/revenue multiples
Discount for lack of
marketability
1,455 Precedent market transaction Offering price
(Dollars in thousands)
Equity Investments
Fair Value
at 12/31/18
$
Valuation Techniques
5,683 Investee financial analysis
1,850 Investee book value adjusted for
market appreciation
Precedent arm’s length offer
Unobservable Inputs
Financial condition and
operating performance of the
borrower
Collateral support
Financial condition and
operating performance of the
investee
Business enterprise value
Business enterprise
value/revenue multiples
Range
(Weighted Average)
N/A
N/A
N/A
$4,855 – $6,120
1.59-5.98x
25%
$8.73 / share
Range
(Weighted Average)
N/A
N/A
N/A
$6,014 – $7,214
0.96x – 4.54x
1,455 Precedent market transaction
209 Investee book value
Offering price
Valuation indicated by investee
$8.73 / share
N/A
filings
F-45
(21) MEDALLION BANK PREFERRED STOCK
On December 17, 2019, the Bank closed an initial public offering of 1,840,000 shares of its Fixed-to-Floating Rate Non-
Cumulative Perpetual Preferred Stock, Series F, with a $46,000,000 aggregate liquidation amount, yielding net proceeds of
$42,485,000, which were recorded in the Bank’s shareholders’ equity. Dividends are payable quarterly from the date of issuance to,
but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark
rate (which is expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.
On February 27, 2009 and December 22, 2009, the Bank issued, and the US Treasury purchased under the Troubled Assets
Relief Program, or TARP, Capital Purchase Program, or the CPP, the Bank’s fixed rate non-cumulative Perpetual Preferred Stock,
Series A, B, C, and D for an aggregate purchase price of $21,498,000 in cash. On July 21, 2011, the Bank issued, and the US Treasury
purchased, 26,303 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series E, or Series E, for an aggregate purchase price
of $26,303,000 under the Small Business Lending Fund Program, or SBLF, with a liquidation amount of $1,000 per share. The SBLF
is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates.
In connection with the issuance of the Series E, the Bank exited the CPP by redeeming the Series A, B, C, and D; and received
approximately $4,000,000, net of dividends due on the repaid securities. The Bank pays a dividend rate of 9% on the Series E.
(22) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The following shows the condensed financial information of Medallion Financial Corp. (parent company only) under Bank
Holding Company Accounting.
Condensed Balance Sheets
(Dollars in thousands)
Assets
Cash
Net loans receivable
Loans collateral in process of foreclosure
Goodwill and intangible assets
Investments in bank subsidiaries
Investments in non-bank subsidiaries
Income tax receivable
Other assets
Total assets
Liabilities
Other liabilities
Intercompany payables
Short-term borrowings
Deferred tax liabilities
Long-term borrowings
Total liabilities
Total stockholders’ equity
Total liabilities and equity
December 31, 2019 December 31, 2018
$
$
$
$
4,477 $
26,802
11,104
177,176
158,201
92,856
4,708
14,111
489,435 $
18,660 $
54,904
8,188
30,728
113,807
226,287
263,148
489,435 $
1,110
37,737
12,001
178,621
142,469
91,059
—
5,776
468,773
9,073
63,352
38,870
28,245
66,625
206,165
262,608
468,773
F-46
Year Ended
December 31, 2019
$
Nine Months Ended
December 31, 2018
(1,958)
5,480
(7,438)
19,190
(26,628)
(16,913)
(2,552 ) $
8,856
(11,408 )
6,377
(17,785 )
(13,686 )
(31,471 )
7,013
(24,458 )
22,696
(1,762 ) $
(43,541)
5,328
(38,213)
28,041
(10,172)
$
Year Ended
December 31, 2019
$
(1,762 ) $
1,081
Nine Months Ended
December 31, 2018
(10,172)
(82)
$
(681 ) $
(10,254)
Condensed Statements of Operations
(Dollars in thousands)
Interest income
Interest expense
Net interest loss
Provision for loan losses
Net interest loss after provision for loan losses
Other income (expenses), net
Loss before income taxes and undistributed earnings of
subsidiaries
Income tax benefit
Loss before undistributed earnings of subsidiaries
Undistributed earnings of subsidiaries
Net income (loss) attributable to parent company
Condensed Statements of Other Comprehensive Income (Loss)
(Dollars in thousands)
Net income (loss)
Other comprehensive income (loss)
Total comprehensive income (loss) attributable to Medallion
Financial
F-47
Condensed Statements of Cash Flow
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries
Provision for loan losses
Depreciation and amortization
Change in deferred and other tax assets/liabilities, net
Proceeds from sales of loan collateral in process of foreclosure
Net change in loan collateral in process of foreclosure
Net change in unrealized depreciation on investments
Stock-based compensation expense
Decrease in other assets
Increase in deferred financing costs
Decrease in intercompany payables
Increase in other liabilities
Net cash used by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
Proceeds from principal receipts, sales, and maturities
of loans and investments
Purchases of investments
Dividends from subsidiaries
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from funds borrowed
Repayments of funds borrowed
Net cash provided by (used for) financing activities
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Year Ended
December 31, 2019
Nine Months Ended
December 31, 2018
$
(1,762 ) $
(10,172)
(22,696 )
6,377
5,484
(2,225 )
2,403
906
1,786
1,221
988
(1,297 )
(8,448 )
(1,759 )
(19,022 )
(28,041)
19,190
5,451
4,512
487
678
—
425
4,073
—
(3,368)
4,237
(2,528)
(3,312 )
(309)
2,313
(1,125 )
6,248
4,124
36,000
(17,735 )
18,265
3,367
1,110
4,477 $
10,900
—
5,200
15,791
—
(17,208)
(17,208)
(3,945)
5,055
1,110
$
(23) VARIABLE INTEREST ENTITIES (VIE)
During the 2018 third quarter, the Company determined that Trust III was a VIE. Trust III had been consolidated as a subsidiary
of MFC historically, although it should have been consolidated under the variable interest model, since MFC was its primary
beneficiary until October 31, 2018. Trust III is a VIE since the key decision-making authority rests in the servicing agreement (where
MFC is the servicer for Trust III) rather than in the voting rights of the equity interests and as a result the decision-making rights are
considered a variable interest. This conclusion is supported by a qualitative assessment that Trust III does not have sufficient equity at
risk. Since the inception of Trust III, MFC had also been party to a limited guaranty which was considered a variable interest because,
pursuant to the guaranty, MFC absorbed variability as a result of the on-going performance of the loans in Trust III. As of October 31,
2018, the Company determined that MFC was no longer the primary beneficiary of Trust III and accordingly deconsolidated the VIE,
leading to a net gain of $25,325,000 recorded as well as a new promissory note payable by MFC of $1,400,000 issued in settlement of
the limited guaranty (see Note 7 for more details). The Company’s interest in Trust III is accounted for as an equity investment and
has a value of $0 as of December 31, 2019 and 2018. In addition, the Company remains the servicer of the assets of Trust III for a fee.
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, or the DZ loan. The loan, which has an outstanding
balance of $88,780,000, currently terminates on November 15, 2020. Borrowings under the DZ loan are collateralized by Trust III’s
assets.
F-48
(24) SUBSEQUENT EVENTS
The Company evaluated the effects of events that have occurred subsequent to the year ended December 31, 2019, through
the date of financial statement issuance.
As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which may negatively and
materially affect the financial position, results of operations, and cash flows of the Company. The COVID-19 outbreak in the US has
disrupted the Company’s operations through its impact on its employees, borrowers, investee companies and their
businesses. Disruptions to the Company’s borrowers and investee companies may impair their ability to fulfill their obligations to the
Company, and result in increased risk of delinquencies, defaults, foreclosures, declining collateral values, loan losses, and other
financial impacts. The Company has taken steps to operate through this crisis, for example, by having employees work remotely, and
negotiating with borrowers and lenders alike as to payment terms. The duration of these uncertainties and the ultimate financial
effects cannot be reasonably estimated at this time, but could be material.
F-49
LIST OF SUBSIDIARIES OF MEDALLION FINANCIAL CORP.
Name
Medallion Funding LLC
Medallion Capital, Inc.
Freshstart Venture Capital Corp.
Medallion Bank
Jurisdiction of Incorporation or Formation
New York
Minnesota
New York
Utah
EXHIBIT 21.1
Exhibit 23.1
Consent Of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-
226130, 333-211788, 333-186533, and 333-136316) and Form S-3 (File No. 333-231705) of our reports dated
March 30, 2020 on (i) the consolidated financial statements of Medallion Financial Corp. and subsidiaries as of
December 31, 2019 and 2018 and for each of the three years in the three-year period ended December 31, 2019
and on the selected financial ratios and other data for each of the three years in the three-year period ended
December 31, 2017; and (ii) the effectiveness of internal control over financial reporting as of December 31,
2019; all of which appear in the Annual Report on Form 10-K of Medallion Financial Corp. for the year ended
December 31, 2019.
/s/ Mazars USA LLP
New York, New York
March 30, 2020
CERTIFICATIONS
Certification of Alvin Murstein
Exhibit 31.1
I, Alvin Murstein, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Medallion Financial Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize, and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2020
By: /s/ Alvin Murstein
Alvin Murstein
Chairman and Chief Executive Officer
Certification of Larry D. Hall
Exhibit 31.2
I, Larry D. Hall, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Medallion Financial Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in registrant’s internal control over financial reporting that
occurred during the registrant’s most recent quarter (the registrant’s fourth fiscal quarter in the case
of the annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize, and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2020
By:
/s/ Larry D. Hall
Larry D. Hall
Senior Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 USC SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Medallion Financial Corp. (the “Company”) for the year
ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), the undersigned hereby certifies, pursuant to 18 USC Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
By:
/s/ Alvin Murstein
Chairman and
Chief Executive Officer
Date: March 30, 2020
CERTIFICATION PURSUANT TO
18 USC SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Medallion Financial Corp. (the “Company”) for the year ended December 31,
2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies,
pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
By:
/s/ Larry D. Hall
Senior Vice President and
Chief Financial Officer
Date: March 30, 2020
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Stock Transfer Agent
and Registrar
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
800.937.5449
The Transfer Agent is
responsible for handling
shareholder questions
regarding lost stock certificates,
address changes and changes
of ownership or name in which
shares are held.
Independent Auditors
Mazars USA LLP
135 West 50th Street
New York, NY 10020
Dividend Policy
Shareholders can enroll
at no charge in Medallion
Financial’s Dividend
Reinvestment Plan.
Directors and Officers
Corporate Information
Board of Directors
Alvin Murstein
Chairman and
Chief Executive Officer
Elected 1995
Andrew M. Murstein
President and
Chief Operating Officer
Elected 1997
Henry L. “Hank” Aaron
Senior Vice President
Atlanta National League
Baseball Club, Inc.
Recipient of the
Presidential Medal of Freedom
Elected 2004
John Everets
Partner at
Arcturus Capital Boston
Elected 2017
Frederick A. Menowitz
Private Real Estate Investor
Elected 2003
David L. Rudnick
Chief Executive Officer
Century Associates Group
Real Estate
Elected 1996
Allan J. Tanenbaum
Of Counsel
at Taylor English
Elected 2017
Executive Officers and
Senior Management
Alvin Murstein
Chairman and
Chief Executive Officer
Andrew M. Murstein
President and
Chief Operating Officer
Larry D. Hall
Senior Vice President
and Chief Financial Officer
Anthony N. Cutrone
Assistant Controller
Justin Haley
Chief Operating Officer
Medallion Bank
Steven Hannay
Chief Lending Officer
Medallion Bank
Trent Hudson
Chief Financial Officer
Medallion Bank
Stephen A. Lewis
Senior Vice President
Medallion Capital, Inc.
Thomas J. Munson
Executive Vice President
and Chief Credit Officer
Donald S. Poulton
Chief Executive Officer
Medallion Bank
Marisa T. Silverman
Chief Compliance Officer,
General Counsel
and Secretary
John Taylor
Senior Vice President
Strategic Partnership
Medallion Bank
Alex Travis
President
Medallion Capital, Inc.
Corporate Headquarters
437 Madison Avenue
38th floor
New York, NY 10022
212.328.2100
Toll Free: 877 MEDALLION
www.medallion.com
Investor Relations
Alex E. Arzeno
212.328.2176
InvestorRelations@medallion.com
Additional Office
Locations
Bothell, WA
Boston, MA
Chicago, IL
Long Island City, NY
Minneapolis, MN
Newark, NJ
Salt Lake City, UT
Stock Market Information
The Common Stock of
Medallion Financial Corp.
began trading publicly on the
Nasdaq Global Select Market
on May 23, 1996. It currently
trades under the symbol
“MFIN”.
The 9.00% Notes due 2021
of Medallion Financial Corp.
began trading publicly on the
Nasdaq Global Select Market
on April 25, 2016. Such
Notes currently trade under
the symbol “MFINL”.
The Fixed-to-Floating Rate
Non-Cumulative Perpetual
Preferred Stock, Series F, of
Medallion Bank began trading
publicly on the Nasdaq Capital
Market on December 17, 2019.
It currently trades under the
symbol “MBNKP”.
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MEDALLION FINANCIAL CORP.
Corporate Headquarters
437 Madison Avenue, 38th floor, New York, NY 10022
212.328.2100
Toll Free: 877 MEDALLION
www.medallion.com